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This Wireless Play Will Shine in 2013

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

These days, it’s easy to forget that Nokia (NYSE: NOK) is still the second largest cell phone manufacturer in the world, commanding a 24% market share that barely trails Samsung’s 29%.

The former undisputed leader of the mobile industry has certainly been battered and bruised over the past five years, with its stock trading 90% lower than its all time high near $40, but it has staged a modest recovery over the past half year, with shares rallying 130% from a multi-year low of $1.63. Although those shareholders who were brave enough to buy at the bottom have profited handsomely, does Nokia still have room to grow in 2013?

Dumb Phones vs. Smart Phones

Although Nokia is still ranked second in the handset industry, most of its global share comes from traditional handsets, and not smartphones. Since the arrival of Apple’s (NASDAQ: AAPL) iPhone in 2007, most investors are now watching figures for smartphone sales, rather than regular mobile devices, more carefully.

In the smartphone race, Nokia finished the third quarter of 2012 in seventh place with a meager 4% market share. This was a disappointing slide after claiming third place in the second quarter. Nokia’s first batch of Lumia devices, running on Microsoft (NASDAQ: MSFT) Windows Phone 7.5, failed to excite consumers, many of whom flocked to Google (NASDAQ: GOOG) Android and Apple iOS devices.

Meanwhile, the top five smartphone spots were claimed by Samsung, Apple, Sony, HTC and Research in Motion (NASDAQ: BBRY), in that order.

By the end of the year, Samsung had pulled even further ahead:

<table> <tbody> <tr> <td> <p><span><span><span><strong>Company (end of 2012)</strong></span></span></span></p> </td> <td> <p><span><span><span><em><strong>Total Cell Phone Market Share (Rank)</strong></em></span></span></span></p> </td> <td> <p><span><span><span><em><strong>Total Smartphone Market Share (Rank)</strong></em></span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Nokia </strong></span></span></span></p> </td> <td> <p><span><span><span>24% (2)</span></span></span></p> </td> <td> <p><span><span><span>4% (7)</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Samsung</strong></span></span></span></p> </td> <td> <p><span><span><span>29% (1)</span></span></span></p> </td> <td> <p><span><span><span>46% (1)</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Apple</strong></span></span></span></p> </td> <td> <p><span><span><span>18.5% (3)</span></span></span></p> </td> <td> <p><span><span><span>35% (2)</span></span></span></p> </td> </tr> </tbody> </table>

Although Nokia appears to be hanging in there, too much of its product line consists of traditional handsets, which are rapidly decreasing in popularity due to the abundance of cheaper Android smartphones. As Apple and Samsung battle it out in courtrooms across the world over patent violations, is there room for Nokia to even squeeze back in?

The Night is Darkest Before the Dawn

Just as Apple and Samsung looked as if they were about to blot out the sky for Nokia’s long suffering investors, surprising news regarding Nokia’s Windows Phone 8 flagship phone, the Lumia 920, emerged. People actually wanted to buy it!

Nokia reported a record 2.5 million pre-orders around the world in the first three weeks of its availability, which is more than the total sales of the entire Lumia series (610,710,800 and 900) during the third quarter of 2012. 

The Lumia 920T sold out within two hours of its debut in China, and received widespread support and promotion from the country’s largest carrier, China Mobile. Meanwhile, the 920 also sold well in Europe - especially in Germany, the U.K. and Finland, which all reported the 920 selling out within several few hours of its release.

In the United States, the 920 emerged as a top seller on Amazon.com and became the third best selling smartphone at AT&T, its exclusive provider. As demand rises, Verizon - the second largest carrier in the United States - is also expected to offer the Lumia 920. Both AT&T and Verizon would benefit from offering the Lumia as a viable alternative to Apple and Android devices. Both Apple and Google-backed handset manufacturers (especially Samsung) have enjoyed an increasing amount of leverage in dictating subsidies due to the near duopoly between the two companies. A popular Nokia handset could give the carriers the upper hand in future negotiations.

Microsoft: “I think we should see other people.”

It’s clear that Nokia is going all-in by ditching Symbian and exclusively offering Windows Phones, but is the feeling mutual? Although Microsoft has placed a great deal of faith in Nokia, it has also started negotiations with Android heavyweights Samsung and HTC to start offering more Windows Phones. In addition, Microsoft already has a contingency plan in case Nokia fails - it may build its own smartphone, just as it built its own tablet with the Surface.

Despite this lack of reciprocity, Nokia still produces 76% of all Windows Phones. Whether or not that fluctuates in the future will depend strongly on Lumia’s measured success in 2013.

Microsoft also doubled the size of its Windows Phone store this year, from 75,000 to 150,000 applications. Although this is still dwarfed by Google’s Play Store and Apple’s App Store, which are both tied at approximately 700,000 applications each, Microsoft’s dedication to growing its mobile marketplace is impressive.

Research in Motion: The Wild Card

Financial journalists, analysts and investors all love to mention Research in Motion and Nokia in the same breath, since both were flattened by Apple and Google over the past five years. Yet in reality Nokia and Research in Motion are moving in two very different trajectories.

Despite all its execution troubles, Research in Motion remains the favorite of enterprise customers, including the United States government, due to its more robust security features in comparison to Android or iOS. Research in Motion also controls 7% of the smartphone market to Nokia’s 4%.

Most importantly, RIM has promised to finally deliver its long awaited BlackBerry 10 upgrade to its flagship devices in January, which could boost its market share in 2013.

RIM has also been engaged in patent litigation battles against Nokia for several years, but two recent key developments signal that a cease fire is on the horizon. Last month, Nokia reached a patent agreement with RIM regarding its WLAN local area network technology, and Nokia withdrew all related lawsuits. Blackberry then paid Nokia 50 million euros ($65.8 million) to settle additional patent disputes. In addition, analysts believe that RIM will be required to pay Nokia a license fee between $2 to $5 for each BlackBerry handset sold using Nokia technology. The deal is similar to Nokia’s arrangement with Apple, in which Apple must pay a $10.60 royalty fee to Nokia for each iPhone sold.

Elop’s Humility Can Save Nokia

When Stephen Elop, a former Microsoft executive, first took the reins at Nokia, board members, executives and shareholders scrambled for the exits, believing that the end was nigh. Elop, a Canadian, was Nokia’s first non-Finnish chief executive, and his opening gambit - to abandon its aging Symbian OS and partner with Microsoft - were widely criticized.

Yet Elop has steadily and capably slowed Nokia’s descent through cost-cutting measures and an all-in bet that Windows Phone 8 will revive the company. Although Elop still stands in the middle of the "burning platform" which he referenced in his infamous leaked memo, he has given Nokia shareholders a vestige of hope that was non-existent under his predecessors.

Most importantly, Elop understands that Nokia has fallen woefully behind in the smartphone race - a position that Nokia had been reluctant to admit since the introduction of the iPhone in 2007.

In Elop’s words in 2011:

The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience. Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes. Unbelievable.”

Bottom Line

As French philosopher Simone Weil once wrote, “Humility is attentive patience.” Nokia is certainly abiding by that mantra today. Although no one expects Nokia to stage an immediate turnaround in 2013 and take down Apple or Samsung, the company’s low price-to-sales ratio of 0.3 and hefty 6% dividend yield should attract patient value investors. The stock also has a price-to-book ratio of 0.98, which means that further downside is limited, unless it posts negative cash flow next year.

Leo Sun is long Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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