Could Nokia's Smartphones Compete With Apple or Samsung?

With a flurry of recent news, fallen tech giant Nokia (NOK 2.03%) is putting the phrase "What's old becomes new" to the test.

Source: Microsoft

After shedding its once-iconic handset to Microsoft (MSFT -1.27%) last year, Nokia has generated media buzz as it sets the stage for the next chapter of its storied history. The company recently announced a long-speculated deal to purchase sprawling French-American communication equipment giant Alcatel-Lucent  for $16.6 billion. And in an even more interesting turn of events, word recently leaked that Nokia is also preparing to reenter the smartphone market in the years to come. Will this eye-catching move even matter in a smartphone market dominated by Apple (AAPL -1.22%) and Google (GOOG -1.10%) (GOOGL -1.23%)?

Nokia's new smartphone strategy
According to media reports , Nokia is quietly working behind the scenes to return to the smartphone market next year. The move is being driven by Nokia's smallest business segment, Nokia Technologies, which principally handles the licensing of Nokia's massive IP portfolio. However, the division has also kept one foot in product development. Out of the handful of new projects Nokia Technologies has produced in recent memory, its coming smartphone effort is likely to be its most significant to date.

Judging by the reports, Nokia has been hard at work designing this smartphone concept for some time now. And when its brand licensing deal with Microsoft expires at the end of this year, Nokia hopes to license this new design or designs under the Nokia brand to a third party handset manufacturer who will handle most of the business aspects of actually taking the product to market. This "capital light" strategy will enable Nokia to leverage its expertise in mobile R&D without having to significantly invest in areas like fabrication facilities, the bulk of which Nokia sold off in its handset division deal with Microsoft. 

Can Nokia compete against Apple and Google?
On the surface, I'm extremely skeptical that Nokia stands a chance in a smartphone world that's become further dominated by Apple and Google in the years since Nokia ditched its "burning platform" for Microsoft. Let's look at few reasons why.

The most significant reason for skepticism here is that the Nokia brand hasn't gone away since Nokia sold its handset business to Microsoft. As part of the agreement, Microsoft has been selling Nokia-branded smartphones running its own Windows Phone operating system -- with little success. According to IDC, Windows Phone's market share didn't exceed 3% of the global smartphone market in any quarter last year. Clearly something isn't working here. It isn't clear what operating system Nokia plans to use for its own upcoming smartphones or whether its smartphone designs will differ dramatically from Microsoft's Lumia. Either way, it might be a moot point.

At the high-end of the smartphone market, Apple's shift to larger screens with its latest set of iPhones has increased the device's popularity generally, but especially in emerging markets that favor so-called "phablets." And with Apple's ecosystem tending to hold onto its users and Samsung's most recent lineup of Galaxy smartphones generally receiving favorable reviews, Nokia's newest smartphones will face stiff competition in the most profitable portion of the smartphone market. However, given the lack of the Lumia's success and the continued dominance of Apple and Samsung at the high-end of the market, I'm guessing Nokia will utilize a more mass-market approach with its coming smartphone designs.

Given the middling results of the Windows Phone OS and the built-in cost and developer advantages, it makes sense for Nokia to design its new smartphone to run on Google's Android platform. It also makes perfect sense for these designs to cater to emerging market consumers, which generates the bulk of smartphone growth. Emerging markets also make sense as Nokia's legacy feature phones could give it some brand appeal among first-time smartphone buyers. However, in order to tap into these markets, Nokia will face stiff competition from high growth operators like Xiaomi, LG, Lenovo, and others.

But since it will be merely licensing its designs and brands to other OEMs, Nokia's coming strategy seems like a low-cost way for it to wade back into the smartphone market. In terms of risk and reward, Nokia will likely have to wager little, and there are a few reasons it could find enough upside to make the bet worthwhile. However, this move will be anything but easy for a company that's already failed spectacularly in the smartphone space.