Nokia Corporation (ADR) Hints at a Mobile Comeback

Will former mobile champ Nokia return to the smartphone market?

Leo Sun
Leo Sun
Jul 18, 2015 at 3:45PM
Technology and Telecom

Nokia (NYSE:NOK), which sold its handset unit to Microsoft (NASDAQ:MSFT) for $9.5 billion last year, wants smartphones to bear its brand once again. But that doesn't mean Nokia plans to make those smartphones by itself.

Microsoft's Nokia Lumia 1520. Source: Microsoft

In a statement on Nokia's website, spokesman Robert Morlino admitted that without its handset "manufacturing, marketing, and channel distribution capabilities", Nokia couldn't make and sell phones again. Instead, Morlino believes Nokia might return to smartphones "through a brand-licensing model," meaning that a partner would manufacture, market, and distribute the devices. Nokia would only design the products and earn the licensing royalties.

That sounds like a conservative way for Nokia to grow its brand again with mobile users, but is it too late to challenge market heavyweights like Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF)?

Testing the waters
Nokia already tested this model once with the N1 Android tablet, which arrived in China earlier this year. The device was designed by Nokia, but was manufactured and distributed by contract-manufacturing giant Foxconn. To diversify away from contract manufacturing, Foxconn has been trying to sell more first-party and licensed hardware. That's why it launched its own Candyard bluetooth headset, Coverbank mobile accessories, and Firefox OS phones and tablets for Mozilla over the past two years. That's also why it agreed to manufacture Nokia's N1 tablets.

Nokia's N1 tablet. Source: Nokia

For Nokia, that was a low-risk, low-reward strategy. If the N1 sold poorly, it merely meant fewer royalties. But if the N1 sold exceptionally well, Foxconn would book most of the profit while Nokia could only collect license and royalty payments. Those payments would feed into Nokia's Technologies division, which accounted for just 8.3% of its total revenue last quarter.

In addition to Foxconn, Chinese smartphone makers like Xiaomi and Huawei could consider licensing Nokia's brand to gain better exposure to overseas markets.

Potential challenges
Nokia might be opening the doors to potential partners, but that doesn't mean we'll see Nokia-branded smartphones anytime soon. Non-compete clauses with Microsoft prevent Nokia from reentering the smartphone market before the end of fiscal 2016. Microsoft's brief use of the Nokia brand as a Windows Phone platform could also cause customers to associate all Nokia devices with Microsoft's unloved mobile OS.

Moreover, there's no guarantee that any handset manufacturer -- other than Apple and Samsung -- can make a profit from smartphones. A recent report by Canaccord Genuity states that Apple claimed 92% of all smartphone profit worldwide during the first quarter, up from 65% a year earlier, although iPhones only account for 18% of the smartphone market. Samsung, which controls 25% of the market, claimed 15% of the profit. That total tops 100% because other smartphone makers broke even or reported losses during the quarter, due to competitors commoditizing the Android market with cheap smartphones.

Back in 2007, Nokia claimed roughly two-thirds of all smartphone industry profit. But after the iPhone arrived in mid-2007, Nokia's global market share plunged from over 50% in 2007 to 3% in 2013.

Under Microsoft, that share then slid below 3% before all Nokia Lumia phones were rebranded as Microsoft Lumia ones. Considering how unloved Nokia's Lumia devices were and how saturated the Android market is, it's doubtful that manufacturers will eagerly license new Nokia handsets.

What does this mean for investors?
For Nokia investors, all this buzz about new Nokia phones doesn't mean much. Even if Nokia licenses its brand out to a hardware partner, it will only generate small license fees.

Instead, investors should focus on the growth of Nokia Networks, its core telecom division, which accounted for 84% of its top line last quarter. To strengthen that business, Nokia agreed to acquire French rival Alcatel-Lucent for 15.6 billion ($16.6 billion) in April, which will create the second-largest telecom-equipment company in the world after Ericsson. Nokia believes that rising LTE penetration rates will eventually boost demand for its telecom equipment.

The bottom line
In my opinion, Nokia's dreams of returning to the smartphone market are based on nostalgia and fuzzy logic. It's overestimating the ability of its historic brand -- which is now restricted to Microsoft's feature phones -- to stand out in a sea of roughly 1,000 smartphone brands worldwide. We might see licensed Nokia phones in late 2016, but it's doubtful that they'll gain meaningful market share against entrenched companies like Apple and Samsung.