When the news broke that Nokia had entered an alliance with Microsoft to make Windows Phone 7 handsets exclusively, everyone thought it was a headslap moment. Now the word is out as to what Microsoft had to do to sweeten the deal. Microsoft will pay Nokia more than $1 Billion to promote and develop Windows Phone 7 handsets. In return, Nokia will rebate back a fee to Redmond for every copy of Windows used on it’s phones. The $1 Billion dollar payment was designed to not only keep Nokia from jumping on the Android bandwagon, but will also help to offset the amount lost by Nokia to focus exclusively on the Windows Phone 7 platform.

Although the entire costs won’t be required up front, a percentage will go to Nokia before the company begins selling handsets. And by contrast the royalty payments by Nokia back to Microsoft will recoup the investment and even make a profit on the Windows Phone 7 platform. The deal is also rumored to be the end of Nokia’s MeeGo smartphone which was scheduled to be released this year.

Once a major player in the cellphone industry, Nokia lost significant marketshare once Apple released the iPhone and Google set the world on fire with it’s shotgun Android approach. Nokia has been scrambling to gain back lost ground ever since. So it wasn’t surprising that they would grab the Windows Phone 7 Life preserver, but even at that, Nokia was wary, no doubt to do the nagging SD card issue that’s been plaguing Windows Phone 7 hand sets since December. Both companies have seen stock decline since news of the deal was announced, but Nokia has seen a greater loss to the tune of 26 percent.

[via Bloomberg]