Is This The Smartphone Segment That Microsoft Wants?

So it's been about three weeks since Microsoft (MSFT -3.29%) announced it was buying Nokia's (NOK 0.14%) devices and services division, and at a quick glance, there's a lot that makes sense about the acquisition. But some new data on Windows Phone usage may mean Microsoft has a long way to go to make big gains from Nokia's handsets. 

A low-tech gadget in high-margin world
According to data from AdDuplex, the Lumia 520 (521 in the U.S.) and the 620 make up a significant amount of the Windows Phone users. The chart below shows the 520 holding the majority at over 21% and the 620 coming in at over 9%. 

Source: AdDuplex.

So what's wrong with that? The problem is that the 520 and the 620 are Nokia's low-end (read: low-margin) devices, so having them make up 30% of Windows Phones isn't a great start as Microsoft begins incorporating Nokia's devices into the company.

Last quarter, Nokia's adjusted gross margin for its Devices and Services division was 24% and the average selling price of of units was about $60. Microsoft is buying up Nokia's devices that are largely comprised of inexpensive feature phones and low-margin smartphones. Kantar Worldpanel just released data this week showing that sales of Nokia's 520 and 620 units are driving Windows Phone market share in Europe, which is good for Microsoft's OS, but not necessarily for its margins.

Microsoft has said it wants to achieve a gross margin of $40 per smartphone, but with Nokia's highest usage coming from the low- to mid-range devices, that target may be difficult to reach.

Aiming a bit too high
Although I think Microsoft's acquisition of Nokia's device and services will ultimately be a positive thing for the Windows maker, the smartphones that are building Windows Phone growth aren't the ones that will bring in the most money for Microsoft. 

The company said in a recent presentation that it expects to save $600 million annually through "cost synergies" 18 months after the deal closes. Whether that's realized or not, with such a large percentage of Nokia's devices coming from the low-end of the smartphone spectrum, Microsoft may have a problem reaching its lofty goal. Investors should keep an eye on what strategy the company takes with smartphones once the Nokia deal closes. While the Redmond-based company will likely try to keep the low-end momentum going, it'll be the high-end Windows Phone units that will make the company's projections a reality.