Nokia will pay Microsoft a fee for each copy of Windows used in its phones, costs that will be offset as Nokia curtails its own budget for software research and development, said one of the people, who declined to be identified because the final contract hasn’t yet been signed. The agreement runs for more than five years, the people said.

“This gives Microsoft scale and allows Nokia to rip out costs,” said Colin Gillis, an analyst at BGC Partners in New York, who recommends buying Microsoft shares. “Microsoft is getting the platform boost that comes from acquiring a Nokia for about a billion dollars.”

If it succeeds, the partnership may benefit both sides financially while helping stave off a smartphone threat from Apple Inc. (AAPL) and Google Inc. (GOOG) Nokia shares have dropped 26 percent since the accord was unveiled Feb. 11, reflecting doubts about the move to adopt Microsoft’s operating system, which is less than six months old and has just a few percentage points of market share.

Shrinking Margins

Microsoft spokeswoman Melissa Havel declined to comment on the specifics of the agreement. Laurie Armstrong, a spokeswoman for Nokia, said the final contract hasn’t been signed and the company will share further details when they are complete.

Espoo, Finland-based Nokia needs to cut costs to keep operating margins from narrowing further, after they shrank to 4.9 percent last year from 19 percent a decade earlier. For 2011 and 2012, Nokia may cut its budget for research and development in devices and services by about a third from last year’s spending of about 3 billion euros, said Sami Sarkamies, a Helsinki-based analyst with Nordea Bank.

Nokia’s royalty payments will help Redmond, Washington- based Microsoft make a profit on the accord even after the payments to Nokia, one person said. Some of the payment to Nokia would be made before the company starts selling the phones, meaning Microsoft bears some upfront cost in the partnership.