Should Nokia Corporation Launch New Smartphones?

After Nokia (NOK 3.60%) sold its handset division to Microsoft last year for $7.2 billion, it seemed as if the Finnish company would never sell phones again.

Source: Pixabay

In late 2014, Microsoft stripped the Nokia branding from all Lumia smartphones, except for feature phones. Nokia retained three businesses after the deal closed -- its network equipment unit, its Nokia Technologies patent portfolio, and its HERE mapping business. Nokia recently boosted the size of the largest segment, the network equipment business, with its $16.6 billion acquisition of Alcatel-Lucent.

But according to a recent Re/code report, Nokia could start selling new smartphones as early as 2016, when the clause barring the company from selling new smartphones expires. But even if Nokia is allowed to sell new smartphones, should it do so? Or should it stick to streamlining its remaining business units?

Why this could be a good idea
To understand why Nokia would want to sell its own smartphones again, look at how its three core businesses fared last quarter.

Source: Nokia Q4 earnings report

Nokia Networks was the only business segment to post bottom line growth. HERE, which is overshadowed by Google Maps and Apple Maps, continues to be a laggard. That is why Nokia is reportedly considering selling the business, worth an estimated $2.1 billion.

If Nokia enters the smartphone market again, it cannot use its own manufacturing facilities, which it sold to Microsoft. Instead, Nokia will likely license out its brand to contract manufacturers like Foxconn, which recently manufactured the Nokia N1 tablet. In that deal, Nokia Technologies designed the tablet, while Foxconn shouldered the overhead risks of manufacturing and marketing. Nokia simply generated revenue from licensing fees. That is a low-risk, low-reward strategy, since revenue from N1 sales go largely to Foxconn.

Nokia N1 tablet. Source: Nokia

If other contract manufacturers like Foxconn agree to manufacture and market new Nokia smartphone designs, the Nokia Technologies unit might generate more licensing revenues while resurrecting the Nokia brand in smartphones.

Why this could be a bad idea
However, there is no evidence that demand for Nokia-branded smartphones still exists. When iPhone and Android devices flooded the market in 2007 and 2008, Nokia stubbornly stuck with its aging Symbian OS instead of launching Android devices.

As a result, global market share for Nokia smartphones plunged from 51% in 2007 to 3% in 2013, when it finally agreed to sell the unit to Microsoft. Microsoft did not have much luck reviving interest in the brand, which it turned into a showcase for Windows Phones. Between the fourth quarters of 2013 and 2014, the global market share of Windows Phones slipped from 3% to 2.8%, according to IDC.

The $70 Lumia 430. Source: Microsoft

It is tempting to think that Nokia smartphones were crippled by their dependence on Windows Phone and that Android-powered Nokia phones would fare much better.

Unfortunately, the Android market today has been commoditized by low-cost competitors like Xiaomi, Huawei, and Lenovo. Plunging consumer price expectations caused global smartphone market share for Samsung to slip from 29% to 20% between the fourth quarters of 2013 and 2014. HTC, which controlled 11% of the market in 2011, now controls less than 2%.

Other considerations
Granted, Nokia would not be taking a big risk if it simply designed the devices and licensed them out to contract manufacturers. However, those design efforts will still bump up R&D costs, and contract manufacturers might not be eager to sell Nokia smartphones.

Lastly, by acquiring Alcatel-Lucent, Nokia is positioning itself as a network equipment company. Ericsson, the largest player in that sector, and Alcatel-Lucent both previously sold smartphones. Ericsson sold its stake of a mobile joint venture with Sony in 2012, while Alcatel-Lucent dumped its stake in a similar joint venture with TCL in 2005. Those decisions indicate that it might be smarter for Nokia to simply let its smartphone business go.

The key takeaways
Nokia smartphones will likely return to the market one day. But even if the company partners with manufacturing giants like Foxconn and decides to run Android, it will have a tough time gaining a foothold in the highly saturated smartphone market.