The price war surrounding smartphones is accelerating as more companies are gaining traction in this space. Devices and content seem to be moving towards a razor and razor blades pricing strategy. You subsidize or lose money on the initial purchase of a razor so that you can make money on the blades. This strategy would apply to smartphones as content like applications or other downloads can be sold at a profit once an attractively-priced smartphone is sold to a customer.
In the meantime, companies will see declining profits as they slash prices for their devices. Investors should protect themselves from profit-eroding competition by requiring attractive valuations.
Nokia Corporation (ADR) (NYSE:NOK) beats expectations
Nokia (NOK) stock price jumped 18 percent when it beat expectations for the fourth quarter. Chief Executive Officer Stephen Elop has had a difficult time trying to revive the mobile-phone business, and the recent profits may be an indicator that his efforts are paying off. Jyske Bank analyst Robert Jakobsen recommended Nokia (NYSE:NOK) stock to investors while applauding the company’s efforts to develop new devices and increase asset sales. According to Jakobsen, “This clearly shows Nokia is making good progress with consumers”.
One of Elop’s main concerns has been the growing smartphone market. He has helped put Nokia on the map with Lumia smartphones that run on Microsoft (MSFT)'s Windows software. Nokia sold more than 4 million Lumia smartphones in the fourth quarter, though Elop indicated that the Lumia 920 faced supply constraints in Germany, the U.S., and Italy. Nokia also made significant revenues from Asha smartphones that are cheaper than the Lumia, and this brought the total number of handsets sold to 86.3 million in the fourth quarter of 2012. Nokia appears to be more creditworthy since it is much cheaper now to insure Nokia bonds. Relief in the bond market can be attributed to the handset maker’s improved performance.
Nokia Siemens Networks, the joint venture between Nokia and Siemens, also reported better operating profits as compared to what was forecasted. Danske Bank analyst Louis Landeman spoke highly of the joint venture and the plan to invest in Nokia Lumia. According to Landeman, “This is clearly very positive news from Nokia as it both shows that the company’s new Lumia product launches are performing well and that the NSN networks business has gained good momentum”.
The growth of Nokia and its surpassing expectations has not come without a few negative implications. To reduce on operating expenses Elop had to lay off about 20,000 employees and close down some research and production sites. The low supply of Lumia 920 also made it difficult for the company to compete favorably with Apple Inc. (NASDAQ:AAPL) iOS devices and SAMSUNG ELECT LTD(F) (PINK:SSNLF) Android smartphones, which currently control the smartphone market. Elop indicated that the challenges are being looked into and supply is expected to stabilize after the first quarter of 2013. Other players in the market like Alcatel Lucent SA (ADR) (NYSE:ALU) and Ericsson (ADR) (NASDAQ:ERIC) also performed well in their respective Exchanges.
Amazon to Launch Smartphone
Amazon.com, Inc. (NASDAQ:AMZN) is planning to launch a new smartphone later in 2013. It is expected that the company will provide a “disruptive” pricing plan. Last year, the company launched Kindle Fire HD tablet to compete against Apple’s iPad, Google Inc (NASDAQ:GOOG) Nexus, and other tablets.