Microsoft has reportedly paid Nokia $1 billion to not only promote but also develop Windows handsets and products.

Less than a month has passed since the announcement of strategic partnership between powerhouses Nokia and Microsoft. While the deal made a media splash, it didn’t reveal a lot of specific information about the partnership. Two sources close with knowledge of the terms revealed to Bloomberg that the deal would span five years and that Nokia would pay Microsoft for every copy of Windows that it uses in its phones. They spoke on condition of anonymity because the contract has yet to be signed.

ZDnet reports that the agreement was part of an attempt by Microsoft to keep Nokia from choosing Google’s Android operating system and opt for Windows 7 instead, according to sources. Nokia also chose Microsoft because Windows Phone software, which is more updated than Android and “has a smaller number of handsets for sale, [and] gives Nokia a better chance to stand out,” sources added.

The deal would financially benefit both companies if it succeeds and it might even give the companies an edge in the smartphone market, curtailing threats from Google and Apple. According to Bloomberg, Nokia needs to cut costs to stop its operating margins from narrowing further, and can achieve this with plans to cut its research and development budget by up to a third in 2011 and 2012. In return, Microsoft will make money from the royalties it will receive from Nokia selling and promoting its products and giving the Finnish smartphone maker access to some of its patents, reports Cnet.

The deal will also allow for Microsoft to use Nokia’s “Navteq” mapping products for geological services and selling local advertisements and coupons, which would generate additional revenue for Nokia. The two companies also plan on dividing revenue from search and advertising, Microsoft president Andy Lees said last month according to Bloomberg. Both companies are under pressure from investors and the new deal might just be enough to propel both companies forward and compete in today’s brutal smartphone market.