Could Sprint Really Lead Smartphones Into the Developing World?

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Sprint (NYSE: S) made a major move on June 11 when it not only announced its entrance into the smartphone sphere, but that it had cracked the developing world market. 

The $99 Sprint ZTE Vital is a high mid-range Android smartphone that has spawned a new option for those not able to afford the more expensive iPhones, Androids, and Galaxies. The move comes out of nowhere and puts pressure on Apple (NASDAQ: AAPL), Samsung, and Google to come out with affordable versions of their smartphones. 

Missing a bite of the Apple?

Apple is rumored to have been making an attempt at developing a cheaper version of the iPhone that is made of plastic. In the first quarter, Apple actually lost market share in China due to a preference in that nation for China's Huawei devices. That could be a result of the iPhone's high cost. Apple recently announced it would develop a bargain iPhone, but didn't disclose the price point. The demand for an affordable product is even evidenced in the developed world, where customers often choose the iPhone 4 over the iPhone 5. That prompted a $28 price reduction. 

It's hard to say anything bad about Apple, but that can lead to inflation of the stock's price. In reality, Apple's market share is gradually dwindling, with sales of the Samsung Galaxy S4 actually beating iPhone sales in May. As Apple faces competition from all sides, the stock's price has reacted with a drop, but don't expect Apple's shares to increase back to the mid-$700s. While the stock's financials add up, with one of the highest returns on equity in the business and a profit margin of over 23%, I predict the years ahead will result in Apple's market share dropping. However, if the company is able to make a dent in the emerging market with a bargain smartphone, then it will have access to that multi-trillion-dollar industry and profits will continue to surge. Either way, I'm excited to see what this company is planning. It could be something big that saves a dominant market share and results in an exploding share price.

Changed landscape

With one statement, which likely took Apple by surprise, Sprint completely changed the landscape of the smartphone market. Not only is this phone comparable in price to some of the basic "non-smart" devices Nokia (NYSE: NOK) sells in the developing world, but it has potentially broken ahead of traditional smartphone providers who haven't managed to release a cheaper option for developing nations. However, in order for Sprint to become a leading smartphone provider, it needs to be able to market and sell its products internationally. 

But, Sprint doesn't look to be capable. In fact, I'm surprised the company was able to dedicate enough money to developing a smartphone. The company has posted a 78% increase in annual losses over the last four years. In 2009, the firm posted about $2.4 billion in losses, and 2012 resulted in more than $4.3 billion in losses. The cost of revenue is too much for this company to handle, at over $30.5 billion compared to revenue of over $35 billion last year. Depreciation and other costs increased operating expenses further. That poor return on equity tells me the firm wouldn't be able to market well in the developing world, and certainly not better than Apple (once it releases its bargain iPhone). These two companies are opposites when it comes to return on equity.

What this means for Nokia

The release could be bad news for Nokia, which has focused much of its attention on developing world sales of traditional models. Most people in these developing nations have a standard cellphone, often made by Nokia, but few are able to afford a smartphone. Now that Sprint released an inexpensive device, many Nokia users could make the switch. 

Nokia stakeholders would have likely taken Sprint's news hard, as any scrap of market share the company was hanging on to was invested in developing nations. Nokia likely knows the stats: according to an Upstream 2013 Emerging Markets Mobile Attitudes report, people in developing worlds have said they would buy a smartphone if it cost less than $100. The percentage of those who would buy: Nigerians (38%), Indians (15%), and Brazilians (9%). That means a lot of people will be trading in their Nokias, potentially for a Sprint ZTE Vital if it is the only affordable smartphone on the market. It should be noted that many of those surveyed don't yet understand what a smartphone has to offer, and the percentage of buyers could be much higher.

Nokia is becoming a dinosaur, and it needs to do something to regain its former prestige. The firm falls into the same category as washed up stars like IBM, BlackBerry, and Kirstie Alley. Revenue has dropped by about 25% since 2009, and profits are... well, there are none. The company posted loss last year of more than $2.6 billion. Anything this company releases should be wrapped in caution tape. Keep out!

Where the future could be headed

According to Dan Appelquist, open web advocate for Telefonica Digital, the smartphone market is about to be anchored in the developing world. "The big opportunity is in how we put smartphones into the hands of the next billion," he told Tech Radar. "And we do not believe that the situation we currently see with smartphones in developed markets will necessarily be replicated..."

If sales of VTE Vital catch on, Sprint could be running ahead of others in the smartphone industry, but that is unlikely to happen due to the company's inability to keep sales costs down. It's difficult to tell just how profitable the developing world market is, but now that a smartphone under $100 is on shelves, that question could be answered very quickly. However, I don't think Sprint has the answer, but they've already shocked us once.

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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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