The Lumia may be key to Nokia’s (NYSE:NOK) resurgent smartphone hopes, but the handset maker cannot afford to lose focus on its feature phone business. While Nokia’s smartphone business has been slipping fast amid a slow and painful transition to Windows Phone, its feature phone sales have held up relatively well and continue to be profitable despite Android’s rising popularity. It is therefore a good sign that while Nokia has been marketing the Lumia well in developed markets, it continues to roll out new S40 feature phone models aimed at its traditional strongholds in emerging markets.
The Finnish mobile phone manufacturer recently unveiled two new additions to its growing portfolio of Asha phones, the Asha 205 and the Asha 206, with smartphone-like social networking features. The Asha 205 has a dedicated Facebook button while the 206 has access to Facebook and Twitter from the home screen. Nokia has also incorporated a feature called Slam, which allows users to share content almost instantly with nearby friends using Bluetooth technology. With these features, Nokia hopes to appeal to first-time users and compete better with cheap Android smartphones that have been exerting a downward pressure on prices in emerging markets for quite some time.
Our price estimate for Nokia’s stock is $4.50, more than 30% ahead of the market price.
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Nokia tries to address plummeting sales
The most valuable market for Nokia’s mobile business has historically been the emerging markets where, although its market share has been declining fast, it has mostly remained ahead of the rest in terms of total units shipped. By our estimates, Nokia’s emerging markets division accounts for close to 20% of the company’s value with cash accounting for another 25%.
The first quarter of this year, however, saw Samsung race ahead to become the world’s largest handset maker, breaking Nokia’s 14-year stranglehold. Nokia’s fall from the top was a result of the proliferation of cheap Android-based smartphones that have eaten into the volumes of its feature phones. Consequently, Nokia’s revenues from emerging markets in the first three quarters of 2012 have fallen 35% over the same period last year.
Until now, Nokia has been able to bring down the prices of its feature phones or enter into the dual-sim phone segment to compete and turn a small profit. But the entry of low-cost $100-$150 Android touch-based smartphones has pressurized margins, causing Nokia to look to increase its feature set to resemble smartphones more and defend its price points better. The Asha 205 and 206 will be launched at a price of $62, more than 50% ahead of its average feature phone ASP of $40.
While the company is pinning all of its hopes on Windows Phone to rejuvenate its smartphone sales, it cannot let feature phone sales decline rapidly since it still accounts for a majority of its sales currently, especially in the emerging markets. Emerging markets accounted for more than 70% of Nokia’s handset revenues last quarter. The Asha line of mobile phones, which not only includes feature phones but also fully touch low-end quasi-smartphones, should help it compete directly with the cheap Android rivals that are infiltrating the market, thereby decreasing the pricing pressure and slowing down the decline in sales.
Additionally, 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 Norway-based mobile OS developer Smarterphone AS whose proprietary software platform will help enrich user experience on feature phones by providing a highly advanced touch-based functionality on moderate hardware. (see Nokia Buys Smarterphone AS; Positive for Emerging Market Penetration) This will help Nokia bolster the old S40 software experience on its feature phones, make its low-end phones smarter, and address the huge demand for quasi-smartphones that are growing in presence in the Chinese market. (see Chinese Telcos Look to Boost Margins With Cheaper Smartphones)