Reasons Why Nokia May Be Planning To Re-Enter The Smartphone Business
Taking a U-turn on its stand on smartphones, Nokia (NYSE:NOK) recently confirmed it is looking for a partner to re-enter the smartphone business, following Microsoft’s (NASDAQ:MSFT) $7.6 billion handset business write-down. [1] While this seems a surprising move given the highly competitive nature of the smartphone market, it makes some sense due to three reasons: 1) there has been a shift in Microsoft’s focus from handset business to developing an ecosystem; 2) the global growth in smartphone sales is strong; and, 3) strong customer response to its N1 tablet might have encouraged Nokia to reconsider its opportunities in the market. However, realizing that competition from leading smartphone vendors Apple (NASDAQ:AAPL) and Samsung (NYSE:SSNLF) and low-cost manufacturers will not allow either easy entry or growth in the market, Nokia is planning to only provide design and technology, and it is searching for a partner to do all the “heavy lifting”. Therefore, it is likely that Nokia’s reincarnated smartphone business will not be nearly as big enough.
Nokia said late on Monday that it can start designing and licensing smartphone handsets in 2016, with a partner who could take care of manufacturing, sales, marketing and customer support. [2] The company had sold off its smartphone unit to Microsoft in 2013 in a deal which forbade the Finnish company to license its brand name to any smartphone manufacturer for 30 months after September 2013. The timing of Microsoft’s apparent disinterest in mobile business is near perfect as Nokia will be free from the terms of the deal by Q4 2016. This gives the company enough time to search for a suitable partner.
Our $7.50 price estimate for Nokia is about in line with the current market price.
See our complete analysis for Nokia stock here
Microsoft’s Disinterest Provides A Window Of Opportunity
Microsoft announced last week that it was writing off 80% of the value of its Nokia smartphone acquisition and cutting almost 7,800 jobs mainly targeting the phone business, which provided significant hints regarding the company’s smartphone strategy. [3] Now, rather than persevering in the competitive smartphone space, Microsoft is planning to develop an ecosystem of applications for Windows 10, that can easily run on desktops, laptops and phones. The shift in Microsoft’s focus from hardware to software has provided Nokia an outside chance to re-establish itself in the smartphone market, after its earlier mediocre attempt.
Microsoft didn’t see much success with handsets after it bought the segment from Nokia, thanks to the dominance of Samsung and Apple, and several emerging low-cost smartphone vendors. Since the Windows operating system was relatively less successful in smartphones (with its share at just 3%) than iOS and Android, Nokia will likely base its new smartphone line on Android, hoping for better reception this time. This makes sense considering that Android devices hold close to 80% of the share in the worldwide smartphone market. [4]
That said, the Android market is extremely competitive and Nokia’s ability to distinguish itself will ultimately depend on the quality of its hardware. Hence, the company needs to find a partner who can manufacture reliable and compelling quality smartphones, and market them accordingly.
Global Smartphone Market Is Growing
Global smartphone shipments increased a sizable 27.4% in 2014, and International Data Corporation (IDC) expects them to grow by 11.3% this year. [4] While this will represent a significant decline in growth rate, the industry is still moving ahead swiftly. The main reason behind the slow expected growth is a year-over-year decline in smartphone shipments to China in the first quarter of 2015, indicating that the largest market is maturing. However, there are still plenty of opportunities for smartphone vendors to explore in developing economies, and the global market is set to reach 1.9 billion units by 2019, up from 1.4 billion in 2015. [4] In developing economies, while Nokia will face stiff competition from affordable smartphone vendors and Samsung, it won’t have to worry about Apple too much, and thus gaining market share can be relatively easier.
N1 Tablet Launch Encouraged Nokia
Nokia launched its Android based N1 tablet earlier this year in China, which saw enthusiastic customer response. The company sold 52,000 units in its first two flash sales, with over 1.1 million buyers registered for these sales events. [5] The tablet, priced at $257, was remotely comparable to Apple’s iPad mini, but had an advantage over it. N1 was the only device available that uses Type-C USB power connector, which allows easy plug-in of the USB/power cable. [6]
Nokia was able to create significant buzz with its N1 launch in a market where smartphone sales are saturating. This would have given the company ample confidence in its ability to churn out appealing devices, thus triggering a possibility of re-entry in the smartphone business. Handsets powered by Android and comparable in design and quality to the N1 can help Nokia gain significant visibility on a global stage, positioning it as a formidable force against Apple, Samsung and others. However, a lot will depend on the partner Nokia has yet to find.
Developed And Competitive Landscape Won’t Allow Easy Growth
Nokia may be hoping for a better response for its smartphones this time around, but it is entering an industry where, except for Apple and Samsung, the market is highly fragmented. Nokia will face tough competition from high-end smartphones from Apple, high-medium range handsets from Samsung and low-cost phones from vendors such as Xiaomi. The Finnish company will have to find a balance between its price and hardware quality to successfully re-enter the market, let alone grow steadily. The illustration below indicates companies’ standings in the global smartphone market. [7]
No single player in the “others” segment including Xiaomi holds higher than 4.6% share, which clearly indicates the competitive landscape of the smartphone market. Nokia will have to strive hard to get its hands on even a small portion of the market. The company’s success in the smartphone arena is accordingly uncertain. That said, the promise is bountiful as well. We thus await Nokia’s pending decision with great interest.
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- Nokia confirms may re-enter mobile phone market through licensing, Reuters, Jul 14 2015 [↩]
- Nokia will only return to handsets with a partner, ZD Net, Jul 14 2015 [↩]
- Microsoft slashes 7,800 workers in latest retreat from failing smartphone business, July 8 2015, www.washingtonpost.com [↩]
- Global Smartphone Growth Expected to Slow to 11.3% in 2015 as Market Penetration Increases in Top Markets, According to IDC, IDC, May 26 2015 [↩] [↩] [↩]
- Nokia N1 has sold out in four consecutive Chinese flash sales, Phone Arena, Feb 3 2015 [↩]
- Nokia sells 20,000 N1 tablets in four minutes, with 500,000 more buyers lining up, ZD Net, Jan 9 2015 [↩]
- Smartphone vendor market share, Q1 2015, IDC [↩]