Is Windows Phone 8 a Nokia Lifeline?
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Things seem to be changing at Microsoft (NASDAQ: MSFT) these days. The company recently rolled out a new logo, the release of the Windows 8 operating system is expected on Oct. 26, the new Surface tablet is expected at the same time as the operating system and the latest version of the Windows Phone is expected on Sept. 5.
This latest phone, which will be carried on the Verizon Communications (NYSE: VZ) network, is made by Nokia (NYSE: NOK). While the release of this new wireless device will impact each company in different ways, the news has caused a price spike in Nokia shares of more than 10%. Investors are hopeful that the tripartite partnership represents the onset of a new era for Nokia. The reality, however, is while this information is an integral part of the company’s resurrection, it overlooks the most critical piece – maintaining a stronghold at the low-cost end of the market.
The Newest Trifecta
The pressures that have affected Nokia are familiar to anyone who owns a wireless phone. Most consumers over age 30 have owned a Nokia device at one time or another; the company once led the market and seemed unstoppable. Since 2008, the stock has given up 90% of its stock price and the company’s market share is in a similar position. In an effort to save itself from the scrap heap in the smartphone wars, Nokia abandoned its own operating system, opting instead to partner with Microsoft. While the union was praised by analysts and investors alike, it has been nearly a year since a new device has been introduced on Verizon’s industry-leading network.
Verizon likely has the least risk in the arrangement, since it’s already well positioned with both Apple’s (NASDAQ: AAPL) iPhone and an array of devices that run of Google’s (NASDAQ: GOOG) Android. Verizon is not in need of an alternative, so its willingness to add a third platform to its network should be seen as a positive for the Windows Phone. Along those lines, research firm IDC predicts that Windows-based phones will account for 19% of the market by 2016. This is good news for Microsoft, which is clearly making a real effort to give itself a facelift in a number of arenas.
Nokia, on the other hand, is likely the company with the most at stake with the upcoming release. Microsoft does not have an exclusive deal with Nokia, so proving its relevance in the smartphone segment is important. Nokia needs to not only look strong in the eyes of the public, but in the eyes of its partner as well. It is likely that to this end the announced release date is just one week before Apple is believed to be announcing the iPhone 5. If Nokia can even hold its own in this environment, it might go a long way toward becoming a more viable alternative.
Unfortunately, the positive news for Nokia is limited to the potential success of the new smartphone. The Microsoft Surface tablet was designed completely devoid of any Nokia input or involvement. With Google’s Nexus 7 gaining in popularity, the established dominance of the iPad and new devices being released with increasing regularity, the lack of a tablet offering represents a significant hole in Nokia’s product line.
Nokia’s True Hope
While the hype and commentary that is, and will be, generated by the launch of the new Windows Phone is important for Nokia, there are other critical factors in play. The company absolutely must become a respected player in the smartphone segment if it is to have a long-term future. The reason that Nokia is not yet in dire straits, however, is that it has maintained a strong global position in overall unit sales, with a concentration in the lower-cost end of the market. According to the most recent figures, Nokia was the second largest producer of wireless phone based on units shipped, coming in just shy of a 20% market share; only Samsung, at 21.6%, sold more units.
Maintaining strong sales in this end of the market has allowed the company to stay in the fight. It may ultimately become a game changer as the relationship between wireless carriers and device manufacturers changes. There continues to be a heightened level of chatter that suggests that the days of subsidized devices may be limited. Under the current framework, the bulk of the cost of most devices is borne by the wireless carrier. In the absence of this kind of arrangement, the most popular smartphones – on both the Apple and Android platforms – would retail for around $600. While some consumers may be willing to pay the full price to have the most current phone, many will not. If Nokia can bring a low-cost smartphone option to its loyal customers, it may serve as a catalyst to return the company to true relevance in the space.
Overview
Nokia’s continuing ability to maintain a stronghold in the low-cost end of the market should give the company the necessary longevity to remain in the fight. If its partnership with Microsoft can reach critical mass, the company has a chance to surge back to become a real competitor. As long as the stock price remains around $3 a share, investors are able to essentially buy a never-expiring option on the company’s turnaround. Owning these shares definitely has a largely speculative component, but Nokia is a real player that has earned the right to be watched with care.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
