Market Insight

Smart Nokia phone strategy dances around Microsoft’s exit from the featurephone business

May 18, 2016  | Subscribers Only


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In coordinated announcements:

  • Microsoft is selling the ex-Nokia featurephone unit for $350m.
  • A new Finnish company called HMD Global has conditionally agreed to acquire from Microsoft the rights to use the “Nokia” trademark on feature phones until 2024, and design rights relating to Microsoft’s featurephone business.
  • Foxconn will acquire the remainder of Microsoft’s featurephone business assets, including its Hanoi manufacturing facility, and global distribution, fulfilment and supply chain networks.
  • HMD has separately reached an agreement with Nokia for a ten year global exclusive licence to the Nokia brand for smartphones and tablets.
  • Foxconn and HMD will build the Nokia-branded Android smartphones and tablets. HMD will have full operational control over sales, marketing and distribution of its Nokia-branded devices, with exclusive access to the sales and distribution network to be acquired by Foxconn from Microsoft.

Our analysis

Microsoft’s exit from the featurephone business is not at all surprising. The deal again highlights Microsoft’s continued failure in mobile. Its smartphone future is up in the air as Microsoft is yet to release any new competitive flagship devices for Windows 10 Mobile with new innovative hardware designs as they have with Surface tablets.

Realistically Microsoft can hope to be no more than a bit player in the mobile phone market now: featurephones comprised 87% of phone unit shipments in the first quarter of 2016. Microsoft shipped just 2.3m smartphones, down 70% from the first quarter of 2015.

These deals highlight the extent of Nokia’s ambition to remain a consumer brand and Nokia’s continued ability to re-invent its business with a modern mobile phone business operating structure. It also completes a slick series of corporate manoeuvres to off-load a mature mobile phone business in need of restructuring, using proceeds to buy out Siemens from the NSN joint venture, while allowing room for this 2016 return to the smartphone market.

Featurephones were never a core part of Microsoft’s strategic aim behind the purchase of Nokia’s devices business. Following the Microsoft reorganisation last year, it was clear the featurephone business was an unwanted extra and Microsoft likely took the first good offer to take the business off its hands.

Nokia on the other hand has been signalling for a while its intentions to re-enter the smartphone market. It launched an Android smartphone launcher app, and the Z1 Nokia tablet, but was restricted from returning to smartphones until this year due to a non-compete agreement it struck with Microsoft when it sold its devices business to Microsoft in 2013.

Nokia’s goal with a return to the handset business is through a substantially less capital intensive and lower risk fashion than how it previously structured its handsets business. By positioning HMD as the sole licensee of the Nokia brand for mobile devices, Nokia is able to achieve this return, but able to outsource most of the risk. Having one licensee means Nokia’s brand is less likely to be abused, while Nokia does have a presence on the board of HMD too which will help protect Nokia’s interest further.

While the featurephone market is declining, shipments were still in excess of 400m units in 2015. The Nokia brand is very strong in certain markets too and HMD will likely target these emerging markets instead of the already saturated developed markets. These deals re-unify the Nokia brand featurephones with the upcoming Nokia-brand smartphones which will make it easier for HMD to up-sell consumers from featurephones to smartphones in countries where Nokia featurephones are still in usage.

The complicated arrangement with Foxconn gives HMD the capabilities to quickly become a significant player in both the smartphone and featurephone markets, while it boosts Foxconn’s grip on outsourced manufacturing as well as extending its reach into supply chain and distribution. 

 


 

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