Nokia (NYSE:NOK) may no longer the world’s largest mobile phone manufacturer, having relinquished that throne to Samsung whose smartphone and feature phone sales outpaced Nokia’s globally last quarter. However, Nokia still commands a market share close to a quarter of the global handset market, with a dominant position in the emerging markets.
While that figure is quite high for a single company, its market share has been falling over the past few years. Only three years back when Nokia was at its peak, it used to command a market share of nearly 40%. But with the advent of smartphones such as Apple’s (NASDAQ:AAPL) iPhone and Research in Motion’s (NASDAQ:RIMM) Blackberry, as well as the emergence of strong Asian rivals such as Samsung, HTC and ZTE, Nokia’s fortunes took a downturn.
A big reason why Nokia failed to stand up to the emerging competition was that it couldn’t come up with a software platform that could address the changing needs of its customers. While competitors Apple, Samsung and HTC either developed a smartphone OS of their own or jumped on an open source mobile software developed by Google especially for smartphones, Nokia chose to stick with its older Symbian platform. The bet proved costly for Nokia as its Symbian smartphones fared poorly in the marketplace and Nokia lost significant market share.
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Microsoft and carrier partnerships key to Nokia’s smartphone plans
However, Symbian is a thing of the past now. Nokia has moved on to Micrososft’s Windows Phone platform and its Lumia family of smartphones have arrived in the market. Collaborating closely with Microsoft not only gave Nokia a better smartphone OS and hence more of a chance to stake a claim on the lucrative smartphone market, but also a deep-pocketed partner that was as desperate for a bigger share of the market. Nokia took the bold step at the start of 2011 and then moved with lightening speed to bring out its first Windows Phones, the Lumia, just ahead of the holiday season in Europe and other markets by the end of the year.
The Lumia smartphones have done reasonably well, garnering rave reviews at the CES 2012 and selling 3 million units in less than five months since launch. While it would be unfair to compare the sales figures with Apple’s or Samsung’s, considering Windows Phones’ relatively poor current position in the market, we believe that Nokia is generating healthy traction in a near duopolistic smartphone market.
Nokia has launched the Lumia on two of the four largest carriers in the U.S., AT&T and T-Mobile, as well as in Canada on Rogers and Telus. The company CEO, Stephen Elop, has gone on record saying that demand from the U.S. markets is “exceeding expectations”. Further, Nokia is pushing the Lumia hard in China as well, which is expected to supplant the U.S. as the world’s biggest smartphone market by the end of the year. With a billion strong mobile subscriber base and growing demand for 3G services, China presents a huge opportunity for Nokia. The Lumia 800C has already been launched on China Telecom, with cheaper variants and deals with China Unicom and China Mobile on the way.
With carriers increasingly warming up to the idea of a competitive third mobile ecosystem that could reduce the dominance of Apple and Google in the smartphone market, Nokia is looking to leverage the close integration of its devices with Microsoft to drive smartphone sales. (see Nokia’s New Year Resolution: Spread Carrier Love and Nokia Faces Big Tests This Year In China And U.S.) A stronger Lumia will also help Nokia increase its presence in the developed markets and derive more value from a region that despite the high-margin opportunity currently contributes less than 20% to Nokia’s overall value.
Symbian losses to be offset as Windows Phone matures
While Nokia’s Lumia story inspires hope, the corresponding story playing out on the Symbian front will continue to disappoint for a few more quarters at least. The recent loss of the top position in the handset market was more due to a sustained loss in market share from a drop in Symbian sales than Lumia’s failure to make up for the losses, since the latter has had limited time and exposure in the market. However, Q3 and Q4 are seasonally the strongest for Nokia by which time even the Lumia sales would have gained in strength from a greater carrier push and presence in the market.
Nokia also made an important acquisition at the start of 2012 that will help bolster its emerging market prospects in the coming years. It acquired a Norway-based mobile OS developer, Smarterphone AS, whose proprietary software platform would help enrich user experience on feature phones by providing a highly advanced functionality on very moderate hardware. (see Nokia Buys Smarterphone AS; Positive for Emerging Market Penetration ) This will help Nokia replace the old S40 software on its feature phones, make its low-end phones smarter and address the yet potentially unmet demand for quasi-smartphones that have already started making an appearance in the Chinese markets. (see Chinese Telcos Look to Boost Margins With Cheaper Smartphones)
We see this move as well as a greater Lumia push in China to help Nokia stem the emerging market share loss in the coming years. Since emerging markets account for close to 40% of Nokia’s overall value, this should go a long way in driving the company’s perceived value higher. Our price estimate for Nokia’s stock is $5, more than 50% ahead of market price.