It looks like Microsoft (NASDAQ:MSFT) has made good on what seemed like a lofty claim made just two months back that it plans to overtake iPhone’s market share in China. According to the company’s COO for the Greater China region, Microsoft’s Windows Phone has already reached a 7% market share in the country trumping Apple (NASDAQ:AAPL) iPhone’s 6%.  While it was never a tall order for Microsoft to achieve that target considering that iPhone’s market share wasn’t too high in the first place, the fact that the company has reached this milestone in such a short period of time shows that China will play a key role in shaping Windows Phone’s as well as its key partner Nokia’s (NYSE:NOK) fortunes in the coming quarters.
Our price estimate for Nokia’s stock is $5, about 75% ahead of market price.
- What Will Drive Growth For Nokia?
- Ericsson & Nokia: Who’s More Leveraged?
- Is Nokia Leveraging Its R&D Investments Effectively?
- Nokia’s Earnings Crash On Account Of Industry Weakness
- Nokia Earnings: What Factors Can Impact Results
- Here’s How Nokia Can Gain From Its Launch Of Connected Health Devices In India
China’s growing smartphone market a huge opportunity…
According to IDC, China’s smartphone market will become the largest in the world by the end of the year. With 3G penetration at a lowly 14%, the growth potential in this market is huge. Even the carriers here are actively trying to transition their huge 2G base to 3G. China Telecom has already jumped on Nokia’s offering and it shouldn’t be long before China Mobile and China Unicom also lap it up.
While selling the iPhone is more lucrative considering its incredible popularity among buyers, emerging market carriers are wary of the margin pressures that selling such an expensive phones entails. Nokia is alleviating these concerns by offering more handset choices at lower prices, or packing in more features for the same price. While the iPhone retails at an unsubsidized $775 in China, Nokia’s Lumia 800C is priced at a competitive $570, more than $200 cheaper. Nokia also plans to bring the cheaper Lumia 610 to China soon.
Nokia’s traditional strength has always been emerging markets such as China. We estimate that emerging markets account for close to 40% of Nokia’s value, almost double as much as developed markets contribute. Nokia’s brand value in these markets together with the low-cost offerings that it plans to bring out should build a solid ground for Windows Phones to pick up strength. (see Lumia And China Drive Nokia’s $5 Value)
…to generate critical mass for the Windows Phone
Growing acceptance for Windows Phones will help Microsoft and Nokia draw in developers to build apps for the platform. Although the Lumia has garnered rave reviews on the web and is seen by many as a worthy third competitor to Apple and Google, lack of app support for the platform is Windows Phone’s biggest weakness currently. The iTunes store and Google Play boast of more than 600k and 400k apps respectively, while there are only 80k available in the Windows Phone Marketplace.
However, a point to be made here is that even Android was slow to take off when it was launched. But slowly and steadily, it gained in popularity and once it hit an inflection point, the rise both in terms of apps and market share was phenomenal. We concede that the smartphone market has changed significantly since then and Nokia/Microsoft are going to face even greater challenges than Google ever did considering that Windows Phone has to contend with two platforms instead of one. However, Microsoft’s long-term strategy of integrating its mobile experience with the PCs, where it has a huge user base to leverage, gives it a big competitive advantage over rivals.
China gives Nokia/Microsoft a huge opportunity to build a critical mass for its Windows Phones and generate developer support. Nokia’s mobile hardware skills, which were never in question despite its falling market share, will help it offer well designed handsets at cheaper price points, undercutting Apple in the country. Together with a competitive and an un-fragmented OS , it will also be able to offer a consistent app experience across its Lumia portfolio, something which the plethora of Android smartphones in the market customized by handset makers lack.Notes:
- Windows Phone overtakes iPhone in world’s largest smartphone market, BGR, May 18th, 2012 [↩]