Why Microsoft Backtracked on Selling Low-End Nokia Phones

Why did Microsoft suddenly decide to launch a new low-end feature phone for developing markets?

Aug 13, 2014 at 10:41AM

Last month, Microsoft (NASDAQ:MSFT) announced that it would discontinue the Nokia X Android phone, Symbian 40, and Asha handsets in developing and emerging markets to clear the way for low-end Windows Phones. Many people assumed that Microsoft would discontinue all of Nokia's low-end "dumbphones" as well, but apparently that's not the case.

Microsoft recently backtracked and announced a new low-end handset, the Nokia 130, which will cost $25 when it launches in September. Microsoft's Jo Harlow, speaking to Re/code, stated that the company still needs a low-end device to reach consumers at the lowest end of the market. The company also hopes that positioning the 130 as a "first cell phone" will lead to future purchases of low-end Windows Phones like the Lumia 530, which starts at $144.


Nokia 130. Source: Company website.

While selling low-end Nokia phones will definitely generate additional revenue for Microsoft, it won't help halt the spread of low-end Android and Firefox OS phones that are flooding lower-income markets. Let's take a look at how Microsoft should approach this challenging market instead.

Why Microsoft still needs Nokia's feature phones
Nokia is still the world's second largest handset brand after Samsung, thanks to its massive footprint in developing and emerging markets. Gartner reports that Nokia sold 251 million handsets in 2013, compared to 444 million from Samsung. However, the two brands are headed in opposite directions -- Nokia's shipments fell 25% from the previous year, while Samsung's shipments rose 16%.

Nokia's market share is falling, but Microsoft won't simply shut off that stream of revenue, considering that the Surface lost $1.7 billion since 2012, and the Xbox One has struggled since last November. That's why the company needs feature phones like the Nokia 130. The 130 would have been considered outdated a decade ago -- the only "extra" features are Bluetooth, a microSD card, a media player, and FM radio. It doesn't have a camera or 3G connectivity.

But these phones can be sold at respectable margins. According to IHS iSuppli, the Nokia 105, which cost $20 last year, was sold with a hardware and manufacturing margin of 29%. That's certainly a much smaller profit per phone than Apple's iPhone 5S or Samsung's Galaxy S5, but Microsoft should certainly milk those profits while it still can.

You'd be surprised how far $25 goes
While Microsoft shouldn't just pull the plug on low-end Nokia feature phones, it should realize that $25 goes a lot farther in developing markets than before.

Mozilla is working with Indian handset makers Intex and Spice to launch a $25 Firefox OS phone later this year. Unlike the Nokia 130, the low-end Firefox phone will be equipped with a camera, GPS, a touchscreen, and Internet connectivity. Another Indian phone, the Celkon Campus A35k, is a full-featured Android 4.4 device that costs $50. Even without a data plan, these devices can access the web via Wi-Fi connections, making them more attractive alternatives to the Nokia 130.

Celkon Campus A

Celkon Campus A35k -- a $50 Android 4.4 phone. Source: Company website.

That's why Microsoft shouldn't discontinue the Asha, which costs $60 to $100 and runs web-based apps over a 3G connection. The Asha flopped due to competition from low-end Android phones, but Microsoft could still save the brand by relaunching it as a low-end smartphone -- running either forked Android or S40 -- and equipping it with web-based apps for Bing and OneDrive.

If Microsoft follows Intex, Spice, and Celkon's footsteps in hardware, it could possibly launch a new Asha that costs less than $50. If it then lowers the price of the Nokia 130 to around $15, it could turn the tables on low-end Android and Firefox OS devices in emerging markets. Microsoft needs to act soon -- customers in India and China are expected to buy over 500 million smartphones this year, accounting for half the total sold in 47 key markets, according to research data provided by research firm Mediacells reported in The Guardian.

The Foolish takeaway
It's easy to see why Microsoft is launching new low-end Nokia feature phones, but it's not a sustainable long-term strategy. Cheap Android and Linux-based phones wiped out the Asha, and they will wipe out feature phones as well -- causing revenue to dry up a lot faster than Microsoft might expect.

In my opinion, Microsoft needs three tiers of low-end devices -- the Lumia 530 at the top, the Asha in the middle, and feature phones at the bottom. However, Microsoft is giving up on the middle tier and letting $25 to $50 Firefox OS and Android devices expand unopposed. If Microsoft wants to survive that onslaught, it needs to cut the prices of all three categories of phones.

Microsoft will certainly sacrifice margins that way, but at least it can draw customers into the "One Windows" system championed by CEO Satya Nadella.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Leo Sun owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers