When Finland-based Nokia (NOK +0.79%) first announced the megadeal to rid itself of its money-losing device manufacturing unit, most industry pundits and investors responded with a collective sigh of relief. It had been years since Nokia was the darling of the mobile phone market, before getting run over by Android OS phones and Apple's (AAPL +1.15%) list of iPhones.
The device division deal not only added to Nokia's balance sheet coffers, it also allowed it to focus on its remaining, profitable divisions including Networks -- which made up 85% of total revenue last quarter -- and the fast-growing map unit HERE, along with research and patent division Technologies. Inexplicably, it appears rumors that Nokia CEO Rajeev Suri's plans to get back into the smartphone fray are true: It's just a matter of time.
The grand plan
It will be a little over a year before Nokia can fulfill its plans of designing its new smartphone lineup thanks to a non-compete clause it signed as part of the device unit sale. But that hasn't stopped Suri from actively laying the foundation for Nokia's unlikely return to smartphones. Already, want ads can be found online for engineers and developers familiar with Android, the operating system of choice for Nokia's phones.
Suri explains that this smartphone go-round will be different in that Nokia doesn't plan on actually manufacturing the phones, as it had done for years. Though the potential for profit is greater by building its own phones, Nokia would also take on more risk due to the higher costs associated with the manufacturing process. No, this time Nokia intends to design and license its phones to outside manufacturers, a la Android, minimizing its exposure.
Of course, as investors know, less risk generally means less chance for reward, and the same applies to Nokia's new smartphone strategy. By licensing its smartphone designs, Nokia will receive royalties based on the sales results of its selected partners. But even that age-old concept isn't quite as simple as it once was.
The problems
As of the end of Q1, Android-run smartphones made up 78% of the world's smartphones, down from 81.2% the prior year. Apple's iOS actually gained share the past year, climbing to 18.3% of the global market from "just" 15.2% in 2014's Q1. As iFans are quick to point out, even more impressive than its growing piece of the smartphone pie is the fact that Apple garners nearly 90% of the industry's profits.
Those are two very large and entrenched competitors for anyone to take on. As if taking on the world's smartphone heavyweights wasn't enough, most industry pundits expect the market to become even more competitive thanks to up-and-coming smartphone manufacturers from China and India, among others.
Not sitting idly by
Nokia officially announced the sale of its HERE maps unit to a group of German auto manufacturers the first week in August for about $2.8 billion. Ostensibly, the sale of HERE was done to allow Nokia to focus on its soon-to-be larger networking division, thanks to the positive steps being made in closing its $16.6 billion acquisition of rival Alcatel-Lucent. Both U.S. regulators and the European Union have given the OK for the Alcatel deal, which will instantly make Nokia a networking force both here and overseas. But smartphones?
In describing Nokia's smartphone ambitions, one analyst said, "They want to be innovative and seen as a company with long-term vision in the (tech) industry, and having a foot in devices plays into this impression." This doesn't sound too far from the truth, but appearances are no reason to make what is likely going to be a poor business decision.
If Nokia wants to show the world it's still innovative, it should stick to devices like its new, cutting-edge virtual reality camera Ozo. Unlike smartphones, Ozo appears to be a great product, and more importantly, it fits nicely into what is quickly becoming a burgeoning market: virtual reality. Nokia's new tablet running Android also makes sense, in that unlike PCs, the tablet market is expected to continue growing.
With the sale of HERE inked, and the Alcatel-Lucent acquisition moving along nicely, Nokia was ready to focus on its networking business, while conducting its research and managing its patent portfolio on the side: perfect. Unfortunately, it appears Suri doesn't know when to say "when."
