Nokia Corporation (ADR) (NOK), Apple Inc. (AAPL): Burning Both Ends of the Candle

Nokia Corporation (ADR) (NYSE:NOK) reported sales that worried investors. Not because its new Lumia was less successful than hoped, but because competition in the company’s stronghold caused low-end handset sales to wane. But don’t worry, Nokia Corporation (ADR) (NYSE:NOK) is fighting back.

The Low End

Nokia Corporation (ADR) (NYSE:NOK) was once the most dominant cell phone maker in the world, but Apple Inc. (NASDAQ:AAPL)’s iPhone changed that quickly. However, the iPhone is at the very top of the cell phone market, which means that Apple Inc. (NASDAQ:AAPL) and new entrants in the smart phone space hadn’t been competing at the low end.

That left Nokia Corporation (ADR) (NYSE:NOK) with an important market position serving the low end of the market with relatively cheap phones. While that market isn’t notable in the United States, it is massive in less affluent countries.

So, with a big market share in emerging economies, Nokia Corporation (ADR) (NYSE:NOK) remains a large cell phone maker–it just hasn’t been an important innovator. In fact, it gave up on its own mobile operating system (OS). That was something of an admission that Nokia Corporation (ADR) (NYSE:NOK) was no longer at the forefront of the industry.

Missed it

Scrapping its own mobile OS and starting from scratch was a big setback. To try to speed things up, Nokia partnered with Microsoft Corporation (NASDAQ:MSFT) on the Lumia. Microsoft Corporation (NASDAQ:MSFT) handled the OS, and Nokia focused on designing the phone.

Although the jury is still out on the success of the phone in mature markets, it has for the most part been well received. However, the company has spent so much time and effort on getting that phone right, that it let its dominance of the low end slip.

A Big Problem

With Asian competitors pinching the company’s market share in emerging markets, the long-run story behind Nokia gets weaker. Essentially, the emerging markets in which it is a leader can’t yet support notable sales of high-end phones.

That means that cheaper phones are the main market. However, these nations are steadily growing. While they can’t afford high-end phones today, they will be able to at some point in the not to distant future. Nokia, being a trusted brand, would arguably have a leg up on competitors when its customers can afford to trade up.

Moreover, the Lumia is something of a showcase product for both Microsoft Corporation (NASDAQ:MSFT) and Nokia. It will take years for Nokia to establish itself again in mature markets. However, if it proves it has a good high-end phone and can create some good intermediate models, it has a great path along which to retain emerging market customers.

The big new phone is the $20105 model. That’s a mighty cheap phone, but easily attainable. It has games, a color screen, and a radio, among other features. According to Bloomberg, it is already on sale in India and Indonesia; two large markets that are growing quickly.  Investors need to watch sales of the 105 closely.

Both Ends

This development, however, could be a big problem for Nokia. It needs to remain dominant at the low end if it hopes to succeed over the long term. At the same time, it needs to focus as much effort as possible on the Lumia at the high end. For a company that just cut its dividend to conserve resources, that’s a lot to ask.

It shows the stark difference between Nokia and its partner Microsoft. Microsoft, which has been increasing its dividend for years and currently yields around 3%, doesn’t need Lumia to succeed–it just needed a showcase for its mobile OS. It got that, and is now working on getting phones from other makers out there with the OS.

Microsoft also has a much more diverse business than Nokia, so it can easily afford a few mistakes. That isn’t to suggest that Microsoft can forget about mobile, but it does have more time than Nokia. It’s a better turnaround bet than Nokia.

What about Apple?

Apple Inc. (NASDAQ:AAPL), meanwhile, has seen its shares sell off to the point where they are of interest to income investors. Although it only just started to pay a dividend, the yield is hovering around 3% after a recent 15% dividend hike. That should provide a decent floor for the shares.

Also, the company is starting to see some traction in China, a key emerging market. There have also been rumors of a less expensive iPhone on the horizon. While that might tarnish the company’s high-end image, it has the potential to open up a vast new audience for Apple Inc. (NASDAQ:AAPL)’s products.

A cheaper iPhone, meanwhile, would make Nokia’s life even harder. With Samsung already putting products into the low end of the market, it seems that Apple Inc. (NASDAQ:AAPL)’s hand will be forced on the cheap phone front. That said, Apple Inc. (NASDAQ:AAPL) may finally be a good option for income investors.

Nokia has Problems

Nokia is only appropriate for aggressive investors willing to bet on a turnaround. Those intrepid enough to jump in need to watch the Lumia and the 105. Microsoft and Apple Inc. (NASDAQ:AAPL) however, look like better options.

The article Burning Both Ends of the Candle originally appeared on Fool.com and is written by Reuben Brewer.

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