There is some critical information that Nokia Corporation (ADR) (NYSE:NOK) does not want you to know — information that could potentially botch up the stock’s flowery turnaround story, and send investors packing. While it would be in order to presume that this information has been blotted out from the lingering eyes of the market, this is not the case.
On the contrary, this information has graced the public domain for quite some time. Don’t scratch about for propaganda driven hearsay, I am talking about the information in Nokia’s 20-F report for fiscal 2012. The 288 page report, released early this month, detailed some very interesting intrigues to Nokia’s partnership with Microsoft Corporation (NASDAQ:MSFT).
As it is with these bulky jargon ridden reports, readers hardly finish going through them. I, for one, admit that I slept through the report twice. Nonetheless after going through the document and parsing every angle, I made some disturbing convictions. Nokia’s partnership with Microsoft Corporation (NASDAQ:MSFT) is overtly one-sided.
Simply put, Microsoft can pull a fast one on Nokia Corporation (ADR) (NYSE:NOK) at any one time without the fear of legal recourse. While this information is not particularly new to me and I presume to you too, the explicit nature of the report made it clear that it is a real threat and not another analyst’s opinion as many would want to believe.
Nokia received the ‘shortest’ end of the stick
To all the ardent English lovers, forgive me for coining my own version of the parlance. However in this case, saying Nokia received the short end of the stick would be an understatement; it received the ‘shortest’ end of the stick.
Nokia’s partnership with Microsoft favors the latter. Worse still, it does so in an undisguised fashion.
Here is a key takeaway from the ‘known risks’ section in the 20-F report.
“The agreements with Microsoft may include terms that prove unfavorable to us or Microsoft could provide better support to another device manufacturer which produces devices that run on the Windows Phone platform.”
To paint a darker shade of gloom, the report further reveals that Nokia Corporation (ADR) (NYSE:NOK) acknowledges the fact that Microsoft Corporation (NASDAQ:MSFT) could act independently with regard to decisions relating to Windows Phone 8. This essentially means that Nokia has no say on the decisions that Microsoft takes on Windows Phone 8. Microsoft could even decide to offer the OS to one of Nokia’s key competitors.
What does this mean for Nokia? In all honesty, this could mean a million different things. Going by the current market conditions, however, there is no reason to worry — for now. Nokia’s Lumia is, as of the moment, progressing positively in the higher end of the market and as I penned in a previous post (here), it has managed to eke out a commendable share of the high end of the market.
That said, what is my worry? After all, the Lumia is selling like hot cake, consumers are responding positively and investors are bullish.
Despite the current optimism, I am worried about Microsoft. Considering that it still has one leg in the gutter as far as overall performance is concerned, it may, at any one moment, warm up to a better deal for its Windows 8 Phone. This could undoubtedly dent Nokia’s prospects as far as the Lumia series goes.
While one may be quick to point out that this possibility is remote, I beg to differ. If there is something that the smartphone revolution has taught us, is that anything can happen. Just look at Apple Inc. (NASDAQ:AAPL). This formidable force has, for the past several months, taken a huge nose dive on unrelenting negative reports. Most recently, Apple was downgraded by CLSA’s Avi Silver, who forecasted weak iPhone trends in the June quarter.
The market might not at the moment see it, but tech companies are viewing Apple’s new-found bearish disposition as a huge opportunity to close in on its market share. I am inclined to believe that Microsoft is also eyeing, albeit from a distance, the opportunity. And if Nokia is a liability, it may choose to close in on the loose hanging market share with another device maker.
Low end market however saves the day
For a moment, Nokia seemingly appears to be in a coal black gutter of incertitude. Nonetheless, it did pick up something from its first big fall; the fall that pushed it toward the fringes of the market.
Nokia has a contingency plan, not just any contingency plan, but a plan that could in itself help the company re-emerge at the top of the industry.
Slowly and slowly, Nokia Corporation (ADR) (NYSE:NOK) is re-emerging as a top player at the low end of the smartphone market. Here, it does not need Microsoft Corporation (NASDAQ:MSFT)’s snappy OS. It only needs low prices and basic functionality. In the fourth quarter of 2012, Nokia managed to sell 9.5 million units of its budget Asha handsets. That marked a sequential increase of 43 percent from 6.5 million units in the third quarter.
IDC projects that, for the first time ever, smartphone shipments will outstrip feature phones in 2013. IDC further adds that China, India, and Brazil, all of which are emerging markets, will be key players in the increased shipments. Going by these projections, I can confidently say that Nokia Corporation (ADR) (NYSE:NOK) is well positioned to make a winning in the low end of the market. Nokia’s Asha handsets sell at the price of feature phones, but adapt the functionality of smartphones. This approach will allow Nokia to corner the market in emerging markets such as India, China and Brazil.
Despite the pitfalls in the Nokia-Microsoft agreement, the odds ultimately lay with Nokia. Not only does its footing in the low-end of the market promise longevity for the brand, but its belligerent Lumia marketing has also drawn in a notable number of consumers in the high end of the market.
The article Risks Behind the Nokia-Microsoft Partnership originally appeared on Fool.com.
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