Nokia Corporation (ADR) (NYSE:NOK)‘s sales hit an unlucky 13-year low in the just ended quarter according to Bloomberg. The reason was weakness in the company’s stronghold — lower priced handsets in emerging markets. That could be big trouble.
A fallen star
Nokia has fallen far from its position as the dominant cell phone handset manufacturer. Its once market leading image has, similarly, been hard hit. The problem was the so-called smartphone. Apple Inc. (NASDAQ:AAPL) and its iPhone basically took over that market, leaving others to play catch up.
Google was able to build a competitive mobile operating system, its wildly popular Android. That OS has been widely adopted. However, Nokia Corporation (ADR) (NYSE:NOK)’s mobile OS was a failure that the company simply gave up. That left Apple Inc. (NASDAQ:AAPL) and companies using Android to effectively push Nokia to the curb.
Betting the farm
To fight back, Nokia teamed up with Microsoft Corporation (NASDAQ:MSFT) to build a new line of phones using the personal computer giant’s mobile operating system. Unfortunately, switching gears in the middle of a tough fight only gave the competition more time to solidify their leads. And, in the fast changing world of technology, that meant a downward spiral in the company’s image.
Worse, management appears to have been too narrowly focused on the new phone launch.
Nokia’s new phone, the Lumia, has received decent marks for its functionality and style. Still, it hasn’t been a huge retail success. That isn’t to say it won’t be someday, but right now the company is still fighting an uphill battle. Exposing the rear flank, emerging markets, could be a costly mistake.
Growth
Nokia Corporation (ADR) (NYSE:NOK)’s saving grace has been its continued strength in emerging markets. These regions are expected to grow more rapidly than mature markets that are largely saturated on the mobile side. Making emerging markets even more enticing is that smartphone adoption is relatively low, too. That’s two tailwinds to help push business.
Of course, these nations lack the wealth of more developed economies. So price is still a big issue, and one that keeps the higher-end handsets from Apple Inc. (NASDAQ:AAPL) and most Android users from being notable competitive threats. But, Nokia Corporation (ADR) (NYSE:NOK)can’t simply forget about these markets. It needs to be there with both low-end devices to maintain market share and an entry-level smart phone to build for the future.
The Lumia
In the end, the Lumia was likely intended to be more of a showcase than anything else, anyway. For Nokia, it proved the company can still design desirable handsets. For Microsoft Corporation (NASDAQ:MSFT), it showed off the company’s mobile operating system.
If Nokia Corporation (ADR) (NYSE:NOK) sets its sights on trying to unseat Apple Inc. (NASDAQ:AAPL) and Google Android phones in developed markets, it could wind up losing the only edge it has. It needs to be seen in developed markets, but growing market share is a years long process for a company that simply doesn’t have time on its side.
Making matters even worse right now is the investor pressure on Apple to prove it still has growth potential. While activist investors have pushed the company to make some changes to its financing approach, the longer-term implication is that the company isn’t given a default pass anymore. Apple Inc. (NASDAQ:AAPL) will have to prove itself, so it will be working even harder to grow.
The company, for example, is starting to venture into China. Although that effort hasn’t been nearly as smooth as Apple might like, it is an important emerging market and Nokia Corporation (ADR) (NYSE:NOK) won’t be happy with the added competition. In fact, if Apple can crack that single market, it would solidify its growth prospects for at least the next few years. That means that you need to watch China closely if you own, or are considering buying, Apple shares.
Nokia needs to start looking at a competitively priced version of the Lumia designed for emerging markets.
The big winner
Microsoft Corporation (NASDAQ:MSFT) looks likely to be the big winner. For example, it is partnering with Nokia Corporation (ADR) (NYSE:NOK) and other companies in emerging markets. It’s working to educate consumers via smartphone training classes and helping to build phones specifically designed for emerging markets. That should help give it a toehold in these key growth regions.
It also has the chance to push into the big leagues with a competitive mobile OS, particularly since many expect Google to start selling handsets of its own. The close tie between Microsoft’s mobile OS and its new Windows OS is further enticement.
Microsoft’s long depressed shares have a lot more going for them than Nokia Corporation (ADR) (NYSE:NOK)’s shares right now. While both companies face notable business risk, Nokia is much closer to a life and death situation. Nokia has stated that it is going to fight back in emerging markets, but the company still has bigger issues to deal with than Microsoft.
In fact, with Google’s shares reaching elevated levels and investors continuing to be concerned about Apple’s ability to keep growing, Microsoft may actually be the best option in the mobile space on a risk adjusted basis for those seeking a turnaround play
The article Bad Luck Number 13 originally appeared on Fool.com and is written by Reuben Brewer.
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