Nokia’s faith in Windows Phone seems to be paying off for now. The company continues to not only dominate the Windows Phone market but also take away market share from rivals such as Samsung and HTC, according to a recently released report by AdDuplex. The usage stats for April show that Nokia has increased its share of the Windows Phone market to 80%, up from about 78% a month ago.
That Nokia is taking market share away from rivals must be reassuring for the company, which has steadfastly remained committed to the Windows Phone platform despite calls to diversify its portfolio with Android phones. With a lion’s share of the Windows Phone market, Nokia has all but ensured that Microsoft needs to remain committed to its biggest hardware partner if it wants to upstage BlackBerry as the third viable mobile ecosystem of choice.
Also, within the Nokia Lumia ecosystem, the higher-end Lumia 920 upstaged the mid-end Lumia 800 as the most popular Windows Phone globally. As a result, the latest Windows Phone 8′s share of the overall WP market accelerated to 43%, more than doubling from 19% three months back. We believe that the 920′s good showing is a potential sign of improving situation at the supply end as well as increasing demand from China, where the 920T is being deeply subsidized by China Mobile. That the costliest Lumia model is selling so well is a big positive for Nokia, which is looking to return its mobile device division to operating profit as soon as possible.
Windows Phone Gives Nokia Its Best Chance
The report helps put to rest concerns about Nokia not benefiting much from going with Windows Phone since the handset maker isn’t Microsoft’s exclusive partner. Further, it backs Nokia’s reasoning that Windows Phone has given it a much better chance than Android – at differentiating itself from rivals and surviving in an industry that is dominated by the duopoly of Apple and Samsung. Nokia believes that developing Android phones would be a drain on its limited resources, which can be put to much better use if it remains focused on a single platform.
We find it hard to ignore the logic behind Nokia’s argument. Going with Android would have put Nokia in direct competition with not only Samsung and HTC, but also Sony, LG and a horde of handset manufacturers in the emerging markets. It would have entered the Android fray a little too late, struggling not only to differentiate itself from the crowd, but also against the marketing might of Samsung. We are already seeing the amount of control Samsung is exerting on the Android ecosystem, with rivals such as HTC struggling to compete despite bringing to market highly competent phones. It is important to remember that HTC’s decline followed its rise to the top of the U.S. smartphone market in Q3 2011. Considering that Nokia is coming from lows in the smartphone industry, it is tough to see how Nokia would have fared any better had it sided with Android.
Moreover, Windows Phone allows Nokia to get more marketing might behind the Lumia brand. Not only is it in the interest of Microsoft to promote the platform, but also for the carriers who are looking to increase competition in their supply chain and gradually decrease the impact of smartphone subsidies. With Android, Nokia would have been on its own since Google would have had no reason to promote the Lumia, considering Android’s already rising popularity and its own acquisition of Motorola’s hardware assets.
Uncertainty Still Persists
We believe that adopting the Windows Phone has given Nokia a fighting chance in the smartphone industry, but its long term ambitions are still tied to the sustainability of Windows Phone, as a viable third alternative to iOS and Android. There is currently a lot of uncertainty surrounding BB10′s future in the smartphone market, but if the new OS puts BlackBerry back in contention, Windows Phone might have to start eating into Android’s and iOS’ market share in order to grow – the odds for which seem pretty low. Despite Lumia’s strong holiday quarter, it is tough to say which way market share might swing in the coming years. Accounting for this risk, we estimate that sales in the developed markets account for less than 10% of our $5 price estimate for Nokia.
Still, we continue to believe that even a small improvement in Nokia’s handset business, together with its patent monetization initiatives and the ongoing turnaround in the wireless infrastructure joint venture with Siemens, should help it realize what we expect to be fair value of Nokia’s stock at this juncture. Trefis’ $5 price estimate for Nokia is about 45% ahead of the current market price.
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