Two Losers – Microsoft & Nokia in SmartPhone Trying to Make a Winner

Mobile IndiaMicrosoft has announced it would purchase Nokia’s entire devices & services business and its over 8,500 design patents, and license Nokia’s utility patents (including 60+ third party license agreements) for a total transaction price of $7.2Bn.

Given NOK’s small presence in the smartphones market (only 3% market share), this transaction isn’t a major event for anyone in the smartphone space in the near term, in our view. However, it does ensure the continued availability of Windows Phone hardware. Nokia has had a high market share in feature phones and it could potentially see an accelerated decline there. If true, SEC and Chinese players stand to gain. If over time MSFT decides to outsource more, some of the supply chain names stand to gain.

MSFT/NOK is a small player in the smartphones market. Despite the growth of Lumia, NOK’s share in the smartphones market is now down to 3%. NOK phones accounted for 92% of total Windows Phone (WP) in 2Q13. This transaction, hence, isn’t a major event for anyone in the smartphone space – it essentially ensures the continued availability of WP hardware in the market place.

Nokia & The Obsession for feature Phone Market NOKIA still has a 25.7% share in the feature phone market (though slowly declining). While MSFT has acquired all NOK’s production facilities and also the right to use the Nokia brand for the next 10 years, we are unsure if it starts to lose share in this segment at a faster pace. If Nokia feature phones start to lose ground, Samsung Electronics and Chinese players (MediaTek, SPRD, RDA-driven feature phones) have the most to gain.

Given that MSFT doesn’t have any inhouse phone manufacturing currently and hasn’t been in the phone hardware business, the immediate impact on NOK suppliers is limited. Over the medium term, one could assume MSFT to outsource more of its hardware manufacturing to realise some of the targeted US$600 mn of cost synergies. Whether this increased outsourcing compensates for the likely further loss in market share for MSFT/NOK feature phones business for the component suppliers is debatable at this stage.

We do not see any change in MSFT’s strategy regarding Windows Phone (WP) and believe that the OS would still be available to all manufacturers (a la Google’s acquisition of Motorola), though outside of Nokia, WP isn’t a major OS for other OEMs.