Nokia’s (NYSE:NOK) low-end expertise seems to be working wonders for the Lumia 520. In the past month, the Lumia 520 has increased its market share of the overall Windows Phone 8 installed base from 18% to 27%, according to recently released data from AdDuplex. The 520’s strong demand helped Nokia increase its share of the WP8 market to almost 87%, ensuring that Microsoft’s (NASDAQ:MSFT) mobile fortunes are tied closely to its own. The data shows that the momentum that Nokia had generated at the low-end in Q2 is continuing this quarter as well. Most of the demand seems to be coming from emerging markets such as India where the Lumia 520 has already captured as much as 36% of the WP8 market. While the Windows Phone market may currently be very small, it is rapidly gaining momentum and has already displaced BlackBerry (NASDAQ:BBRY) as the third smartphone ecosystem of choice.
Nokia’s fortunes in the emerging markets have taken a hit as feature phone sales increasingly face the brunt of increased competition from cheap Android smartphones. But the success of the Lumia 520 could help offset some of that pain in the coming quarters. However, just as we saw last quarter, a higher mix of sales of the lower-end smartphones could put pressure on ASP levels and possibly margins as well in the coming quarters. Nokia has however had a lot of experience selling low-end mobile phones at a profit, and playing the volume game is what the Finnish handset maker is known for and is best at. Last quarter, despite selling more of the low-end smartphones and continuing to see a rapid decline in its feature phone business, Nokia managed to almost break-even with operating margins of about -1%. Moreover, the bigger issue at hand is the lack of a strong app ecosystem around Windows Phone that would draw in both developers and users alike to the fledgling platform. Building a critical mass of Windows Phone users is therefore paramount to Nokia’s future prospects, and the 520 is playing a critical role in that process.
520 Offsets Some Of The EM Pain
Due to Nokia’s traditional strength in emerging markets, the sharp decline in the company’s market share in these markets has been very concerning. Last quarter, the company saw its device revenues from the Asia Pacific and Greater China regions decline by about 28% and 57% respectively. In a quarter that is seasonally a strong one for the company, device shipments to Asia Pacific dropped 13% sequentially as Nokia’s strong Asha push and launch of low-end Lumia models did little to defend its market share against the armada of cheap Android smartphone options flooding the market.
Thankfully, however, it seems as though the Lumia has had little to do with the volume weakness. The strong sequential Lumia growth of 32% but weak ASPs, which fell from over 190 Euros to 157 in a single quarter, imply that Nokia shipped more of the low-end models such as the 520 than the 92x. The volume disappointment is therefore more the result of a quicker than anticipated transition from feature phones to smartphones happening in the emerging markets, as local manufacturers such as Spice, Karbonn and Micromax drive prices down. With feature phone sales rapidly shrinking, Nokia needs its Lumia smartphones to pick up the mantle soon. If the AdDuplex stats are anything to go by, the Lumia 520 seems to be doing that job in the emerging markets well.
Volumes Required For Ecosystem Development
A higher mix of low-end Lumia sales will however continue to put pressure on ASP levels and hence top-line growth. Margin-wise, however, there should not be much concern since we believe that the gross margins remain roughly the same across the Lumia portfolio. This could be gleaned from the company’s financials last quarter when smartphone gross margins registered a sequential jump of 40 basis points despite the shift in sales mix towards the low-end.
From a longer term perspective, getting more users on to the Windows Phone platform is even more essential than any potential near-term margin hit. Against the might of Android and the iOS, both of which combine to take a lion’s share of the smartphone market, Windows Phone needs users to adopt it as much and as soon as possible. This is required to incentivize app development and create a sustainable and profitable ecosystem for developers to thrive in. At 160,000, the number of apps on the WP platform is only a fraction of what is available on the competing Android and iOS platforms currently. However, Windows Phone is gaining momentum, having already surpassed BlackBerry in market share, and the number of apps have almost doubled from where they were a little over a year ago.