Microsoft and Nokia: When dinosaurs mate

Singapore: In March 2013, Frank Shaw, head of public relations at Microsoft Corp., posted on his blog that Windows phones were outshipping Apple Inc.’s iPhone in seven countries.

add_main_imageShaw did not name the seven countries, but IDC data shows the only large market in these so called seven countries, where Windows operating system via Nokia handware outshipped iPhone, was India.

Had Shaw’s factoids included Google Inc.’s Android figures, it would have revealed that Nokia’s pseudo smartphone—the Asha series—primarily aimed at markets such as India, were being outshipped by Android-powered competitors.NextMAds

Why did Nokia sell for a shockingly low price of just $7.17 billion, a valuation that has stunned pundits? The answer lies in Nokia slipping badly in traditional strongholds—even in India, its largest market where it enjoys enormous goodwill, and where vast majorities of its billion-plus population cannot afford an Apple product, the masses have begun giving up on the Finnish company.

While Samsung continues to be the undisputed leader in smartphones in India, a recent report by Voice & Data reveals that Nokia has now ceded the top spot in revenue, too, to the South Korean firm. Against a 15% growth in handphone sales, Nokia’s sales fell 18%. It and BlackBerry were the only two handset makers in the top 10 to witness a fall in revenue.

In layman’s language, Nokia was forced to sell to Microsoft as it had no Plan B. In the West, Nokia lost the plot and was left behind during the smartphone revolution, and recent data indicate that its catch-up strategy, where it put all eggs in the Windows OS basket appears to be failing. From 50% market share in the smartphone segment globally, the Finnish company ended 2012 with at a mere 4.3%. But in emerging markets, Nokia’s failure to sense local trends provided the much needed foothold for nimble competitors.

In India, the company failed to latch on to the dual-SIM phenomenon for nearly two years, giving a boost to the prospects of tens of domestic entrepreneurs, thereby indirectly contributing to the success stories of Micromax, Lava and Karbonn. While Nokia did make a strong comeback in this segment later, the dual-SIM fiasco, undoubtedly, marked the beginning of its slide in a country where it once enjoyed a 70% marketshare.

Extrapolating Nokia’s recent embarrassments in India may provide a better insight into the deal. Just like in India, in other emerging markets, too, Nokia’s feature phones are confronted by collapsing sales. After a successful 2012, the Asha range is increasingly losing out to low-end Android handsets in Asia, Africa and Latin America. Did the irreversible collapse press the company into panic mode, forcing it to sell to Microsoft? Or, did Apple’s plans for a value iPhone, targeted at emerging markets such as India, a potential death knell for Nokia’s mid-range Lumia products, trigger the sale?

Nokia may still sell loads of $20 handsets, but these don’t add much to the company’s profits. Here again, the cost of supporting these handsets across emerging markets puts Nokia at a tremendous disadvantage vis-a-vis many of its Asian competitors, who matched Nokia’s pricing strategy but largely avoided setting up support infrastructure, bringing enormous savings to their cost structure.sixthMAds

For Microsoft, too, the deal has a major emerging markets connection, India included. The Redmond, Washington company wants to use the Asha brand, which it has acquired outright, to access millions of customers in India and other parts of Asia and Africa that don’t typically use any of Microsoft’s current offerings. About 50% of the world’s mobile phone users still use feature phones and a vast majority of these customers are in emerging markets. Asha gives Microsoft the platform to take on Apple’s cheaper iPhone as well as compete with other inexpensive models from other companies (including Samsung’s Galaxy) that have been hugely successful in countries such as India. More importantly, Microsoft now has access to the sweet spot that Nokia products enjoyed with the masses from India to Africa to Latin America.

For Microsoft, the acquisition also opens the possibilities of a Skype handset (Skype is owned by Microsoft). A Skype-Asha combination could be highly successful in emerging markets where consumers are slowly but steadily moving towards data connections.

The possibilities appear bright and Microsoft’s takeover of Nokia could pay off, but I wish Google vice-president Vic Gundotra, whose famous tweet in February 2011, “Two turkeys do not make an eagle,” would give his opinion on the coming together of two dinosaurs?