AT&T (NYSE:T) announced it is offering Nokia's (NYSE:NOK) flagship phone, the Lumia 920, for $99 with a two year contract. In addition, AT&T is offering the Lumia 820 for $49.99. When compared to its competitors, Apple's (NASDAQ:AAPL) iPhone 5 costs $199 with the same two year contract and Samsung's (OTC:SSNLF) Galaxy Note II for $299. Even when you compare the price of previous iPhone models to the Lumia 920 (all with a two year contract) the iPhone 4S costs $99.99 and the iPhone 4 $49.99 in some areas. That means that a Lumia 920 costs the same as an iPhone 4S and the Lumia 820 costs the same as the ancient iPhone 4. On top of this good news AT&T also announced that it will add a wireless charging pad for free for those who purchase a Lumia 920 early but be warned this is a limited time offer and AT&T most likely has a cap for the free charging pads.
The Lumia 920, with no contract commitment, costs $449.99, whereas the iPhone 5 and the Samsung Galaxy Note II costs $649.99. With no commitment for a two year plan there are no carrier subsidies, and the $200 price difference is very promising for Nokia. In just its second generation Windows phone is was able to match, if not beat, the competition in both software and hardware while making it for roughly $200 less.
I personally love the strategy Nokia is moving forward with. The company is temporarily cutting profit margins in its Lumias in order to establish a larger customer base. Nokia has been shedding unprofitable sectors for over the last year and now with only small losses as a whole Nokia can push its profit margin of the new Lumias down to gain market share for the future. This can be done due to Nokia having over $3.5 billion of cash on hand. Both Nokia and Microsoft believe that the Lumia matches up with both of its competitors, the problem is proving it to the customer. Brand loyalty is always prevalent but in the U.S. it is in overdrive and customers need an obvious reason to switch operating systems. With a much lower price point many will be willing to give the Lumia 920 a shot and those on a tight budget that never even considered buying a newer smart phone and would opt out for older smart phones such as an iPhone 4 or older now have a new option with the Lumia 820 which costs less than $50. Assuming Nokia can gain a decent market share in the U.S., say around 4-5%, that will get its foot in the door and become relevant as an alternative to the other operating systems.
Many will argue Nokia's plan forward is fundamentally wrong when looking at the numbers in the coming quarterly reports due to the expected lower profit margins. But this strategy is one for the next decade, not the next 12 months. Another bonus of lower prices points is that in emerging countries customers look for cheap deals and hold onto phones for shorter durations than do U.S. customers. The proof of this is in the success of Nokia's Asha line. The Asha 305 costs less than $90 with no contract. Even if the Lumia line would not be able to gain market share in the U.S., which I believe it will, the emerging markets such as China and India are places were even Apple hasn't tried to expand into yet and with customers it is mainly about brand loyalty which is why Apple experiences so much success in the U.S. Nokia has been able to get its foot in the door before Apple with lower level smart phones in emerging markets and has already developed a brand loyalty around the world from when it was on top before the smart phone revolution. This can be seen even in Europe. In Italy the Lumia 920 sold out in days and other countries like Germany and France were no different. And this is what many experts are not mentioning, the huge success that Nokia will experience outside the U.S.. With that said it does take two to tango, especially in the U.S.
Many experts crucified Nokia for giving exclusive rights to AT&T for its flagship Lumia 920 and Lumia 820 but now it is clear what the plan was all along. In my view, AT&T still seems bitter from the ending of its exclusive deal it had with Apple for the first few generations of iPhones and the subsidies it is giving Nokia over Apple and Samsung is amazing. In addition, AT&T is trying to get back to the top and beat out rival Verizon (NYSE:VZ). Nokia will balance low profits in the U.S. with higher profits in Europe and Asia.
It is obvious AT&T wants to establish itself over Verizon and may even be looking into a similar deal with Nokia that it had with Apple only a few years ago. This bodes well for Nokia, as the company appears to have finally found a partner that is willing to buy into its Windows 8 operating system and even choose them over other Windows 8 phones.
