Is there a future for Nokia's dumb phones under Microsoft?

Nokia's feature phones propped up revenues during its Windows Phone transition, but they take on a new meaning under Microsoft.
Written by Liam Tung, Contributing Writer

Microsoft's main interest in acquiring Nokia's devices and services unit may be its Lumia smartphone business, but it's also planning to back the company's declining Asha and feature phone ranges too.

Nokia has come to dominate the Windows Phone ecosystem today, but as its ploughed time and effort into building up the sales of its Lumia devices, its once powerful mobile device business has waned.

In the second quarter of this year Nokia sold 53.7 million units of what it calls mobile phones — any non-smartphone device, typically feature phones running its Series 40 or 30 OS. The figure is down 27 percent year on year, with sales of Asha devices — its higher end featurephones, touted as starter smartphones — falling from 9.3 million units to 4.3 million over the same period.

As part of Microsoft's €5.4bn buyout of Nokia's devices and services business, announced today, Microsoft will acquire Nokia's mobile phones business unit, and will license the Nokia brand for 10 years to sell feature phones based on Nokia's Series 30 and Series 40 operating systems.

Despite their rapid decline, according to outgoing Nokia CEO Stephen Elop, Nokia's mobile phones will serve as bridge for consumers to move to Lumia.

"Microsoft can extend its service offerings to a far wider group of people around the world, while allowing Nokia's mobile phones to serve as an on-ramp to Windows Phone," Elop said at a press conference earlier today.

With a common design language across mobile and smart devices and a relatively small jump in price between the highest-end Asha and the lowest-end Lumia, Elop's vision may not seem entirely outlandish. And, with Nokia consistently talking up the smartphone-like features of the Ashas, it may be that Nokia has been laying the groundwork for a future when its Lumia smartphones can play a more significant role in developing economies.

Research firm Kantar World Panel highlighted in a report yesterday that Lumia devices have a higher appeal among first time smartphone owners than Android and iOS.  While 42 percent of all new Windows Phone buyers were first time smartphone owners, the figure for iOS and Android was 27 percent.

There may also be a more practical reason for Microsoft's continuing interest in feature phones: they may be declining, but they're still a bigger business than smartphones for Nokia. In the second quarter, total sales of mobile phones were worth €1.4bn to the company, compared to smart devices' €1.1bn.

Surface changes

Interestingly, from Nokia's side, questions over what to do with its devices and services business intensified after Microsoft launched its Surface tablets.

"The Nokia board has been evaluating and analysing all imaginable strategic alternatives since Microsoft announced a deeper focus on hardware in June 2012 by introducing the Surface tablet, heralding a tectonic shift in the broader Windows ecosystem," Risto Siilasmaa, Nokia's chairman and interim CEO, said at the conference. 

Eight months after announcing Surface, in February 2013, Ballmer approached Siilasmaa to discuss a potential acquisition.

Siilasmaa said that Nokia "had learned the best way to prosper way to prosper in device business is to be tightly aligned with the operating system, and associated ecosystem and cloud services".

Another lesson was that it was simply too expensive for Nokia to grow the third ecosystem to challenge the iOS/Android duopoly. 

"Even as people who try a Lumia and usually fall in love with the device, it does require a significant investment to drive large numbers of people to try a new experience. These investments now are significantly higher than ever before," Siilasmaa said.

"Where do those required investments come from? With all these dynamics it's evident that Nokia alone does not have the resources to fund the acceleration across mobile phones and smart devices."

Siilasmaa also acknowledged the impact on other vendors that Nokia's rise to the top of the Windows Phone ecosystem has had.

"We cannot expect other device vendors to significantly invest as Nokia has grown to dominate the Windows phone ecosystem. Microsoft does have the resources but they lack a business model that allows them to gain an improved investment from significant incremental investment. If Microsoft had to spend $20 to sell one more device, and would earn $10 on licensing fees as a result, there is no incentive to invest."

Global coverage: Nokia Interim CEO: Microsoft deal makes us stronger | Even with Nokia devices, Microsoft wants to license Windows Phone to other makers | Does its Nokia buy thwart or fuel a possible Microsoft break-up? | Microsoft shows how to flush decades of Nokia goodwill away | Microsoft gets less than $10 per Windows Phone unit | Microsoft-Nokia deal: Reaction from the Twitter trenches | Elop drops Nokia CEO role to lead devices team under Microsoft deal | Microsoft-Nokia deal: 11 quick facts | Microsoft to buy Nokia's devices, services unit for $7.2bn

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