Cheaper Chips Mean Smarter Cheap Phones

Qualcomm (Nasdaq: QCOM  ) has been the only provider of chipsets for Microsoft's (Nasdaq: MSFT  ) Windows Phone mobile operating system. As of last month, when Nokia (NYSE: NOK  ) unveiled its two latest smartphones, the Lumia 800 and Lumia 710, that was still true. But take nothing for granted, because Nokia has decided to change its chipset provider for its future Windows Phone handsets.

Earlier this month, Nokia announced that it would start using chipsets from ST-Ericsson, a joint venture between STMicroelectronics (NYSE: STM  ) and Ericsson (Nasdaq: ERIC  ) . Nokia described its agreement with ST-Ericsson as one that will help Windows Phone-powered smartphones reach "new price points and geographies." That phrase is the key to the switch in suppliers.

Geographies
When Nokia originally showed off its new smartphones, CEO Stephen Elop dwelled on Nokia's global reach. He was likely referring to emerging markets, places where potential future growth for smartphone sales is high -- if the costs for such handsets can be contained.

Price points
As Nokia has found out, cost can make all the difference. Even though it has been steadily losing ground with its phones in established areas, in impoverished regions like Africa, Nokia has made itself into a brand as recognizable as Coca-Cola, according to The Economist. It has done so with such devices as the $30 Nokia 1100 cellphone, which that publication has called the "Kalashnikov of communication for the poor."

So for Nokia's 60% share of the African cellphone market, and for its 50% share of the Chinese and Indian markets -- where most consumers can only afford the cheapest entry-level phones -- the company must be able to bring the cost of its Windows Phones so low they can become those markets' first affordable smartphones.

And it better do it before Samsung, Huawei, or ZTE do it with a phone powered by Google's (Nasdaq: GOOG  ) Android OS, or well before Apple (Nasdaq: AAPL  ) could ever bring out an entry-level iPhone.

A chipset price war?
Qualcomm, meanwhile, is not giving up the fight to keep Nokia's business. A top executive for the company, Enrico Salvatori, told TechRadar that the company is working on a long-term relationship with Nokia. But if that relationship is going to go back to more than a friends-with- benefits arrangement, then the chipset maker will have to keep chipping away at cost. If it doesn't, as demonstrated by ST-Ericsson, there are others that will.

Nokia's earnings for last quarter showed a company that was down but not out. It is still the world's largest maker of mobile devices; it still creates positive cash flow, and has more cash on hand than money it owes. It builds good, well-designed equipment, but has fallen down hard with its own smartphone software. Abandoning its unpopular homegrown Symbian OS for its new smartphones is a good decision. Whether or not going with Microsoft's Windows Phone OS turns out better won't be determined for at least several months.

A lot depends on how those Windows Phones do. I am going to give Nokia a thumbs-up on CAPS. I don't intend to put my hard-earned cash in it yet, as I still have trepidations, but I feel (with fingers crossed) the company can pull out of its tailspin.

Fool contributor Dan Radovsky has no financial interest in the above-mentioned companies, but dares you to say the title of this article five times fast. The Motley Fool owns shares of Apple, Qualcomm, Microsoft, and Google. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Google, creating a bull call spread position in Apple, and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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