How Many Lumias Can Nokia Sell At These Prices?

 |  About: Nokia Corporation (NOK)
by: Jacob Steinberg

After staying quiet for a while following the company's September 5 announcement, Nokia's (NYSE:NOK) management finally provided the company's consumers and investors with more information regarding its new line of Lumias. Finally we know the release date and price range of new Lumias in many countries. Prior to this announcement, BMO Capital's Tim Long said that he didn't expect the company to sell more than 20 million Lumias in 2013. This roughly comes down to 5 million Lumias per quarter, which is slightly above the 4 million Lumias sold by Nokia in the last quarter. Basically, Mr. Long doesn't believe that the new line of Lumias will outperform the current line of Lumias by much. As an investor and customer of Nokia, I completely disagree with this assessment.

Let's look into the details first. It looks like many European countries will get their hands on Lumia 920 and Lumia 820 in November, which is in line with the earlier estimates. There are some sellers that will start taking pre-orders very soon, including Nokia's Russian subsidiary that has already started taking these orders. Lumias will have a wide range of prices depending on the country, service provider and the seller. In some countries the phones will only be available through the service providers, while in others people will be able to buy their phones from other sources such as the online stores. In Italy, the unlocked version of Lumia 920 is expected to have a price tag of $775, and in Germany the price tag is expected to be $840. Lumia 820 is expected to cost around $640 in both countries. In all markets, Lumia 920 will be cheaper than iPhone 5. On the other hand, the phone's price will be comparable to Samsung's Galaxy S3. In some countries, Samsung's Galaxy S3 will enjoy a cheaper price while in others Lumia 920 will enjoy a cheaper price. Smart phones tend to cost more in Europe than in the US, as with all other electronics. Interestingly enough, the company has yet to provide any information regarding its plans in the UK, France and its home country Finland. Sweden, Norway, Russia and Denmark are expected to receive the phone around the same time as Germany and Italy.

Immediately after the company's announcement, many people started to complain about how Nokia's new Lumias are too pricey for a brand that desperately wants to gain market share. Nokia's Windows phone would be a deviation from what people are used to in their smart phones (i.e., Android and iOS). In order to get people to switch from what they are comfortable with to a completely different user interface, Nokia's new line of phones could have been more wallet-friendly. I agree with these two arguments; however, there is also something that needs to be added to these arguments. First, Nokia is very good at adjusting its prices based on demand. For example, Nokia has changed the price tag of Lumia 900 more than twice in the last 6 months in order to adjust for the demand in the market. When the new Lumias hit the market, if they don't sell as many copies as expected, the company will be quick to cut the prices. Second, sometimes a higher price can help a product sell more copies. Apple charges a huge premium for its phones and people see owning an iPhone as a sign of status. I am sure a significant portion of the people that buy iPhone buy it just to show that they can afford one. Of course, Nokia's Lumia will not enjoy the social status of an iPhone anytime soon, but it doesn't hurt to try. Third, in countries where smart phones are subsidized by service carriers, the price of these phones will be less of an issue.

Also, keep in mind that in many countries, Nokia sells its phones in large numbers to third-party sellers who decide on the final price of these phones. Because Nokia doesn't really have its own phone stores, the company provides its third-party sellers with a lot of flexibility in determining the price of a phone. If the demand is not there, the sellers will quickly adjust their prices.

Now back to the main question: how many Lumias can Nokia sell in 2013? Nokia's first line of Lumias which include Lumia 610, Lumia 710, Lumia 800 and Lumia 900 sold 4 million copies in the last quarter. These phones were available in very select countries and they were offered by very select carriers. For example, because some of these phones didn't support many languages or alphabets, they were never sold in many parts of the world including parts of Asia, Africa and Middle East. These phones were only available in 54 countries. In most countries, these phones were offered by only one carrier. This will not be the case with the new line of Lumias.

The new Nokias will come to many more countries as they will support many more languages and alphabets. Nokia will continue to introduce its current line of phones in different countries before upgrading them to the new line of Lumias. For example, Lumia 900 was introduced in India just a couple weeks ago. The phone didn't even enter the Chinese market until mid-June. China and India are the two countries where Nokia enjoys the largest fan base. Russia also received Lumia 900 later in the summer. In many countries Nokia will continue to support and sell its Windows 7 based models even after those countries get Windows 8 phones.

Furthermore, keep in mind that there were many people who were holding off buying a Lumia 900 or Lumia 800, because they knew that they wouldn't be able to upgrade their phone to the Windows Phone 8 operating system. Most people who bought their Lumias bought them knowing well that they wouldn't be able to upgrade their operating system. New line of Lumias will sell much more copies than the current ones because they won't have this "upgradability" problem.

Nokia sold 600,000 Lumia 900s in the US in the last quarter even though the phone was only offered by AT&T and many people were holding off for the Windows 8 phone. With addition of Verizon and Sprint and launching of Windows 8 phone, this number can easily climb to 1.2-1.7 million per quarter. If Microsoft and Nokia market this phone heavily in the country, the number can go up further. In China and India, not many people will be buying a Lumia 900 while they are waiting on Lumia 920. Still, the two countries combined present a possible market size of a billion, and it wouldn't be unfair to expect Nokia to sell at least a million Lumias combined in these two countries per quarter. In addition to the existing markets, new markets such as the Middle East and Eastern Europe will present many growth opportunities for Lumia because Nokia enjoys a strong brand in these regions.

If the company launches the new line of Lumias in multiple markets fast enough, I don't see why it shouldn't sell 7-8 million Lumias per quarter. This would total up to 28-32 million Lumias in 2013. This number is sufficient to generate positive cash flow for the company. If the current line of Lumias can sell 4 million copies per quarter while they were under-marketed, available in only select countries with select carriers, there were many people holding off for a Windows 8 phone, the new Lumias can easily sell 7-8 million copies while they are being marketed better, will be available in more markets under more carriers and they will have the latest and the best version of Windows Phone operating system. With Nokia, users are getting a great phone, a great camera and a great GPS all in one device. This is something Apple or Samsung never achieved.

I am bullish on Nokia and I expect the company to achieve positive cash flow sometime in 2013. The company's mapping segment and Nokia-Siemens Networks should start generating positive cash flow in the first quarter of 2013 and the mobile device segment should achieve positive cash flow by second or third quarter of the year.

In order to keep this article balanced, I also have to provide the bearish case. If the new line of Lumias fail, so will Nokia and the company will cease to exist. This would be terrible for the investors of the company as the value of their shares would be nearly zero. A large majority of my portfolio consists of companies that are successfully generating positive cash flow and seeing a lot of growth. This should be the case with most if not all investors. Companies like Nokia should only make up a small percentage of your portfolio due to the high risk they carry.

Disclosure: I am long NOK. 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.