Nokia Corp. (NOK), the largest mobile phone manufacturers of the world, today officially announced that the company has entered into a strategic deal with Microsoft Corp. (MSFT) to embrace the latter’s Windows Phone 7 software as its smartphone operating system (OS). Nokia will utilize its expertise on hardware design and language support to innovate the Windows Phone 7 platform in areas like imaging.
Is This the End of OS Shuffling
For the last one and half year, Nokia is suffering from its indecision on operating system selection. Its traditional Symbian OS was grossly backdated and was unable to compete with feature rich smartphones. In August 2009, Nokia announced that it will use Linux-based Maemo 5 open-source software as its operating system.
In June 2010, the company announced that all its future smartphones will use the Linux-based MeeGo operating system. MeeGo has been jointly developed by Nokia and Intel Inc. (INTC). This OS is basically a combination of Nokia’s Meamo 5 and Intel’s Moblin. Meanwhile, Nokia launched some of its flagship smartphones with upgraded Symbian 3 software, but none of these phones contain any feature, which is unique in the market.
Is Windows the Best Option
Launched just four months ago, Windows Phone 7 software received a reasonable market acceptance. Although miles below the current run rate of Apple Inc’s (AAPL) iPhone or Google Inc’s (GOOG) Android-based smartphones, the software already created a strong developer community. This is a key feature for the success of any smartphone. Currently, there are more than 8,000 applications in the market on Windows Phone 7.
Further, Windows is the most powerful operating system for PC/notebook throughout the world, especially in the U.S. We believe its smartphone counterpart will enable Nokia to get a meaningful foothold in the lucrative North American market, where the company never finds any reasonable acceptance in its history.
Additionally, Windows Phone 7 OS is still not commoditized like Android. Samsung and HTC are the two big players, who have developed some devices using this OS. This signifies Nokia has the opportunity to differentiate its offerings using its skilled workforce and marketing strategies. The company’s solid balance sheet of more than $10 billion of net cash will sustain its long-term product development initiatives.
But Concerns Remain
Although we believe opting for Windows mobile OS is a right step in the right direction for Nokia, a series of hurdle are still there for the company. A firm carrier partner agreement is a precondition in the U.S. for the commercial success of any mobile phone.
For smartphones, this is a necessary condition since these feature-rich phones are very costly and requires carrier subsidy to offer a competitive price. A major concern for Nokia is its utter failure to understand the importance of the carrier-manufacturer partnership in the U.S. Therefore, the company is being increasingly marginalized in the lucrative U.S. market.
The key growth area of Nokia is the emerging markets. However, price elasticity of demand is very high in these markets due to low per capita income and the existence of several low-cost Asian phone manufacturers like Samsung, LG Electronics, HTC to name a few. Too expensive Nokia smartphones may not find the required momentum.
The Winners and Losers
We expect Nokia to perform much better after adopting Windows mobile OS. However, it is still hypothetical whether Nokia can beat the legendary iPhone or Andriod-based phones. It will solely depend on Nokia’s ability to upgrade the Windows Phone 7 platform into a pathbreaking mobile phone OS, which will benefit Microsoft too.
Nevertheless, we believe the major loser after today’s development will be Intel and major beneficiary is anticipated to be Qualcomm Inc. (QCOM). Intel lost a major partnership with Nokia when the company is struggling a bit due to lack of growth of the PC/notebook market.
On the other side, Qualcomm is the undisputed leader for the Windows Phone 7 software. Almost all the major windows mobile developers use its robust Snapdragon platform. Qualcomm is the only one company, which enjoy the majority chipset market share for three most vital OS, namely, Andriod, CDMA iOS, and Windows mobile system.
Recommendation
We maintain a long-term Neutral Recommendation for both Nokia and Microsoft. Currently, both companies are holding a short-term Zacks #3 Rank (Hold).
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