How Microsoft Is Becoming More Nokia Dependent Than Vice Versa

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 |  About: Nokia Corporation (NOK), Includes: MSFT
by: Sneha Shah

The Finnish mobile giant Nokia (NYSE:NOK) was heavily criticized for abandoning its Symbian platform and going exclusively with Microsoft's (NASDAQ:MSFT) Windows OS for its smartphones. The main complaint was that Nokia would become totally dependent on Microsoft software and would lose flexibility. The decision was quite unique as all major mobile device makers such as Samsung (OTC:SSNLF), LG (NYSE:LG), HTC (OTC:HTCCY) etc., produce smartphones using both Android and Windows OS. Windows smartphones have performed poorly as it was not meant for mobile devices unlike Android, which was developed for mobile devices. It was only in the last couple of years that Microsoft has been forced to give Windows a more mobile centric focus. "Live Tiles" and removal of the Start button are the major changes that MSFT has made to give its OS a more modern "app" centric focus. Nokia has introduced an excellent lineup of Windows 8 Lumia smartphones, which have performed quite well in the market. Other companies are slowly abandoning their Windows smartphone lineup as Nokia has pretty much won over the entire Windows segment. This has made MSFT more dependent on Nokia as other mobile makers are giving up on the Microsoft OS. I remain positive about Nokia given the Lumia shipment strength being seen. I think that Nokia has made an excellent beginning with its new smartphone strategy and the stock remains undervalued.

Apple and Google have overtaken Microsoft in the computing devices OS Industry

The strength in shipment of mobile devices has surprised the Wintel duopoly that is scrambling to get a foothold in the mobile industry. Tablet shipments are surging beyond everyone's expectations, while smartphones will reach almost 1 billion units this year. Windows faces a huge problem as it has negligible presence in the mobile OS market. Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) have a combined ~92% market share in the mobile OS market. MSFT's Surface tables have bombed while non-Nokia WP8 smartphone shipments have been quite lackluster. The PC industry is expected to decline by ~8% in 2013, as consumers move towards smaller, cheaper form factors for their computing needs. The mobile OS market has become much more important than the PC OS market due to sheer overwhelming numbers. Microsoft has to increase its mobile OS market share otherwise it would be pushed to irrelevance in the battle of the software ecosystems. Microsoft's other divisions like the Office and Server will also feel the effects of the decline in the OS segment, as rival ecosystems push their own productivity solutions (Google Apps).

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Other mobile makers are abandoning the Windows OS

Top smartphone makers except for Apple have concentrated their resources on the Android OS, while introducing very few phones featuring the Windows 8 OS. Not only is Android free but also allows these companies to add their own software layer, which differentiates them from the other Android makers in the market. HTC's Sense software interface is known for its great features and ease of use. The mobile makers not only have to pay Microsoft a fee for the OS, but also have to depend on MSFT for adding patches and new features to the OS. Nokia has captured the WP 8 mobile market with its excellent Lumia phones. Nokia also gives tremendously useful apps such as Here Maps, Nokia Music and Nokia City Lens for free to its Lumia users.

International smartphone vendors other than Nokia have become less interested in adopting Microsoft Windows Phone 8 (WP8) platform mainly because WP8 has had a global smartphone market share of 3%, far short of the originally expected 10%, and Nokia has dominated the global market segment of WP8 smartphones by occupying over 70% of sales, according to Taiwan-based supply chain makers. Since Microsoft offered WP8 in the fourth quarter of 2012, Nokia has focused on the platform and has so far launched six WP8 smartphone models, the sources indicated. Samsung Electronics, Taiwan-based HTC and China-based Huawei Device launched WP8 smartphones initially but then have not launched additional models, the sources noted… Another reason is that if these vendors are unable to develop WP8 smartphones with functional differentiation, it is difficult for them to compete with Nokia, the sources pointed out.

Source - DigiTimes

Nokia is powering ahead with Lumia

Nokia has put all its egg in the Lumia basket, which is showing very encouraging results. The sales of the Lumia smartphones surged by 27% q/q in Q113 and are expected to grow in the high double digits in the coming quarters as well. The Lumia 520 is a terrific smartphone in my opinion at ~$180 and its popularity can be gauged from the fact that supply shortages are being seen for this product. Even other Lumia smartphones have received excellent reviews and I think that Nokia will surprise analysts with its Lumia shipments in the coming quarters.

Microsoft now desperately needs Nokia

The finer details of the exclusive contract between Microsoft and Nokia are not known, but it is becoming clear to me that the relationship between these two technology giants is now favoring Nokia more. Microsoft desperately needs a strong partner in the 1 billion unit smartphone market. The company does not make a smartphone unlike the Surface tablet. Microsoft's earlier "Kin" foray proved to be a complete failure and the company is having troubles with Surface as well. The two companies are benefiting strongly from each others' respective strengths and Nokia has hinted of a stronger partnership in the coming days.

Nokia UK's Ray Haddow said that it was "working even closer" with Redmond and that we can expect to see the fruits of this pairing "in the next few weeks."…. It appears that reps have been emphasizing the marketing aspects of this pair up, suggesting the two companies will work together in advertising and increasing Nokia's visibility.

Nokia Valuation remains compelling

Nokia's stock has been in a holding pattern since it announced its Q113 results which were not very good. The company's strength in Lumia shipments were overshadowed by the large decline in feature phone shipments. The company remains undervalued in my opinion, with a market capitalization of just $13.1 billion. Given that small technology startups like Waze are being bought for more than a billion dollars, Nokia seems extremely cheap given its hugely valuable assets in the form of its Nokia-Siemens JV and a huge patent portfolio. Microsoft has a value that is more than 20 times the current value of Nokia; and Microsoft could easily buy the company even after paying a big premium.

Summary

Nokia has executed quite well on its new strategy of focusing on Windows 8 smartphones, despite coming under huge criticism. The company has faced a lot of pressure as it transitioned to its new OS strategy, since the sales of Symbian smartphones plummeted. However, the company is now emerging as a stronger and more focused organization after the painstaking changes. A number of people believe that Nokia risks becoming too dependent on MSFT for its software needs. Instead, I think that Nokia through its single minded focus has made MSFT more dependent on Nokia than vice versa. I remain highly positive on Nokia's stock given its current cheap valuation.

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.