Recently, Nokia (NYSE:NOK) announced new Lumia phones that will be cheaper and will be available in developing nations. These phones will not have very high margins, which causes some analysts to worry about cannibalizing. After all, if people buy cheaper Lumia models, this might hurt the sales of higher-end Lumia models. I don't think this will happen and I don't think margins of low-end Lumias should matter that much either (as long as they are not in negative territory). As long as the low-end Lumias are able to breakeven, this should be good enough for Nokia. I will explain why in this article.
Nokia built itself a worldwide reputation by building cheap and endurable feature phones. Many people knew Nokia for building those "indestructible" phones that looked and weighed like bricks and were only good for making calls, sending text messages, and of course, self defense. Even though Nokia invented the concept of smart phones as early as 1996, it didn't market it because the people running the company at the time didn't think that people would be interested in checking their e-mail and surfing the internet on a small screen (and they were wrong). In addition, there wasn't any presence of social media including Twitter, Facebook (NASDAQ:FB) or Instagram at the time. Later on, Apple (NASDAQ:AAPL) carried the concept of smart phones one step further (more like 5 steps further) and left the competition in the dust. After that, Nokia has tried to catch up with the competition while forgetting that perception is everything. Now Nokia is able to understand this concept by experience, and the company is acting on it.
You may wonder how the cheaper Lumia phones will help Nokia's perception. It's simple. Currently, many people aren't even aware of Nokia's smart phone products. A lot of people still think that Nokia is a producer of cheap feature phones. The company tried to change this perception by releasing high-end and medium-end Lumias and this was partially successful but there is still a lot of work to do and a lot of road to travel. This is where the cheapest phones get handy. It is estimated that 1 billion people will transfer from feature phones to smart phones in the next decade. Because most of these people will come from poorer countries where service carriers don't offer subsidizes, most of them will opt for low end smart phones. Also keep in mind that most of these feature phone users are currently using Nokia. By offering a cheap low end smart phone, Nokia is providing these feature phone users with a chance to upgrade their phone without changing brands or hurting their budget. If these people are happy with the low-end Lumias, they will move to high-end Lumias when they have money. This is all part of Stephen Elop's strategy of providing the next billion people with their smart phones. If the low-end smart phones barely breakeven, this still means free advertising for Nokia.
Think of Nokia's low end Lumia phones as a tasting sample for those who will potentially buy higher-end smart phones over the next decade when they can afford these. As countries like China, Russia and India get wealthier, the citizens of these countries will be more likely to be able to afford better phones. If Nokia can get these people hooked up to its ecosystem, they will stay within Nokia's Windows Phone ecosystem. This is why the cheaper smart phones are important for Nokia's future.
Nokia's Lumia 520, Lumia 620, Lumia 720, Lumia 820 and Lumia 920 vary greatly in hardware specifications but they are all part of the Windows Phone 8 ecosystem. If users of Lumia 520 are happy with their phones, they are more likely to upgrade to Lumia 620. If users of Lumia 620 are happy with their phones, they are more likely to upgrade to Lumia 720, and so on. Nokia's Lumia phones currently represent 80% of all Windows Phones sold worldwide, which means Microsoft's (NASDAQ:MSFT) big project highly depends on Nokia's success. Without Nokia the entire Windows Phone project would be dead. Nokia's low end smart phones will be another factor that keeps Windows Phone project alive, because a lot of people in developing nations will get a taste of Windows Phone without spending too much of their income.
After nearing $5 per share, Nokia's price is on the decline again. I believe that this is a short term trend triggered by panic. While I don't think Nokia will topple Apple anytime soon, I also don't see Nokia become irrelevant anytime soon either. I'm still holding onto my shares while writing covered calls on them.
Disclosure: I am long NOK, MSFT. 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.