Carriers And App Support Are Key To Nokia’s Turnaround Plans

Nokia (NYSE:NOK) may not have started the year on a good note as it lost the top spot in the mobile phone market to Samsung after 14 long years at the helm, but its turnaround plans are surely gaining traction in the U.S. Earlier this month, Nokia said that it was trying hard to keep up with the demand for the Lumia in the U.S., particularly for the cyan version. This was confirmed later by Raymond James analyst Tavis McCourt, whose channel checks showed that the new Nokia Lumia 900 was in fact a hot seller at some AT&T (NYSE:T) stores, trailing behind only the Apple’s (NASDAQ:AAPL) iPhone. ^[1] If true, this is a good start for Nokia in a key smartphone market where it has failed to compete before.

However, Nokia faces an uphill task against the two well-entrenched ecosystems of Apple and Android to create a niche for itself and Microsoft (NASDAQ:MSFT). Nonetheless, more carrier partnerships and better app support to drive the Lumia sales will be key to its resurgent hopes.

We have a $5 price estimate for Nokia, more than 50% ahead of the current market price.

See our complete analysis for Nokia stock here

Nokia has the carriers’ backing

The need for more competition in the smartphone market, not only in terms of hardware but also software, is being increasingly felt by both customers and carriers alike. A competitive third mobile ecosystem will increase the number of choices for customers and foster innovation in the industry. More competition will also put less burden on the carriers who are increasingly feeling the pinch of smartphone subsidies on their margins. It is no wonder therefore that wireless carriers in both the U.S. and China have jumped on Nokia’s latest offerings to counter the growing dominance of Android and iOS in both these markets.

In the U.S., AT&T is backing the Lumia, affording the phone a “hero” status at its stores and making it the exclusive free phone for all AT&T employees to generate awareness. This means that the Lumia is not only benefiting from a greater marketing push from its founding partners but also the second largest national carrier. With recent reports about the Lumia 900 doing well at AT&T after the steady start at T-Mobile, Nokia’s U.S. plans seem to be working for now. Bringing in more CDMA-based carriers like Verizon and Sprint into its fold will be the next step in Nokia’s gradual plans to penetrate the U.S. market.

While Nokia doesn’t have a CDMA handset available in the U.S., it has already released one in China, the Lumia 800C, on China Telecom, and so it’s only a matter of time before the customized handsets are available on the CDMA networks in the U.S. as well.

As for China, its smartphone market is expected to be the largest in the world by the end of the year. With 3G penetration at a lowly 14%, the growth potential is huge. Even the carriers here are actively trying to transition their huge 2G base to 3G. China Telecom has already jumped on Nokia’s offering, and it shouldn’t be long before China Mobile and China Unicom also lap up.

While selling the iPhone is more lucrative considering its incredible popularity among buyers, emerging market carriers are wary of margin pressures that selling such an expensive phone entails. Nokia is planning to alleviate these concerns by offering more handset choices at lower prices, or packing in more features at the same price. While the iPhone retails at an unsubsidized $775 in China, Nokia’s Lumia 800C is priced at a competitive $570, more than $200 cheaper. Nokia also plans to bring the cheaper Lumia 610 to China soon.

App support to grow gradually

While carrier backing doesn’t seem very tough to garner, where Nokia faces the most significant headwind is creating an app ecosystem vibrant enough to counter Apple’s and Google’s growing presence. The iTunes store and Google Play boast of more than 600k and 400k apps, respectively, while there are only 80k available in the Windows Phone Marketplace. Nokia is trying to bridge the gap by incentivizing app developers as well as partnering with some of the more popular ones to create exclusive content for the Lumia. ^[2]

While Nokia and Microsoft are trying their best to generate app momentum, it will take time before they can hope to compete with the current leaders. Investors also need to understand that even Android was slow to take off, but once it hit an inflection point, the rise was phenomenal. We hence believe that in Windows Phone, Nokia has a good chance to compete in the smartphone market and create a third mobile ecosystem, at least more effectively than the outdated Symbian.

Nokia’s hardware skills, which were never in question despite its falling market share, will help it offer well-designed handsets at cheaper prices, undercutting Apple in emerging markets. Together with a competitive and unfragmented OS , it will also be able to offer a consistent app experience across its Lumia portfolio, something that the plethora of Android smartphones in the market customized by handset makers lack.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. HTC ‘One’ Doing Well, ‘Lumia 900′ Still Impressive, Says Raymond James, Barron’s, May 9th, 2012 [↩]
2. Nokia Lumia drives further ecosystem momentum with new app partnerships announced at CTIA, Reuters, May 8th, 2012 [↩]