Why Did Microsoft Kill Off Nokia X and Asha?

Last week, Microsoft (NASDAQ: MSFT  ) killed off its Nokia (NYSE: NOK  ) X Android smartphone, ending its brief experiment with producing Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Android handsets.

The ill-fated Nokia X. Source: Nokia.

The Nokia X was never meant for developed markets. Instead, it was intended to compete against low-end Android phones in developing and emerging ones. The Nokia X was a "forked" Android device with a Windows Phone-like skin that could only run certain Android programs. The goal was to bridge the gap between low-end Android phones and Windows Phones, and offset sales of Nokia's Asha phones, which are as cheap as $60 and run on a hybrid version of Nokia's Symbian S40 and Smarterphone operating systems.

According to The Verge, Microsoft will discontinue support for the Nokia X, Asha, and S40 phones over the next 18 months. In other words, Microsoft just wiped out all of Nokia's previous efforts to establish a foothold in developing and emerging markets. Were these bold moves necessary?

Why axing the Nokia X and Asha makes sense
Prior to his resignation, former CEO Steve Ballmer emphasized the importance of uniting the Windows operating systems across desktop, laptop, and mobile devices. The idea was that Windows, like Android, could be cross-compatible across platforms, making it much easier to develop software for. Cloud-based solutions like OneDrive would then connect the dots and synchronize multiple devices.

The problem is that Nokia X, S40 phones, and Asha don't fit into that vision of a "One Windows" ecosystem in any way. Former Nokia CEO Stephen Elop introduced the Nokia X as a way to dodge Microsoft's Windows licensing fees and offer users a cheap entry point to OneDrive, Outlook, and other Microsoft services. However, the X was also an indirect acknowledgment that Google's mobile ecosystem, with over 1.3 million apps, was preferable to the 255,000 apps available on Windows Phone.

Nokia's Asha. Source: Nokia.

Once Microsoft completed its acquisition of Nokia's handset division in April 2014, the Nokia X no longer made any strategic sense -- why would it sell a phone that generated no license fees while diminishing the importance of its own mobile app store?

The Nokia X was also not competitively priced. The cheapest Nokia X handset starts at $125 -- making it comparably priced to the low-end Lumia 520, a Windows Phone that costs $150. Meanwhile, low-end S40s and Ashas flopped in a market where cheap Android phones, like the Celkon Campus A35k, pushed the low-end price under $50.

Since low-end Android models are now comparably priced or cheaper than S40s and Ashas but offer more apps, the only way for Microsoft to compete would be to slash prices -- which would be pointless considering the damage to its razor-thin margins.

The $50 Celkon Campus A35k, a low-end Android 4.4 phone in India. Source: Digitalsoon.com

A matter of market share
Most importantly, the X, S40, and Asha phones didn't help Windows Phone gain market share against Android or iOS.

Windows Phones currently account for 3% of the world's smartphones, but research firm IDC believes that its share could more than double to 7% by 2018. While that growth doesn't seem impressive, Windows Phone is the only mobile OS that is expected to grow at all.

Android is expected to fall from 78.9% to 76% between 2014 and 2018. Apple (NASDAQ: AAPL  ) iOS is expected to decline from 14.9% to 14.4%. BlackBerry could fall from 1% to 0.3%. The relative growth of Windows Phones could convince developers to launch newer apps for the platform, instead of simply porting dated Android and iOS apps.

However, Microsoft can't live up to those projections if it doesn't clean up Nokia's mess in emerging markets first. Microsoft's new plan, to market low-end Lumias in emerging markets, is much clearer and will keep its global users united under a single operating system.

Emerging markets still have high-end consumers
After Microsoft establishes a firm foothold with lower-end Lumias, it could also have a better shot at marketing higher-end Lumias to high-income customers who favor iPhones or Samsung Galaxy S phones. Investors should note that emerging markets like India have huge income gaps and not all customers are interested in low-end phones.

The average Indian worker earns less than $300 per month, but the top 10% of wage earners in India earn roughly 12 times the bottom 10%, according to a recent OECD (Organization for Economic Cooperation and Development) report. India's top 5% also contributes to 21.3% of total expenditures in the country -- meaning that over a fifth of the money spent in the country comes from people who can easily afford higher-end phones. Those are the same customers who might be interested in Nokia's higher-end Lumia flagship devices, like the new Lumia 930.

The Foolish takeaway
In conclusion, CEO Satya Nadella was wise to kill off Nokia's non-Windows phones. Those phones served no real purpose, were bleeding market share, and throttled Windows Phones' own potential for growth.

Replacing the S40, Asha, and X phones with low-end Windows Phones cleanly connects emerging markets to the rest of the Microsoft ecosystem, and makes more sense for building mobile market share worldwide and reinforcing the company's ultimate "One Windows" goal.

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