With the newly released Lumia 928 and 925, Nokia (NOK) will finally have a wider U.S. presence for its flagship Windows Phones. The Finnish handset maker made two important announcements this month, launching the Lumia 928 on Verizon and announcing that the 925 will be launched globally in the coming months. In the U.S., the 925 will be sold exclusively on T-Mobile. With AT&T (T) already selling the 920, this means that the high-end Lumia will now be available on each of the U.S. carriers that had initially offered support for the Lumia. Sprint (S) remains the only carrier in the top four to have not yet offered the Lumia, but it has announced that it will be launching a Windows Phone 8 smartphone soon. It is however not clear if Sprint will launch a Lumia or one of the rivals’ WP8 smartphone.
Due to the limited presence of the Lumia at the top carriers, Nokia’s U.S. performance in the past few months has been lackluster. Last quarter, Nokia managed to sell only about 400,000 handset units in North America, a decline of 33% over the same period last year. The U.S. smartphone market is extremely crucial for handset makers since success here generally translates into positive consumer sentiment in the other markets as well. It is therefore important that Nokia figures out the U.S. market, where it has historically lagged rivals. A wider high-end presence at the carriers gives Nokia its best opportunity to drive traction for the fledgling Windows Phone platform in the U.S., where it will increasingly face competition from BlackBerry’s (BBRY) recently launched BB10 smartphones as well.
With rivals such as Samsung (OTC:SSNLF) and HTC (OTC:HTCCY) focused more on the Android platform, Nokia has done well to garner a lion’s share of the steadily growing Windows Phone market. According to recent data from AdDuplex, Nokia has accounts for a commanding 80% of the WP market. Considering that the Windows Phone market is pretty small currently, Nokia’s share may not account for much. But recent data from IDC has shown that Microsoft’s smartphone platform is gradually gaining share as well. In the first quarter of 2013, Windows Phone earned itself a market share of 3.2% – up from 2% a year ago. Helped by BlackBerry’s recent travails and its delayed launch of BB10, Microsoft managed to usurp BlackBerry’s position as the third largest mobile platform. However, BlackBerry’s BB10 launch is gradually gaining momentum with the recent launch of QWERTY handset models, the Q10 and Q5, and it will be interesting to see if Nokia and Windows Phone manage to convert the initial gains into long-term growth.
What will help Nokia here is that having a huge market share of the Windows Phone market enables it to benefit the most from Microsoft’s huge marketing push. With PC sales falling, Microsoft is looking to gain a toehold in the mobile market, and Nokia’s dominant WP market share makes it a lot more central to the PC giant’s mobile plans. That Nokia doesn’t have to spend as much on promoting the Lumia, which has become synonymous with the Windows Phone brand, is one of the main reasons why the company had decided to go with Windows Phone instead of Android in the first place. Lower sales and marketing expense will help Nokia preserve its cash balance and manage its transition period better.
Apart from Microsoft (MSFT), Nokia will also be counting on support from carriers who are looking to increase competition in the smartphone market and lessen the impact of subsidies on their margins. Offering carriers exclusive access to different custom-built Lumias is how Nokia is looking to get more marketing dollars behind the Lumia brand. With different Lumia models, carriers will look to differentiate themselves from competitors better and try to make the most out of the ‘exclusivity’ they have over their respective Lumias.
Uncertainty Still Persists
Adopting the Windows Phone has definitely given Nokia a fighting chance in the smartphone industry, but its long-term ambitions are still tied to the sustainability of Microsoft’s mobile platform as a viable third alternative to iOS and Android. There is currently a lot of uncertainty surrounding BB10′s future in the smartphone market, but if the new OS puts BlackBerry back in contention, Windows Phone might have to start eating into Android’s and iOS’ market shares in order to grow – the odds for which seem pretty low. Despite Lumia’s strong holiday quarter, it is tough to say which way the market share might swing in the coming years. Accounting for this risk, we estimate that sales in the developed markets account for less than 10% of our $5 price estimate for Nokia.
Still, we continue to believe that even a small improvement in Nokia’s handset business, together with its patent monetization initiatives and the ongoing turnaround in the wireless infrastructure joint venture with Siemens, should help it realize what we expect to be fair value of Nokia’s stock at this juncture. Trefis’ $5 price estimate for Nokia is about 30% ahead of the current market price.
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