The Nokia (NOK) Lumia thesis must be revised when juxtaposed against Apple. To be considered a success, it is not necessary for the premium Lumia 1020 to emerge as a real Apple iPhone killer. For now, the goal here is to establish the Windows ecosystem as a viable third-wheel option alongside the Google (GOOG) Android - Apple (AAPL) iOS duopoly that dominates mobile. From there, Microsoft (MSFT) and Nokia will effectively force Apple into a price war, largely due in part to both the Lumia 520 and Asha lines that target down market consumers. Yes, the Catch-22 success of the Nokia Lumia will threaten margins at Apple and the mobile market, at large. It is inevitable for mobile product to transition out of growth and into the maturity stage within the business cycle. Nokia may hasten the end of the Apple revolution.
Windows Mobile Ecosystem
On September 3, 2013, Microsoft announced that it would be acquiring Nokia's devices and services businesses for $7.2 billion, while also continuing to license patents and mapping technologies from the Finnish firm. In retrospect, Microsoft's acquisition of Nokia was the inevitable conclusion to the 2011 partnership agreement between the two companies. The original 2011 partnership agreement called for Microsoft to exchange operating software for complete access to Nokia hardware, in order to build out a global mobile ecosystem. This arrangement also implied that Microsoft would step in and effectively play the benefactor role to the cash strapped Nokia. The Microsoft-Nokia buyout deal is officially scheduled to close during the first quarter of 2014.
From Nokia's vantage point, Intel (INTC) is somewhat of a large adjunct to the Windows mobile ecosystem. Within his 2012 letter to Intel shareholders, former CEO Paul S. Otellini highlighted the company's "mobile edge." Otellini touched upon Intel's manufacturing prowess, as he projected that company foundries would graduate to produce chips with 14 nm processes into 2014. As a backdrop to this letter, Intel had aggressively increased research and development spending from $8.4 billion to $10.1 billion between 2011 and 2012, despite revenue actually falling from $54 billion to $53.3 billion during this time frame. On May 2, 2013, Brian Krzanich took up the CEO mantle at Intel. Intel Inside smartphones now include the ASUS FonePad, Casper VIA A6108, and Motorola RAZR I.
Taken together, historical running partners Microsoft and Intel have averaged $41.8 billion in annual free cash flow from operations over the past five years. On October 9, research firm Gartner issued a statement that estimated that the global PC market had contracted by 8.6% through calendar Q3 2013, upon a year-over-year basis. Going forward, both Microsoft and Intel can and will maintain the means and the motives to effectively wage war against Apple, behind the Nokia Lumia as proxy. For now, Qualcomm (QCOM) Snapdragon chips based off ARM (ARMH) architecture power premium Lumia phones. Microsoft can play the powerful chip manufacturers against each other to improve performance, while also reigning in costs relative to Apple A-Series smartphones and tablets.
Nokia Lumia Specifications
The Nokia Lumia 1020 compares quite favorably against the Apple iPhone 5S. Numerous technology gurus have already hailed the Lumia 1020 as the best camera phone on the market. The Lumia 1020 converts into a 41-megapixel camera, which is technically superior to the 8-megapixel sensors attached to the iPhone 5S. The Nokia Lumia 1020 features a 4.5" 1280p X 768p at 334-ppi resolution AMOLED screen that displays sharper graphics than the Apple 5S 4" Retina display, which offers 1136p X 640p at 326-ppi resolution. The Apple 5S, of course, is attached to the much more dominant ecosystem of applications that includes Siri, iTunes, and Garage Band. AT&T (T) retails 32 GB versions of the Nokia Lumia 1020 and Apple iPhone 5S for $199 and $299, respectively, if customers agree to the terms and conditions of a two-year service contract.
Again, success at Nokia is being defined as the company is ultimately establishing the Windows brand as a real alternative to the Android - iOS duopoly. It is unrealistic to expect the Nokia Lumia 1020 to go toe-to-toe as a challenger to the Apple iPhone 5S, in terms of unit sales within the premium target market. If anything, Nokia Lumia is best positioned to appeal to value conscious consumers. For example, the Nokia Lumia 520 may be described as a stripped down Windows phone. The Lumia 520 features a smaller 4" screen, converts into a 5-megapixel camera, and provides 8GB worth of built-in storage. Middle market customers can purchase the Nokia Lumia 520 for $99, after also signing up for a two-year contract.
In response, Apple was to recently launch its iPhone 5C. Notable analysts have described the 5C event as "confusing," at best. The 5C also retails for $99 ($549 in U.S. for unlocked 5C) and is made of plastic. Still, Tim Cook, Apple CEO, has openly rejected calls to label the iPhone 5C as an "entry level" phone. The mere presence of the 5C, however, may suggest that Apple executives acknowledge the idea that low-cost barbarians at the gate will challenge the iPhone stronghold.
The Bottom Line
On October 28, 2013, Apple released its fourth quarterly report of fiscal year 2013. Apple banked $19.5 billion in revenue upon 33.8 million iPhone unit sales during the fourth quarterly period ended September 28, 2013. This performance calculated out to year-over-year growth at 26% and 17% rates in respective iPhone related unit sales and revenue. In terms of geographic regions, Japan experienced 41% growth in Apple sales, while year-over-year results out of the Americas (1% revenue growth), Europe (unchanged), and Greater China (6% revenue growth) were flat in the aggregate. Numerous analysts have blamed the unceremonious launch of the 5C as the primary culprit behind this relatively weak quarter at Apple. Going forward, Apple investors should expect the company to return larger portions of capital back to shareholders in the form of dividends and stock buybacks.
A strong case may be made that the Nokia Lumia is finally expanding share at the expense of Apple growth, especially in Europe. To be specific, Apple generated $8 billion in revenue in Europe for separate Q4 2012 and Q4 2013 time frames. On October 29, 2013, Nokia released its interim report for its third quarterly period of fiscal 2013. Nokia recorded 8.8 million Q3 2012 Lumia sales, which was a 40% improvement above the year-over-year period. Nokia device and service business division volumes have advanced by 17% upon a sequential basis in Europe. Recent statistics out of research firm Kantar Worldpanel ComTech have indicated that Windows phone market share is approaching roughly 10% throughout Western Europe. Sales of the low to middle market Nokia Lumia 520 and 620 handsets have been key drivers behind this newfound success of Windows mobile in Europe.
Going forward, however, Microsoft shareholder returns may be threatened by both the Law of Large Numbers and the steady deterioration of the personal computer market. Microsoft generated $6.3 billion in operating income upon $18.5 billion in revenue through its latest fiscal Q1 2013. Be advised that Microsoft's Q1 2014 largely overlapped with the aforementioned Q3 2013 at Nokia. Despite the nominal sales success of Lumia handsets, Nokia Devices and Services still slogged through $118 million in operating losses upon $4 billion in Q3 2013 net sales. Over the long term, Microsoft stock will be dead money, if this company fails to leverage the Nokia buyout and mobile market for real growth above secular personal computer industry decline.