This deal should stir up the consumer base to at least look into the Lumia. While most will not receive the free charging pad because they were essentially unaware of the Lumia offering, the offer should create buzz in the media for the coming holiday season. I believe this was Nokia's plan all along and while it was not ideal to wait this long to put the Lumia into the market that was not the company's decision, it was Microsoft's (NASDAQ:MSFT), and the company took a bad situation and turned it into a positive by giving away a free charging pad. With the offering of the charging pad being so close to the holiday season the buzz should still be around even though the offer will have expired by then. If the Lumia had been released closer to the release date of the iPhone 5 the free charging pad offer would've been forgotten by the holiday season.
Nokia also knew that Microsoft would sell its operating system to the public with its $1+ billion dollar marketing campaign but appeared to have trouble distinguishing itself from the likes of HTC due to its phone looking very similar to Nokia's Lumia. The key is will Nokia run with this advertising advantage Microsoft is giving it or sit on its hands and let fate play out? Many always thought Nokia was banking on Microsoft to sell its product but now it seems Nokia has been working behind the scenes very hard and its temporary exclusive partnership with AT&T should resolve the marketing problem. AT&T is banking its current growth on the Nokia Lumia line and will have commercials galore advertising it.
Every time we seem to doubt Nokia's strategy, a few weeks later the company amazes us with its commitment to a sound strategy. No one in Nokia seems worried, they are all calm and collected. Steven Elop should be praised for sticking to a strategy that even supporters criticized countless times. With strong sales in the Lumia 920 and 820 shorters should at least become worried and I believe we will see an ending to the shorts (Yahoo Finance Short Ratio). Nokia's current short ratio is 8.0. The short ratio is the number of shorts divided by the average trading volume. The reduction of shorts alone should propel Nokia into the $3 to $4 range in the next few months.
My advice is stay strong and stick with Nokia and AT&T because I can already tell you what the bears will say when Q4 numbers come out. They will say things like...Nokia did sell twice as many devices as we predicted, but its profit margin was so small that the company barely made any profit. While lower profits do matter, Nokia and AT&T are both in the stage of setting up a consumer base when there are already major powerhouses. This is completely on purpose: Nokia and AT&T are sacrificing short-term profit margins in order to get phones out.
Any market share Nokia can get from Apple and Samsung will likely be maintained. Windows 8 may be a completely new operating system, but consumers will quickly learn how connected all of the devices that run on Windows 8 are. Plus the Lumia has many unique features that may convince some to switch over such as wireless charging, Nokia maps, free music, a new screen display that works with gloves on, and its Pure View camera which beat out the iPhone 5 and Galaxy Note II in most comparisons. Additionally, phones are used like a temporary computer to do everything from checking on sports to reading articles, therefore phone integration into a connected ecosystem is crucial and there is no other connected system out there that can rival the one Microsoft has set up. It has a new line of laptops running on the Windows 8 software, the new Surface which blurs the line between computer and tablet, the new Lumia line, and Xbox. I personally believe it will be the Xbox that makes this new ecosystem work. Even Apple cannot offer a gaming platform as successful as the Xbox and that will make the difference, being able to connect your phone to Xbox.
To make things even better Microsoft sees this and is fully committed to expanding into the smart phone market. Without a smart phone in its arsenal it would be hard for Microsoft to convince consumers to pick its other new products such as the Surface. This is due to the interconnectivity all devices now have and Microsoft is creating an entirely new ecosystem that no one can match.
The exclusive deal with AT&T for the Lumia 920 and 820 is starting to make sense. AT&T and Nokia worked hard to make these phones dirt cheap and are willing to throw in a wireless charger to create buzz. Both sides needed to give a little to make this a success and they did just that. While the profit numbers at the end of Q4 may not be the best for either company, they will have a large volume of sales. I have always thought Nokia was a value buy, but not anymore. I believe it is beyond a value buy now. Nokia looks like it is in prime position to pick up a larger market share than most experts thought even a few months ago. Also do not forget AT&T in the future, I have a feeling it will make (or have already made) a similar deal with Nokia as it did originally with Apple. The company has put too much effort and subsidizing too much of the Lumia line for me to believe there is not more to this deal that will benefit both AT&T and Nokia in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.