The Nokia X2 Will Keep Microsoft Devices Alive For Now

| About: Microsoft Corporation (MSFT)
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The Nokia X2 is poised for success amid hardware updates, aesthetics, and the brand value of Nokia in emerging markets.

Microsoft will expand its services footprint (OneDrive, Skype, etc.) in emerging markets due to the success of the Nokia X2.

The "Android One" initiative from Google is a long-term threat to Microsoft's low-end line of phones in emerging markets.

Hostility is not always the way to go. Microsoft (NASDAQ:MSFT) demonstrated this with the launch of its Android open-source platform, or AOSP, based Nokia X. As a result, the company improved its market share in emerging markets like India. The company recently unveiled a descendent to this line of phones, named the Nokia X2. The phone will gain traction due to the improved hardware, software, and design. It will help Microsoft to stay relevant in the smartphone wars. The apps, services, and cloud footprint of Microsoft will expand as a direct result of the Nokia X2. Continuance of the AOSP-based phones can be fruitful for the company in the long run.

Nokia X2 Dual SIM
Source: Nokia website

X2 Will Be a Success

Emerging markets will drive the growth of the smartphone industry in the upcoming years. The penetration of smartphones is very low in these markets. In India, the smartphone penetration stands at just around 10%. As a result, the Indian smartphone industry is set to grow at a CAGR of 40% in the next five years. Moreover, the sub-$200 phones make up around 78% of the emerging smartphone market, indicating that the growth is constrained toward the low-end devices. These statistics point toward the fact that emerging markets are inclined toward low-end smartphones, and the market is also price-sensitive. The Nokia X2, with its low-end specifications and a reasonable price tag, is exactly targeted toward the high-growth, low-end emerging markets.

Improved Hardware

The hardware of the Nokia X2 has improved vs. the previous version. It can run AOSP decently. The problem with the Nokia X was the lack of sufficient RAM, 512MB, resulting in a lagging, stuttering display experience. A review from TNW said, "It's not quite as fast as a high-end smartphone when navigating around." Despite this, the Nokia X made an impact on emerging markets. IDC noted that in India, the Nokia X was partially responsible for Nokia's improved market share in the first quarter of 2014. "The Nokia X launch coupled with other low-end Lumia phones helped in improving the overall performance of the brand," said IDC. As the Nokia X2 resolved the RAM problem by including 1GB instead of 512MB of RAM, it will definitely gain more traction as compared to the Nokia X.

Source: IDC

Differentiated Design

The design of the Nokia phones is the second reason that will drive the volume of the Nokia X2. This new phone features the eye-catching and colorful design of the Nokia X. An extra translucent outer layer is added that renders a glowing look. TechRadar has given a four-star rating to the design of the Nokia X. Given that the phone is in the low-cost bracket, this rating is impressive. Nokia's design and the quality of material used in manufacturing puts it ahead of the local competition in emerging markets.

Brand Recognition

Nokia is a major brand in emerging markets. It is still considered to be the sign of quality in countries like Pakistan. Nokia is the third-best seller in India, and it is a top seller in countries like Russia, Nigeria, Korea, and Pakistan. The feature-phone users of these geographies, who are currently using Nokia's phone, will preferably consider Nokia's smartphone in case they want to switch, due to the brand value created by Nokia. Brand recognition is a major factor, giving the Nokia X2 a better shot at success.

Source: IDC

Threats to the Success

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has recently announced a project named Android One. Google will collaborate with some of the phone makers of emerging markets to produce sub-$100 phones. This is a threat to Microsoft's Nokia line of phones. As the first Android One phone is slated for a launch this Fall, the Nokia X2 will have its share of sales, thanks to its early launch. On a different note, Microsoft must come up with an answer to the Android One program in order to compete decently in the future.

The price is supposed to be another threat to the success of the X2. In my view, it's not. Nokia is known in emerging markets for its brand, its aesthetics, and the quality of its hardware. To gain some perspective, consider that Apple's (NASDAQ:AAPL) iPhone continues to be successful in the North American market, and it gets away with higher pricing despite intense competition. Why? It's because of Apple's hardware quality, the aesthetics of its products, and its brand recognition. A small price difference is not going to affect the prospects of the Nokia X2.

What's in it for Microsoft?

Microsoft is pushing its cloud-first, mobile-first strategy. The Nokia X2 complements that. First, the growth of X2 will add to the growth of the devices segment of Microsoft. Second, Microsoft will extend the reach of its apps, services, and cloud footprint in emerging markets. More importantly, the AOSP is customized to reflect a Windows-like visual presentation in X2. The users will prefer the Lumia series of phones later, if they want to switch to a high-end device. This is because of the familiar visual presentation and the absence of the learning curve of using a completely different OS. Note that I am talking about the adoption of the Lumia in emerging markets. Mature markets are already dominated by iOS and Android.

Bottom Line

The Nokia X2 will receive a warm welcome in emerging markets. It is set to outperform its predecessor, thanks to its updated hardware and software. Microsoft will extend its services and cloud footprint. The Nokia series will also act as a starting point for the growth of the Lumia phones. The phone is poised to succeed, but Microsoft must counter the threat of Android One in order to remain relevant in the smartphone market of the near future.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.