Nokia (NYSE:NOK) could launch a new smartwatch soon, according to its board of directors' proposed amendments to the company's constitution. The changes will add "consumer wearables" and "Internet of Things" devices to its list of Nokia's planned products, with a focus on "human health and well-being." Nokia didn't explicitly say "smartwatch," but the language indicates that it could launch a device in the near future.
This wouldn't be the first time Nokia developed a smartwatch. Prior to its acquisition by Microsoft (NASDAQ:MSFT) last year, Nokia's handset division was developing a smartwatch called the Moonraker LS-50, which was intended to launch alongside the Lumia 930. However, Microsoft allegedly killed the project in favor of its own Microsoft Band. Looking ahead, would it make sense for Nokia to revisit smartwatches on its own?
Understanding the "new" Nokia
After Nokia sold its handset unit to Microsoft, it focused on expanding its telecom equipment business, Nokia Networks. That's why Nokia agreed to acquire French rival Alcatel-Lucent for $16.6 billion earlier this year, which would make it the second-largest telecom equipment company in the world. In August, Nokia further streamlined its business by agreeing to sell its HERE mapping business to several German automakers for $3.1 billion.
Last quarter, Nokia Networks' revenue and operating profit both slipped 2% annually as growth in China offset declines in North America and Europe. Considering that Nokia Networks now accounts for 95% of the company's revenue and 82% of its operating profit, it would seem like an odd move to suddenly develop smartwatches, especially after it sold all its mobile device manufacturing facilities to Microsoft.
Nokia's low-risk approach to mobile devices
Even if Nokia built new plants to manufacture smartphones again, it would need to wait until next year, when a non-compete agreement with Microsoft expires. But based on Nokia's recent moves in the mobile space, it's unlikely to follow that path.
Late last year, Nokia licensed its brand to Foxconn for the N1 Android tablet. Although Nokia designed the device, Foxconn manufactured and marketed the device, while Nokia earned the license fees. This was a low-risk, low-reward strategy, since Foxconn took all the overhead risks and retained most of the revenues. This partnership fueled speculation that Nokia might sell new phones under the same licensing model as early as next year. If it does so, those licensing revenues will flow into its smaller Nokia Technologies division, which posted 7% sales growth last quarter.
How Nokia will approach smartwatches
If Nokia launches a smartwatch, I expect it to adopt a similar strategy. That overall market for smartwatches is extremely crowded -- 89 companies sold just 6.8 million smartwatches worldwide last year, according to research firm Smartwatch Group.
This April, Apple (NASDAQ:AAPL) launched the Apple Watch. The company hasn't disclosed exact sales figures yet, but most analysts believe it has sold about 5 million of the devices. Back in July, research firm Strategy Analytics pegged Apple's overall smartwatch market share at 75.5%. Samsung, last year's market leader, came in a distant second with just 7.5%.
These numbers indicate that there are a lot of smaller players being marginalized by Apple and Samsung. Many of these companies might be willing to license Nokia's brand and design for new smartwatches. Foxconn, which reported decent sales with the N1, could also be willing to license designs for Nokia smartwatches.
Even though Apple currently dominates the smartwatch market, there could be room for other competitors to grow. Research firm IDC expects total wearable device shipments (smartwatches, fitness bands, and other trackers) to rise 164% annually this year to 76.1 million units. By 2019, that figure could more than double to 173.4 million.
It wouldn't be practical for Nokia to open new plants and manufacture its own smartwatch, but it would be wise to court licensing partners to maintain a brand presence in new mobile devices. That growth would strengthen the Nokia Technologies business, which could offset losses incurred by the Nokia Networks division as it battles tough low-margin telecom equipment rivals like ZTE and Huawei.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.