Microsoft Corp's acquisition of Nokia's handset business gives the
software behemoth control of its main Windows smartphone partner, but
leaves a question mark over the bigger business it has bought: Nokia's
cheap and basic phones that still dominate emerging markets like India.
Chief Executive Steve Ballmer has said he sees such phones - of which
Nokia shipped more than 50 million last quarter - as an entree to more
(Also see: Microsoft to acquire Nokia's Devices & Services business in 5.44 billion euros deal)
"We look at that as an excellent feeder system
into the smartphone world and a way to touch people with our services
even on much lower-end devices in many parts of the world," he said in a
conference call to analysts on Tuesday.
But analysts warn that's easier said than done.
problem, said Jayanth Kolla, partner at Convergence Catalyst, an
India-based telecom research and advisory firm, is that Microsoft simply
lacks Nokia's retail and supply chain experience in the Finnish
company's most important markets.
"The devices business, especially the non-smartphones business in emerging markets, is a completely different dynamic," he said.
pointed to the need to manage tight supply chains, distribution, and
building brands through word-of-mouth. "Microsoft doesn't have it in its
DNA to run operations at this level," he said.
India is a case in
point. Nokia has been there since the mid 1990s and the country
accounted for 7 percent of its 2012 revenue while the United States
generated just 6 percent, according to Thomson Reuters data. Its India
roots run deep: it has a presence in 200,000 outlets, 70,000 of which
sell only its devices. One of its biggest plants in the world is in the
southern city of Chennai.
For sure, Nokia has slipped in India as
elsewhere: After nearly two decades as the market leader it was unseated
by Samsung Electronics Co Ltd in overall sales last quarter.
But it still sold more of its more basic feature phones.
recently as last October, market research company Nielsen ranked it the
top handset brand. The Economic Times ranked it the country's third
most trusted brand.
Loyalty runs deep
In a land of frequent
power cuts and rugged roads, the sturdiness and longer battery life of
Nokia's phones have won it a loyal fan base - some of whom have stayed
loyal when trading up.
Take Sunil Sachdeva, a Delhi-based
executive, who has stuck with Nokia since his first phone. He has just
bought his fifth: an upgrade to the Nokia Lumia smartphone running
Microsoft's mobile operating system.
"Technology-wise they are still the best," he said of Nokia.
Microsoft can't take such loyalty for granted. Challenging it and
Samsung are local players such as Karbonn and Micromax, which are
churning out smartphones running Google Inc's Android operating system
for as little as $50.
Such players are also denting Nokia's
efforts to build its Asha brand, touchscreen devices perched somewhere
between a feature phone and a smartphone.
Nokia shipped 4.3 million Asha phones globally in the second quarter of this year, down from 5.0 million the previous quarter.
sales performance of the Asha line has been quite poor," said Sameer
Singh, Hyderabad-based analyst at BitChemy Ventures, an investor in
local startups. "With increasing competition from the low-end smartphone
vendors, I'm unsure how long that business will last."
leaves the cheap seats. Singh estimates that the Asia Pacific, Middle
East and Africa accounted for two-thirds of Nokia's feature phone
volumes in the last quarter, at an average selling price of between 25
to 30 euros.
"I don't see how Microsoft can really leverage this
volume," he said. "The market is extremely price sensitive and margins
are racing into negative territory."
Too big to ignore
The quandary for Microsoft is that while the basic phone market may be declining, it may simply be too big to ignore.
you look at markets like India and Indonesia, more than 70 percent of
the volume comes from the feature phone business," Anshul Gupta,
principal research analyst at Gartner said. "It's still a significant
part of the overall market."
That means that if Microsoft wants to
herd this market up the value chain to its Windows phones, it needs to
keep the Nokia and Asha brands afloat - while also narrowing the price
gap between its smartphones and the feature phones and cheap
Microsoft has hinted that lowering prices of
smartphones would be a priority. The Windows Phone series includes the
top-end Lumia 1020, which comes with a 41-megapixel camera, while it
also sells simpler models such as the Lumia 610 and 620 aimed at
first-time smartphone buyers.
"The lower price phone is a
strategic initiative for the next Windows Phone release," Terry Myerson,
vice president of operating systems said on the same conference call,
while declining to provide details.
An option for Microsoft,
analysts said, would be to shoe-horn services like Bing search, Outlook
webmail and Skype, the Internet telephony and messaging application,
into the lower-end phones as a way to drive traffic to those services
and make the devices more appealing.
"So you can bundle services
with these low-end products and that way you can reach a wider
audience," said Finland-based Nordea Markets analyst Sami Sarkamies.
in the meantime Microsoft needs to brace for assault on all fronts as
emerging market rivals see an opportunity to eat further into Nokia's
market share. In India, said Convergent Catalyst's Kolla, cheap local
Android brands have been held back by Nokia's strong promotion of its
mid-tier Asha brand.
"Now, I expect them to pounce," he said.
© Thomson Reuters 2013