For Microsoft/Nokia Phones, Future Reception is Unclear

Digital Life-Tech Test-Big Phones
Associated Press
There was a time, not so many years ago, when Nokia (NOK) was almost synonymous with the term "mobile phone." The company's robust hardware and simple yet effective operating system made its handsets the choice of the masses, and the Finnish concern was by far the globe's dominant producer of cellphones.

But dominance has a way of melting fast in the tech world. Several years ago, the company's market share started to slip. It continued to plummet downward, but it looked like a collaboration with rich software giant Microsoft (MSFT) to replace its aging Symbian operating system with Windows Phone could possibly halt that decline.

However, Nokia's latest quarter -- its last as a handset maker, following its $7.2 billion sale of its devices and services unit to, yes, Microsoft -- indicated a swoon in phone sales. Unlucky but extremely wealthy Microsoft is about to inherit this fading asset. Given the power and resources of its new parent, is there any hope for a resurgence for Nokia/Microsoft phones?

Tumbling Into Irrelevance

Like most tech companies that have fallen from a high perch, Nokia should say its decline was due to its unwillingness to adapt quickly to the market.

While the firm continued to sell essentially the same phones encased in different shells, the resurgent Apple (AAPL) moved its focus from computers to portable music devices and cellphones, bringing sleek design and beauty to objects that had largely been only functional. Meanwhile, ambitious newcomers from Asia like Samsung (SSNLF) also marched into the mobile space.

More significantly, as this was happening, dumb phones got smart. Essentially, they became small computers with touchscreens. Fatally, Nokia stuck with its text-and-scroll Symbian operating system for far too long. Such goods were fine for less affluent markets where price was a factor, but that's not where the action was (and is) in mobile tech. The consumers that drive markets wanted touch-and-swipe, pretty graphics and a Web browser that produced a smaller version of what they saw on their computers.

Nokia's 2011 decision to collaborate with Microsoft by swapping out Symbian with Windows Phone was a good one, but by the time it was made, the sun was already setting.

Windows Phone continues to be a niche OS, holding barely more than 3 percent of the market in terms of operating system in Q4 2013, according to industry researcher comScore (SCOR). That's not even close to Google's (GOOG) ubiquitous Android (52 percent) or ever-cool Apple's iOS (41 percent).

Nice Camera ... but I Like My iPhone

Nokia tried -- it really did -- to carve out market share for its latest and greatest line of phones, the Lumia. It packed them with plenty of features, some of which -- particularly a 41-megapixel camera in its Lumia 1020 -- are well above current standards.

This worked for a while, and sales started to pick up ... until this past quarter. The fourth quarter saw sales lurch downward to 2.6 billion euros ($3.6 billion). That's 5 percent below the previous quarter, and a queasy 29 percent drop on a year-over-year basis. By coincidence, 29 percent was also the figure for the year-over-year decline in handset sales for fiscal 2013.

Those aren't happy numbers. Fortunately for Nokia, as the ink is now dry on its sale contract for the devices unit to Microsoft. It can now book the unit's results as "discontinued operations" and worry about it no longer. It's now the American IT giant's problem.

Which is a problem. The company was named Microsoft for a reason; it got to its rather bloated present state by selling the software the world needed to operate PCs. When the world started to leap into mobile computing, it became obvious the big money from that business wasn't going to last. But what to capitalize on next?

Like Apple, Microsoft wants to sell cool devices. But outside of the thumpingly successful Xbox gaming console line, its attempts have been dismal. How many of us ever owned a Zune music player? Precious few. And how often do we witness others actively using Surface tablets? "Rarely" and "never" would be typical responses.

Microstuck

With its track record, Microsoft just doesn't inspire confidence that it'll be able to make the products of soon-to-be-ex Nokia devices and services any kind of serious threat to Apple and Samsung, currently the rulers of the hardware roost.

There's room for third and even fourth place, but the lower ranks of the market are already packed with veterans of this catfight, such as LG (LG) and HTC. Not only that, a determined upstart, China-based Lenovo (LNVGY), is about to grab some market share and hold on tight. Last month, Lenovo pulled a Microsoft and opened its wallet for a device-making unit, in this case Google's Motorola Mobility for $2.9 billion.

Still, Microsoft coughed up plenty for Nokia devices and services, so it's committed to at least trying to make it a success. MicroPhones are not going to be like Zune, making little impression on the market and disappearing quickly. But they likely won't reach the heights of an iPhone or a Galaxy.

The company will hang in there and continue to spend money on the unit, perhaps even gain a little market share in the process. It's highly doubtful that its phones will do better than that, so look for the company to gradually fade away from the market.

So no, these latest results aren't quite the final chapter for Microsoft/Nokia phones...but that unit's best days are clearly far behind it, and it doesn't look like it has much of a future to speak of.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Apple and Google, and it owns shares of Apple, Google and Microsoft. Try any of our newsletter services free for 30 days.

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