With the new high-end Lumia smartphones seemingly off to a good start, Nokia (NYSE:NOK) is looking to use the initial momentum to gain a wider audience for the Windows Phone platform. The Finnish handset maker unveiled Wednesday its most affordable Windows Phone 8 yet, the Lumia 620, with an eye on the low-end smartphone market in emerging economies. Priced at just $249 and contract-free, the Lumia 620 will launch in January 2013 initially in Asian markets, followed closely by Europe and the Middle East. With cheap Android smartphones flooding the market and pushing prices down to sub-$150 levels, Nokia still has some way to go before Windows Phone 8 reaches the very low-end of the market, but the Lumia 620 does make for a very good start.
While Nokia’s smartphone business has been slipping fast amid a slow and painful transition to Windows Phone, sales of low-end phones in emerging markets have held up relatively well and continue to be profitable despite Android’s rising popularity. The Asha feature phones have so far held fort in the face of growing competition from Android, but Nokia will eventually have to come out with cheaper Windows Phones aimed at its traditional strongholds in emerging markets. The Lumia 620 is a good sign that Nokia is indeed working towards that end, and announcing the Lumia 5xx series (recently launched in India on WP 7.5 for less than $200) with Windows Phone 8 will likely be the next step in this strategy to broaden the Lumia reach and generate momentum in the app ecosystem.
Our price estimate for Nokia’s stock is $4.50, more than 30% ahead of the market price.
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%.
However, the first quarter of this year 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 low-end 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 earn 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 Asha feature sets to resemble smartphones more, and defend its price points better. The launch of the full touch Asha phones last quarter helped Nokia staunch the decline in feature phone sales as positive response for the new phones saw sales of almost 6.5 million full touch Asha units.
While Asha defends the very low-end sub-$100 price points in the emerging markets, Nokia will look to its expanding line of Windows Phones to compete with Android on an even keel. With the company pinning all of its hopes on Windows Phone to rejuvenate its smartphone sales, it has started with the high-end models in order to generate buzz and get customers to talk about their new smartphones. However, Nokia will eventually need to use Lumia to address the emerging markets as well. Emerging markets accounted for more than 70% of Nokia’s handset revenues last quarter.
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)