Since Nokia's (NOK) fall from grace began, there was going to be the quarter which would mark the bottom for them. With their Q3 results finally in the books, it is pretty safe to say that this one just passed was most likely it. From the botched rollout of the optical technology in their Lumia 920 to the near death of Windows Phone sales in the U.S. - less than 200,000 units sold - the 3rd quarter could not have been any worse than it was from a consumer products perspective. And I'm sure CEO Stephan Elop would have preferred for Microsoft (MSFT) to have gotten Windows 8 out the door sometime in the 3rd quarter to have something positive to report from Nokia's core business on this earnings call.
But that launch window closed months ago, and Windows 8 is going on sale in few days, which will begin to answer the questions as to whether there is any hope of a third ecosystem challenging that of Apple (AAPL) and Google (GOOG). For the first time the flagship devices for all three ecosystems will be of similar capabilities, albeit with different selling points, beyond the logo and the cloud infrastructure behind them.
But the market for phones is far bigger than the number of phones sold through AT&T (T) or Verizon, i.e. the U.S. For Nokia they are going to have to build on where they have momentum with both their existing Windows Phones, namely Europe, and their expanding Asha line of proto smart phones being sold in emerging markets, i.e. India and China. The full-touch line of cheap Asha phones sold more than 77 million units in Q3, up from 68 million in Q2. Those sales figures are a testament to having a product for a market that Apple cannot compete in because of price.
Henry Blodget at Business Insider made the important point that lack of carrier subsidy in India is the main reason Apple isn't even trying to compete in one of the 2 biggest potential markets in the world. Is the value proposition for a $800 iPhone 5 really 10 times that of an $82 Asha 305 for a person making $2,000 a year?
Moreover, are device sales really where the future revenue is? The strength of the ecosystem will be determined by its ability to generate revenue for its app developers and any ad revenue. Both of those revenue streams depend on the raw user numbers, not the price paid for the device. There is no arguing that. So, while Apple refuses to sully its hands selling cheap phones and tablets to the great unwashed in emerging markets, Google's partners and, soon, Microsoft's, are and will be grabbing market share in the process.
This is not to say that Nokia's future is tied to this ultra-low-end market but it is a market that needs to be served for the foreseeable future. For a company whose near-term future is tied directly to its ability to manage its cash, having the Asha line along with the Nokia-Siemens Networking subsidiary returning strong positive cash flow is extremely important while the Windows ecosystem develops and Nokia can bring low-end Lumias into the market to compete with the $99 Android phones that are beginning to penetrate the no-contract carriers in the U.S. like Virgin Mobile and MetroPCS.
The birth of the $99 smartphone market is the future and while Apple is not interested in competing in that space they may have no choice but to come down and do so. The growth in U.S. smartphone sales is in the no-contract space. The U.S. market is becoming more like the rest of the world proportionately. Nokia's measured rollout to appease AT&T and Verizon with only high-cost flagship phones to compete with the iPhone 5 and latest Samsung Galaxy may be a tactical mistake in grabbing some U.S. market share which they desperately need to stop the mind share bleeding. It is a risky strategy to attack the top of the most influential market without servicing its low end as well.
HTC's 8S has more promise as an entry-level WinPhone8 device than the Nokia 820 because of its lower capabilities and hence lower price. The 820 is a hand-me-down flagship phone for the carriers who aren't AT&T who has a 6 month exclusivity period with the Lumia 920. The opportunity to put forward a Sprint network compatible CDMA version of the last-generation Lumia 8/900 for the Metro-PCS crowd exists now and they are missing out on it.
Ultimately, nothing has changed between Q2 and Q3 for those interested in playing Nokia. This quarter's results were operationally better than expected - from Asha sales to Nokia Siemens Networks results - but the company is still struggling to establish a new place for itself in what has to be its core competency, i.e. smart phones. But, unlike Research in Motion, at least it is ready today to mount an attack on Mount AppleGoogle. The supporting verticals to their smart phone business look healthy and are gaining in strength, and that is surely a positive, but until we know how the public responds to the latest iteration of Windows, Nokia remains a purely speculative play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
