After selling its handset business to Microsoft for $7.2 billion earlier this year, many people -- myself included -- thought Nokia (NYSE:NOK) was done with devices and would focus on its core business of network infrastructure. Well, it appears we were wrong. Although the company can't manufacture cell phones because of a condition of the sale, Nokia is going to release a tablet next year.
The tablet appears to be focused on the low end. Dubbed the N1, the device has a 7.9-inch display, will cost approximately $250, and will be focused on the greater-China region. However, the most interesting part of the release is the company will use Google's Android operating system rather than Microsoft's (NASDAQ:MSFT) OS.
They aren't competing on price
Earlier this year, Microsoft took a bold step of giving away its Windows license for phones and devices under 9 inches in a bid to entice OEMs, or original equipment manufacturers, away from Android. That came after an earlier price cut of 70%. The company wanted to increase supply of Windows-based tablets in order to increase adoption. Unfortunately, this hasn't spurred the type of adoption the company would like.
The Android mobile operating system is also free for manufacturers to install, but it does require a license to access Google Mobile Services -- a suite that includes Gmail, Google Maps, and Google Play. The license costs nothing but requires a certificate from a testing facility; many OEMs have complained these costs are rather onerous. That said, it is apparent that Nokia isn't looking at cost when comparing these two ecosystems. So what separates the two?
China is important here
The key may lie with the target market: China. When it comes to operating systems and ecosystems, this is an easy choice. In fact, a Kantar Worldpanel September report shows how one-sided this fight has become in the Middle Kingdom. Using smartphone market share as a proxy for tablets, Google's Android commands a massive 83.4% of the market with Apple's iOS taking a distant second at 15.2%; Microsoft's OS holds fourth place with an estimated 0.4% of the market.
Led by Samsung and new and exciting upstart Xiaomi, Android already has a loyal following here. The Xiaomi example is encouraging for Nokia in many aspects. Essentially, the company came out of nowhere to overtake Samsung as the leading smartphone in the Chinese market. The company accomplished this task by taking heavy design cues from Apple's iPhone at a lower price point. And it appears Nokia got the message: Nokia's N1 looks similar to Apple's iPad.
And while it's simply too early to predict success for the Finnish company, this will be an interesting challenge for Xiaomi. Utilizing a low price point and marketing to a receptive domestic audience has been good for the company. Xiaomi is in talks to raise roughly $1.5 billion at a valuation of $40 billion. If its success can be replicated by Nokia, look for other companies to quickly copy this strategy.
Microsoft device woes continue, but are improving
Microsoft finds itself struggling with devices, but things are getting better. The previously Nokia-owned Lumia line of phones actually reported its highest quarter of units shipped ever in its September quarter, although it didn't experience substantive increases in market share. In addition, the Surface line of tablets actually reported its first positive gross margin since its launch.
As these little wins increase -- eventually gaining users, market share, and acceptance -- look for more OEMs to partner with Microsoft. And don't be too concerned by Nokia's decision to use Android in China. Should the company choose to launch the N1 in Europe, they might be more inclined to partner up with Microsoft to take advantage of the Windows-friendly market there.