Around the Mobile World Congress (MWC) there has been much noise about Nokia's (NOK) phone business. New models were discussed from the lowest $15 phone up to the smartphone flagship Lumia 920 and possible pure-view predecessors or a possible Nokia tablet.
Many people forget within this noise that Nokia has other important business units as well. According to trefis Nokia Siemens Networks and Nokia's mapping business Navteq contribute to about half of Nokia's stock price. While NSN is a big story for itself, I want to focus in this article on Nokia's mapping business HERE.
I am especially concerned about the following question:
Why does Nokia make its valuable mapping service available for other Windows Phone 8 devices?
Don't they lose a big advantage towards their competitors? The danger is that Nokia becomes exchangeable. It loses one of its main features which makes the Lumia phones different and superior to other phones. Nokia easily beats Apple (AAPL) concerning location services and has some advantages compared with Google's (GOOG) well known maps.
You can see in the recent Toyota deal that how good Nokia's mapping business is. Last year, Nokia beat Google for Ford's (F) mapping contract and this is becoming more of a trend now. Four out of five cars with pre-mounted navigation are driving with HERE-technologies.
Thus the HERE technology must be damned good. The car industry needs reliable partners in its competitive business. Nokia's successful maps will help Microsoft (MSFT) to push its Windows Phone platform.
So Microsoft has the advantage and Nokia the costs?
In this context you should consider that the HERE maps could be integrated very deeply into the ecosystem. This was published last summer in the official Nokia blog:
"Nokia Drive might not be exclusive to Nokia smartphones anymore but that doesn't mean that we can't differentiate with apps anymore. How can we still do it? First of all, navigation on Windows Phone 8 will be always exclusively provided by Nokia. Then by having the very closest, deepest integration possible. So watch this space for more apps and upgrades that become a seamless aspect of the overall Nokia Lumia experience. The Nokia Location Platform provides a set of APIs that let organizations develop map-related apps and services."
Since the HERE platform will be available on all WP8 devices, Nokia's goal is that app-developers will use it as a base to build new applications. And these hopes have a solid base with Microsoft's Windows Phone platform. A recent survey shows that while programming apps for BlackBerry (BBRY) and Apple devices seems to be the most difficult (64% say it's difficult for BlackBerry, 59% for IOS) Windows Phone 8 is loved by programmers- only a minority of 21% find it difficult to program apps there.
This is good news for Microsoft and Nokia since programmers will further push not only the WP8 platform but at the same time also Nokia's HERE business.
Keep in mind that the smartphone market will continue to grow rapidly. IDC's newest research report claims that by 2016 Microsoft's market share in the smartphone market will be up to 11.4 percent. That may still look small, but it's huge compared to the company's current 2.6 percent share in that business.
Nokia's new license business
I could not find out how much Nokia will charge for heavy usage of its maps. But a Nokia spokesperson, Mr. Sihlman, confirmed that "the company will push to license its map data out to other developers and partner companies to raise money, stating that "revenue can be generated in variety of areas: licensing content, licensing platform, revenue per apps or through advertising."
"We are basically the world's largest maps company," Sihlman said. "We have built our reputation during the last years also by acquiring companies like NAVTEQ and others. And we have a name to celebrate our position in the industry…HERE relies on more than 80,000 data sources."
The advantage of licensing fees is that while the costs stay constant Nokia earns money with each sold WP8 device. Like this the company becomes more independent from the hardware business in which margins suffer, mainly because of increasing competition from Samsung (OTC:SSNLF) and other Asian manufacturers.
So on the one side Nokia cannibalizes a bit of its hardware, but on the other hand it builds a new business with software licensing.
In my opinion this could be one important reason why Nokia decided against Google's Android- although Google offered money to Nokia to use its Android ecosystem. Google already has quite a good map business and takes big efforts to increase it further. Additionally Microsoft's business to gain money with licenses fits better into Nokia's business model than Google's model to gain money with advertisement.
Now Microsoft relies on Nokia and Nokia should get part of the cake like Samsung tries to take part of Google's cake.
Huge research efforts
Within the last years Nokia has invested a lot in research and development. In 2012 Nokia spent around $5.7 billion, while the much bigger Apple only paid $3.3 billion. That is nearly double. Keep in mind that Apple market cap is 30 times bigger than Nokia's! BlackBerry (BBRY) also increased the percent of R&D out of its net sales, but the percentage is much lower than that of Nokia.
One focus within Nokia's R&D efforts stays with the HERE platform. Keep in mind that only in Berlin Nokia pays 600 workers to develop location based services.
If Nokia will keep spending a big chunk of its revenue on R&D it might eventually lead to another great product that could also increase the company's sales in the near future.
One of these services is called City Lens, an Augmented Reality App. City Lens uses your device's camera to display nearby restaurants, stores, and other notable locations in augmented reality style, along with important information about each location including reviews, directions, hours of operation, and more.
I admit that it looks strange to walk around with your phone in front of your head. But as mentioned above, Nokia makes a huge business already with the car industry. And probably you heard of Google's project glass and Apple's iWatch. In the long term we will not need to look on a smartphone's display.
Nokia's HERE platform will only have a chance to improve and become relevant if it gets a broad user basis. That is why Nokia puts it onto all WP8 smartphones. Furthermore its apps will also be installed on an endless number of devices of the leading iOS and Android platforms. Nokia has invested much effort into the HERE platform and has a close cooperation with Microsoft. Both companies sit in the same boat and need to gain market shares rapidly if they want to stay relevant in the smartphone business within the next years. If this cooperation becomes successful and Windows Phone can gain more market share, the HERE platform will become a new business for Nokia to gain revenues through licenses. This could become important especially since margins in the hardware manufacturing business decrease.
All these findings underline the importance of the ecosystem. That is the reason why Nokia at the MWC is currently pushing all these cheaper smartphones like the Lumia 520, 620, 720 etc. into the market. It is important to spread lots of these phones- even if they sell cheaper and Nokia gains less profit in the short term. They are important in the long run to establish the WP8-platform together with the HERE platform.
Within the last few weeks the Nokia stock price fell from its high of $4.70 more than $1 back into the $3.60 region. From a technical point of view this decline could continue for a while. However Nokia's fundamentals have not changed in the meantime and the company's overall strategy looks convincing in all business segments.
In my opinion Nokia remains a speculative buy. If you are long the stock, in order to minimize your risk, you could think of selling some out of the money call options.