With the new high-end Lumia smartphones (920 and 820) off to a good start, Nokia (NYSE:NOK) is now looking to push through lower tiers and gain a wider audience for the Windows Phone platform. The Finnish handset maker has been gradually launching the Lumia 620, its most affordable Windows Phone 8 yet, in several Asian and European markets in a bid to make up for the loss of Symbian market share in recent quarters.
Priced at just $249 (excluding local taxes), the latest Lumia is aggressively priced and easily undercuts the only other mid-range Windows model, the HTC 8S, in all the launch markets. Moreover, the fact that Nokia is launching its mid-level Windows Phones before Samsung or LG do the same, and before BlackBerry gets its entry-level BB10 handsets out next year, should give it a significant head start over rivals in emerging economies. 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.
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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 S40-based 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 similar-priced 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 a Lumia 5xx (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 $5, about 25% 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 15% of the company’s value with cash accounting for another 30%.
However, the first quarter of 2012 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 2012, fell close to 36% over the previous year.
Until recently, Nokia was 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 put pressure on margins causing Nokia to look to increase its Asha sets features’ to resemble smartphones more and defend its price points better. The launch of the full touch Asha phones in the later half of 2012, helped Nokia staunch the decline in feature phone sales as positive response for the new phones saw Q3 and Q4 combined sales of almost 16 million full touch Asha units, with a q-o-q growth of about 43% last quarter.
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 interested in the new Windows platform. However, Nokia will eventually need to push Lumia down to lower tiers, to address the emerging markets as well. Emerging markets accounted for almost 65% of Nokia’s handset revenues last quarter.
Additionally, Nokia 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)