Commoditization Of Smartphones: Good Or Bad For Nokia?

| About: Nokia Corporation (NOK)

About 6 years ago when Apple (NASDAQ:AAPL) launched its first iPhone, it shocked the world. The company was introducing a product that was unheard of before. Back then, Apple was miles away from the competition in terms of innovation and it nearly wiped them off with its first smartphone launch. Fast-forward a few years, the competition has caught on. Now when people see Apple's new products, they say "oh yeah, this is just like Samsung's (or Nokia's, or another company's) phone with a couple new features." The smartphone market is going through commoditization.

Here is a definition of commoditization from Wikipedia: "In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers." In layman's terms, an initially unique product that is difficult to copy becomes easier to copy over time (as competition catches up) and the product becomes cheaper for consumers because of the intensified competition (which brings price cuts and lower margins for the companies involved).

I'm not going to discuss here whether iPhone is better than high-end Lumias or if Galaxy series is better than these. At this point, it's all subjective. A few years ago, we couldn't even make a comparison between iPhone and other phones, and today, we can easily make such comparisons. In other words, the competition's high-end phones are at least comparable to Apple's iPhone today.

Nokia (NYSE:NOK) is very familiar with the commoditization process. This happened to the company before the smartphones even hit the market. As smartphones were introduced in the market for the first time, the feature phones were in the process of commoditization. Every newly released phone looked a lot like the every other phone that's already in the market with a few updates here and there. The phones were also getting more affordable. I remember when the cell phones first came out, there was only one phone per home. In the later years, even the kids of the family started to have their own cell phones. When kids start having a product their dads used to enjoy a couple years ago, you know that the product is being commoditized.

When feature phones were commoditizing, Nokia responded by releasing a large number of phones. The company had tens of different models, each model differing very little from the other. The company released many phones in different sizes, shapes and colors in an effort to attract buyers with different tastes. Until Apple came with its disruptive iPhone technology, all seemed to work well too. In 2007, the year the first iPhone was launched, Nokia sold 437 million phones, up from 347 million in 2006, and 265 million in 2005.

While Nokia's volume is much lower now, it is using the same tactics it did during those years. The company is launching a large number of smartphones from different price ranges, colors, sizes and hardware specifications in order to attract the largest amount of consumers it possibly can. If Lumia 920 is too expensive for a buyer, he or she can buy Lumia 820 instead. Nokia offers an option for everyone, which is a good way to attack the commoditization problem.

There is a difference though. As feature phones were commoditizing, Nokia was competing with Ericsson and Motorola, which also employed similar tactics. Today, we have Samsung, LG, Sony, Apple and many other companies. As the Asian companies entered in the global market, the market became more crowded. This doesn't mean end of the game though. Nokia can still turn the situation around.

In the chart below, we see the market share of Lumia 520 within the Windows Phone ecosystem, the cheapest phone in the Lumia lineup. Even though the phone was launched only 4 months ago, it enjoys nearly 20% market share in the global Windows Phone ecosystem. This was calculated by looking at the number of application downloads, so the real market share of the phone might be off by a few percentage points in either direction. In the U.S., the phone goes by the name Lumia 521, which accounts for 5% of the market share in the country.

In 2012, Nokia sold 13.4 million units of Lumia phones. In the first quarter of 2013, the company sold another 5.6 million Lumias. When we combined the two numbers, we get that Nokia sold 19 million Lumias in the last five quarters. Given that Nokia enjoys 85% market share in the Windows Phone ecosystem, we can conclude that the market volume of Windows Phone was 22.3 million units. Given that Lumia 520 was launched in the second quarter of 2013 and it already enjoys a market share of 15% or so, it is safe to assume that Nokia was able to sell nearly 4 million Lumia 520s in the last quarter (excluding Lumia 521s being sold in the U.S.).

As the smartphone market continues to commoditize, I expect Nokia to launch more low-end smartphones in order to capture more market share. Low-end smartphones are not as profitable as high-end phones, however, their volume is higher and they are likely to account for future market share gains in the smartphone market.

Until another disruptive product like the original iPhone comes to take the market to the next level, the commoditization of smartphones will continue at an increasing rate. With its wide range of phones addressing different tastes and price ranges, Nokia is one of the companies that is well positioned to take advantage of this trend (I feel the same way about Samsung too).

Disclosure: I am long NOK, AAPL. 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.