Nokia admits big risk in Windows Phone 7 deal

Nokia has warned investors that it's taking a big risk with its deal with Microsoft to develop handsets for Windows Phone 7.

The Microsoft deal marks the first time Nokia has ever agreed to develop hardware for a third-party operating system, and the company's annual report - filed on Friday with the US Securities and Exchange Commission (SEC) - highlights a range of 'risk factors' associated with the change in policy.

By signing the agreement, which could see Microsoft paying Nokia a rumoured $1 billion, the Finnish company admits it has pinned its hopes on a mobile platform that remains - in the company's own words - 'unproven'.

"In choosing to adopt Windows Phone as our primary smartphone platform, we may forgo more competitive alternatives achieving greater and faster acceptance in the smartphone market," says the report.

"If we fail to finalise our partnership with Microsoft or the benefits of that partnership do not materialise as expected, we will have limited our options and more competitive alternatives may not be available to us in a timely manner, or at all."

The warning echoes recent comments made by Google CEO Eric Schmidt at last month's Mobile World Congress in Barcelona. Schmidt said the Finnish mobile giant had made a 'mistake' by deciding not to opt for his company's already-established Android platform, now the most widely-used mobile OS in the smartphone market.

Microsoft's Windows Phone 7 is, by contrast, "a very recent, largely unproven addition to the market focused solely on high-end smartphones with currently very low adoption and consumer awareness", according to Nokia's annual report, which adds: "The proposed Microsoft partnership may not succeed in developing it into a sufficiently broad competitive smartphone platform."

The company expresses doubts over its own ability to turn a profit on Windows Phone 7 handsets when it has to build a licence fee into the price structure.

The SEC document also voices concerns over the negative impact the Windows Phone 7 deal may have on the development and sales of handsets using Nokia's existing Symbian operating system - as well as the threat posed to the future of the MeeGo OS that the firm has been developing with Intel and others.

"We may not be able to maintain the viability of our current Symbian smartphone platform during the transition to Windows Phone as our primary smartphone platform or we may not realise a return on our investment in MeeGo," the report states.

"Our mobile operator and distributor customers and consumers may no longer see our Symbian smartphones as attractive investments during the transition to Windows Phone.

"This would result in a loss of market share, which could be substantial during the transition, and which we may not be able to regain when quantities of Nokia Windows Phone smartphones are commercially available."

Fears over job losses among Symbian developers and the potential downturn in the company's fortunes were behind a recent hoax 'revolt' by a disgruntled employee angry at Nokia's new CEO Stephen Elop, a former head of Microsoft's business division who has faced allegations of a conflict of interest over the deal.