Nokia’s Pact with Microsoft – The Long and Short of It
Nokia (NYSE:NOK) recently announced a strategic partnership with Microsoft (NASDAQ:MSFT), in which it will adopt Windows Phone 7 as the main operating system for its smartphones. [1] Nokia competes with Samsung and Motorola Mobility (NYSE:MMI) in the featured phones (low end) category and Apple (NASDAQ:AAPL) and Research in Motion (NASDAQ:RIMM) in the smartphone (higher end) category.
Following the announcement, Nokia’s market price dropped almost 15%, leaving our $11.78 price estimate for Nokia stock 30% ahead of market price. Below we examine the potential short and long term impact of this news on our price estimate.
The Strategy Doesn’t Look Great in the Short-Term
According to Nokia, the transition to implement the new partnership transition could take at least two years to complete, after which Nokia hopes to see growth in both market share and margins. [2] Two years is a long time in the rapidly changing smartphone industry, which certainly is a risk factor for Nokia. It has already undergone large market share losses, mainly to Apple’s iPhone and Research in Motion’s BlackBerry. By the time the transition is complete, Nokia could be looking back at further market share declines. We anticipate that Nokia’s market share in emerging markets will decline from around 33% in 2010 to 24% by the end of our forecast period.
[trefis_forecast ticker=”NOK” driver=”0058″]
See our full analysis and $11.78 price estimate for Nokia
By giving operating system control to Microsoft, Nokia stands to lose the opportunity to differentiate its smartphones from the competition, and risks making its smartphones a commodity.
Further, Microsoft’s smartphone operating system has struggled to gain ground in the recent past. Its market share in the smartphone operating system market has dropped from around 9% in 2009 to 4% in 2010. Google’s (NASDAQ:GOOG) Android OS has grown its presence in the mobile market during this time.
So Nokia will likely struggle to maintain market share during the two-year transition. Additionally, the company will have to increase spending to integrate Microsoft’s OS, which could affect bottom-line profits in the near term.
Hope for the Long-Term
However, there is still hope for Nokia in the long-term, as the initiative will allow Nokia to concentrate on its hardware products post-transition and cut costs currently spent on software development. We believe that Nokia’s operating margins will continue to decline from around 11% in 2010 to 7% by the end of our forecast period.
[trefis_forecast ticker=”NOK” driver=”0647″ noanim=”1″]
Nokia can certainly save on R&D and SG&A costs that it currently spends on development of its Symbian operating system. Moreover, Microsoft could help Nokia gain presence in the U.S. market through its marketing prowess. Nokia has struggled in the recent past to gain share in developed markets, most notably in the U.S.
[trefis_forecast ticker=”NOK” driver=”0053″ noanim=”1″]
Notes: