Several aspects of Microsoft’s acquisition of Nokia’s handset business have analysts and other assorted pundits scratching their heads. Ben Evans of Enders Analysis lays out some questions in his blog post on the deal:
There’s lots of detail in the transaction structure to pick over. Why is Nokia licensing the brand instead of selling it when it has no consumer-facing business? Why isn’t Microsoft buying Here, the location platform? Why are the patents licensed instead of sold? Why did Microsoft take on the feature phone business?
That last one is of particular interest. Microsoft will continue to use the Nokia brand name on feature phones—i.e. non-smartphones—such as the Asha range that retails for $99 or less before tax. The margins on such phones are razor-thin. What possible reason could Microsoft have for wanting to manufacture cheap phones that carry neither its name nor its Windows Phone operating system?
Perhaps that is the wrong question. Feature phones sales are declining as people across the world switch to fancier devices. But not everyone can afford—or even desires—a smartphone. Though smartphone sales have started outstripping the older models, it is worth remembering that there are plenty of people still buying new feature phones—with 210 million sold during the second quarter alone. Nokia’s Asha phones remain a popular choice; they look like smartphones, connect to the internet (albeit using older, slower technology) and, most importantly, allow their users to access services like Facebook, Google and Twitter. For a lot of people in the developing world, that is the internet.
The terms of this morning’s deal stipulate that Microsoft can use the Nokia brand name on “current mobile phone products” for the next 10 years: “This element provides Microsoft with the opportunity to extend its service offerings to a far wider group around the world while allowing Nokia’s mobile phones to serve as an on-ramp to Windows Phone,” according to the press release. That sounds like a plan to slap the Windows name on the Asha’s operating system, and possibly to also upgrade it or simply replace it. As Asha’s users graduate to real smartphones, Windows Phone devices may seem an obvious choice over Android or Apple phones. Indeed, this already seems to be happening in some part of the world.
As Microsoft put it in a presentation explaining the “strategic rationale” for the deal, the “mobile phone business provides entry into key growth markets.” One of those is India, where the Nokia brand name still commands huge amounts of trust. With over 700 million subscribers, it is one of the world’s largest markets for mobile phones. It is also one where there is tremendous space for growth. Smartphone sales accounted for just a quarter of the market in the second quarter of this year. Nokia made it a focus of its Asha phones—it launched the latest one there earlier this year—and it seems likely Microsoft will too. A lot rides on Asha. But that was always its purpose: the name is Hindi for “hope.”