Nokia Buys Smarterphone AS; Positive for Emerging Market Penetration

Nokia (NYSE:NOK) has acquired Norway-based mobile Operating System developer, Smarterphone AS, in a move that will help it address its sliding market share in emerging markets. ^[1] The acquisition gives Nokia access to Smarterphone’s proprietary software platform that claims to enrich the user experience on feature phones by providing a “highly advanced functionality on very moderate hardware.” Last year, Nokia had abandoned MeeGo and Symbian in favor of Microsoft’s (NASDAQ:MSFT) Windows Phone platform for all its newer smartphones. With this deal, we should now see its feature phones get a lift in emerging markets.

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Old S40 shown the door…

We do not see this acquisition clashing with the company’s stance of using the Windows Phone for all its smartphones, as this software is merely intended to make the feature phones more appeal and give it a smartphone-like feel. We expect these smarter low end phones to still be a different market segment and not cannibalize the costlier smartphone sales. Nokia will continue to use the Windows Phone platform on its smartphones, but its feature phones, that have until now run on the 10-year old Series 40 software, will see a marked improvement with this new OS.

Moreover, this move also seems well-aligned with earlier reports that the company was creating a Linux-based operating system code-named Meltemi that would allow it to offer smartphone lookalikes at rock-bottom prices. ^[2] However, we are still unsure if Nokia will replace the rumored Linux-based OS with the newly acquired one or merely integrate some of its features on the OS it had under development. In any case, it will help it address a potentially unmet demand for quasi-smartphones, that have already started making an appearance in Chinese markets. (see Chinese Telcos Look to Boost Margins With Cheaper Smartphones)

As Nokia readies big plans for emerging markets

Nokia was late on the scene when dual-sim phones became a rage in emerging markets, such as India, China and Africa, allowing local vendors to gain a foothold on a market it used to dominate not so long ago. Moreover it has also had to contend with Samsung that offers the full range of mobile phones in these markets. Samsung recently overtook Nokia to emerge as the leader in the Indian smartphone market and is slowly taking away its feature phone share too. ^[3]

The Finnish mobile phone maker has seen its market share in developing markets fall from what was once more than 70% in 2007 to an expected close to 50% in 2011. We have also seen its market share in developed markets fall in tandem, but emerging markets, at 35%, contribute the most to our $6.84 price estimate for Nokia, as compared to 14% by developed markets.

While smartphones may help Nokia with its margins, emerging markets are where it still sees the most sales. Therefore, we see this acquisition by Nokia as a very positive move as it shows that the company has not forgotten its primary growth driver after forging ties with Microsoft to address its developed market woes.

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

1. Feld Capital Sells Smarterphone to Nokia, Feld Press Release, January 5th, 2012 [↩]
2. Nokia Aims Software At Low-End Phones, WSJ, September 29th, 2011 [↩]
3. Samsung beats Nokia in India, Times Of India, December 31st, 2011 [↩]