Samsung is spewing out oddities like Smart Scroll, Smart Pause, Air View and Air Gesture. Apple's (NASDAQ:AAPL) innovation of the iPhone is similarly peripheral with design updates and rarely-if-ever used Siri. This article will explain why Nokia's (NYSE:NOK) product development direction addresses actual consumer needs and thus is superior to the fringe benefits Samsung and Apple are producing with their product iterations.
The investment thesis is that the market does not appreciate the importance and power of Nokia's product, and how well-positioned Nokia is to seize market share from Apple and Samsung on the back of this. Combined, Apple and Samsung hold ca 50% of the worldwide smartphone market (source: IDC Mobile Tracker).
The thesis is based on the following reasoning:
- The consumer need is focused on the camera and core functionality
a. Usage rates of various phone features show the camera is the leading feature
b. Segments with low smartphone penetration have even higher relative importance of the camera
- Nokia is a clear market leader in camera technology, while competitors are adding minor non-core features.
Let's get started.
1a) The camera is the most commonly used feature
As a measure of what consumers are looking for when purchasing what is in most cases their second, third or fourth smartphone, let's look at data on what they're actually using their current phones for, as an indicator of what features will be able to move their future purchase decisions.
Source: Pew Research Center ("The % of cell phone owners who use their cell phone to…")
A few key conclusions:
· The camera is absolutely essential, both for taking pictures and video - if you need evidence, just look at your social feeds.
· For the majority of users, core functionality like texting, e-mail and browsing the Internet is still key.
· Downloading and using apps is in the end not a main functionality.
It's clear that camera performance will play a significant role when smartphone users make their picks for upgrades, which will also lead first-time buyers.
1b) Growth segments have even higher weighting of camera performance
From the above exhibit, we know that current smartphone users strongly favour camera features over e.g. apps - but what about first-time buyers? The young demographic is reaching a high degree of smartphone penetration, and thus it's fair to assume that growth will happen to a large extent in the older demographic. How does this demographic's needs line up? It turns out, it's even more focused on camera functionality.
Source: Pew Research Center
Among consumers 50+, using the camera will be even more common than using the phone for texting. What is not obvious from the above graph, is that the relative importance of the camera vs. other features in fact increases with the older demographic. This is better illustrated in the graph below, which has been indexed around the usage for the youngest demographic.
Source: Pew Research Center
What this graph tells us, is that the frequency of many activities fall to levels 2-3 times lower than the camera usage - making the camera stand out as an even more important feature for the older demographic.
2) Camera functionality is key… and Nokia is the product leader
So we've established that cameras are a key feature for repeat-buyers and first-time buyers alike. This would obviously be a fact of little importance, unless a player in the smartphone market held a substantial power-position in this product feature. That's the fact with Nokia, which has shown time and time again that their focus lies with the camera and that they excel in the segment. The very recent launch of the Lumia 1020 manifested this focus with a flagship phone that is now being praised as an astounding piece of camera technology.
Let's quickly look at some exhibits testifying to Nokia's superior camera in the form of reviews of some of the latest phone releases:
- Lumia 925 review from Trusted Reviews.com
- Lumia 925 review from Techradar
- Lumia 1020 review from CNET
For more exhibits, Google is full of them.
We've concluded that:
- Camera functionality is the key feature for the future smartphone users.
- Nokia is the product leader in smartphone cameras.
Given this, the outlook is that Nokia is in an excellent position to take a very significant smartphone market share as the market and consumer needs mature. The positive outlook on Nokia's market share is driven by an actual product leadership - which is obvious only if you look at the phone features weighted by consumer usage. The features that the mass market craves are different from what the early adopters wanted, and Nokia is running a product strategy that excellently caters to the current and evolving mass market needs.
Nokia's product leadership is rooted in technology and defended by patents, and is thus both sustainable and defensible - in contrast with Apple (which deserves praise and admiration for inventing the product genre) which has based its leadership on first-mover advantage and less tangible product benefits (such as UI and design principles, which have generated a lot of value but is not easily defensible).
The rise of Nokia will, however, be slow, still hampered by switching costs and skepticism of Windows Phone, but it will happen and on a long-term basis I'm very optimistic about a great long story for the next few years.
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.