Armed With Windows Phone 8, Nokia Catches Big Fish China Mobile

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Nokia’s (NYSE:NOK) Lumia line could have a much bigger presence in China soon. While all the talk in the past week has been about Apple (NASDAQ:AAPL) and the big iPhone 5 launch, Nokia seems to have pulled off a major coup by getting China Mobile (NYSE:CHL) on board to sell the Lumia 920. The news was revealed by a Nokia representative this week. [1] While pricing, availability and other details remained absent, we feel the roll out will happen after the Lumia launch in the U.S. considering the big marketing push that Microsoft is going to put behind the whole Windows story. With the world’s largest subscriber base of close to 700 million and a 3G penetration of only about 10%, China Mobile presents a huge opportunity for a popular emerging market brand such as Nokia.

This comes on the back of another news that Nokia and Microsoft (NASDAQ:MSFT) have also enlisted the services of Verizon to support Windows Phone 8 in the U.S. With AT&T (NYSE:T) and T-Mobile already offering the Lumia 900 and Lumia 710, respectively, Nokia seems to be moving to aggressively market the Lumia now that it finally has a strong smartphone OS in Windows Phone 8.

However, Nokia faces an uphill task against the two well-entrenched ecosystems of Apple and Google (NASDAQ:GOOG) to create a niche for itself and Microsoft. Nonetheless, more carrier partnerships and better app support to drive Lumia sales will be key to its resurgent hopes. We have a $4.50 price estimate for Nokia, about 70% ahead of the current market price.

See our complete analysis for Nokia stock here

Nokia has carrier backing

The need for more competition in the smartphone market, not only in terms of hardware but also software, is being increasingly felt by both customers and carriers alike. A competitive third mobile ecosystem will increase the number of choices for customers and foster innovation in the industry. More competition will also put less burden on the carriers who are increasingly feeling the pinch of smartphone subsidies on their margins. It is no wonder therefore that wireless carriers in both the U.S. and China have jumped on Nokia’s latest offerings to counter the growing dominance of Android and iOS in both of these markets.

In the U.S., T-Mobile and AT&T were the early Lumia backers with AT&T affording the phone a “hero” status at its stores and making it the exclusive free phone for all AT&T employees to generate awareness. The marketing push ensure that the Lumia 900 was among the top three best-selling handsets at AT&T until July, a period of four months since launch. [2] With Lumia WP8 on the horizon, bringing in more CDMA-based carriers like Verizon and Sprint into its fold will be the next step in Nokia’s gradual plans to penetrate the U.S. market.

As for China, its smartphone market is expected to be the largest in the world by the end of the year. With 3G penetration at a lowly 18%, the growth potential 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 800C offering. China Mobile is in need of a flagship smartphone that it can actively market in order to promote its 3G network, an area where it has lagged its competitors. (see China Mobile Needs To Step Up As 3G Growth Slows) It is pursuing an Apple iPhone deal, but the company CEO believes that this could take a while due to a ‘lag’ in the development of a TD-SCDMA compatible chipset. It may not be long before the iPhone arrives on China Mobile, so Nokia will be looking to the make the most of the opportunity while the sun shines.

Still, while selling the iPhone is more lucrative considering its incredible popularity among buyers, emerging market carriers are wary of margin pressures that selling such an expensive phone entails. Nokia can alleviate these concerns by offering more handset choices at lower prices, or packing in more features at 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 has also announced the cheaper Lumia 610 on China Telecom, and will be looking to add other carriers soon.

WP8 has essential ingredients for success

Where carrier partnerships have not been hard to come by for Nokia, getting people to warm up to the Windows ecosystem has proved increasingly tough considering how well-entrenched Android and iOS have become as mobile ecosystems. The iTunes store and Google Play boast of more than 650k and 600k apps, respectively, while there are only about 100K available in the Windows Phone Marketplace.

It is here that WP8 offers both Nokia and Microsoft their best chance to find a place in the growing mobile market. While building Windows 8 and WP8, Microsoft ensured that they both share the same kernel and therefore inherit the same rich feature set that has made Windows a household name in the PC industry. This will help integrate the two platforms closely, thereby making apps developed for either platform easier to port. Having a huge user base for its Windows PC platform will therefore help Microsoft generate significant support for the new integrated Windows8/WP8 user experience, driving the sales of Windows Phones in general and the Lumia in particular.

What could also help Windows Phone 8 generate more traction in the market, as opposed to earlier versions of the OS, is the increasingly litigious environment in the smartphone industry, courtesy Apple. As partners such as Samsung and HTC, driven by the Apple verdict, devote more marketing as well as developmental support to Microsoft’s new OS, we could see more Windows Phones reach customers, fueling developers’ interest in the platform. A thriving WP ecosystem will help Nokia benefit from an increase in Lumia sales, as it works closely with Microsoft to bring down costs and tightly integrate hardware with software. (see Apple Patent Tide Could Lift Microsoft, Nokia and Maybe Even RIM)

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Notes:
  1. Nokia to produce Lumia 920 with TD-SCDMA support for China Mobile, Engadget, September 15th, 2012 []
  2. Apple’s iPhone 4S is no longer the top-selling smartphone in the U.S., BGR.com, September 4th, 2012 []
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