Microsoft (NASDAQ:MSFT) recently unveiled the Nokia 215, a smarter "dumbphone" that will launch for just $29 in the Middle East, Africa, and Europe in the first quarter of 2015. Although the Series 30 phone is powered by bottom-end hardware, it comes loaded with Web apps like Facebook, Facebook Messenger, Twitter(NYSE:TWTR), Opera, Bing Search, and MSN Weather.
According to Microsoft's announcement at CES, the Nokia 215 will come in single and dual-SIM versions, have a talk time of 20 hours, play MP3s for up to 50 hours, and last 29 days on standby. Microsoft didn't disclose how long the 215 lasts for 3G browsing or video playback.
The Nokia 215 might not initially seem like a major device for Microsoft, but it actually reveals a lot about its long-term mobile strategies.
Why the Nokia 215 matters
People often forget that Nokia's handset division, which Microsoft acquired last year, remains the second-largest cell phone manufacturer in the world after Samsung(OTC:SSNLF). However, most of the division's sales were generated by Nokia's low-end feature phones instead of Lumia Windows Phones (which Microsoft rebranded as its own last year).
Last year, Microsoft discontinued its Nokia X Android phone and the low-end Asha Series 40 smartphones to clear the way for lower-end Windows Phones to enter emerging markets. While many people believed that Nokia-branded feature phones would also be discontinued, Microsoft kept the business alive and launched the $25 Nokia 130 last September.
However, the Nokia 130 was as spartan as a phone could be -- it lacked a camera or 3G connectivity, and its only "extra" features were a Bluetooth antenna, an FM radio, a media player, and a microSD card slot. The 130 might generate a little extra pocket change for Microsoft, but it didn't fit into the company's low-end Windows Phone strategy of tethering more users to its mobile ecosystem.
Therefore, selling the Nokia 215 for just $29 represents a way for Microsoft to wean more "dumbphone" users onto "smarter" feature phones with Web connectivity. Microsoft likely hopes that getting users hooked on Facebook, Twitter, Bing, and MSN apps can encourage them to eventually upgrade to low-end Windows Phones.
The shrinking business of feature phones
Between the third quarters of 2013 and 2014, Microsoft Mobile (Nokia)'s global handset shipments fell 23% from 64.6 million units to 49.8 million units, according to Counterpoint Research. That decline will likely accelerate as lower cost smartphones render feature phones obsolete. In 2013, Gartner reported that smartphones outsold feature phones globally for the first time in history.
Feature phone shipments are declining, but their margins are surprisingly decent. IHS iSuppli estimates that the Nokia 105, which launched for $20 in 2013, was sold with a hardware and manufacturing margin of 29%. Therefore, it makes sense for Microsoft to milk those profits before the feature phone market completely dries up.
Leaping from platform to platform
However, it would be foolish to let the feature phone market simply dry up without converting some of those users to the Microsoft ecosystem.
The first step is to launch Microsoft's Bing in developing and emerging markets via phones like the Nokia 215. Net Market Share currently ranks Bing as the second-largest search engine in the world, with nearly 20% of the global search market compared to Google's 66%. If Microsoft introduces Bing to first-time smartphone users with Bing-powered feature phones, that market share could keep rising.
The second step is to bridge the price gap between feature phones and smartphones. That's why Microsoft recently launched the cheapest Windows Phone ever, the $81 Lumia 435, which undercuts Google's Android One devices and Samsung's new India-only Tizen Z1, which each cost around $100.
An uphill battle
Looking ahead, the odds are still stacked against Microsoft in the smartphone market. Windows Phone only accounted for 2.7% of smartphones worldwide in 2014, down from 3.3% in 2013, according to IDC. That tiny market share causes many developers to bypass the platform, which convinces consumers to buy iOS and Android devices instead.
However, smarter Nokia-branded feature phones like the Nokia 215 could help Microsoft carve out a reputation in developing and emerging markets, which might increase dependence on Bing as a default search engine and fuel fresh Windows Phone sales.