Nokia offers investors the best returns if Windows 8, Microsoft's latest operating system, is a hit. So says Dr Richard Windsor, an independent consultant and former tech stock analyst at Nomura Securities. He reckons an uptick in demand, driven by Windows 8 and Windows Phone 8 (the smartphone version), would deliver a share price upside of 20-40 per cent for most of the major tech companies involved. Not only for Microsoft, says Dr Windsor, but Intel - the world's biggest semiconductor company - and a range of big-name tablet and laptop manufacturers.
Beleaguered Nokia, on the other hand, with a share price languishing below $5 - down from over $30 a few years ago - would get a much bigger bounce. "If Windows 8 roars away, it's not hard to see scenarios where Nokia's share price trebles," says Dr Windsor. "Nokia is by far the most geared to any success that Windows 8 might have."
There's no guarantee, of course, that Windows 8 will be a roaring success, particularly in mobile where Microsoft has long struggled to make an impact. Chief executive Stephen Elop, appointed in 2010, has nevertheless tied Nokia's fortunes closely to those of the software giant. Shortly after his arrival - from Microsoft no less - Mr Elop ditched the Finnish firm's home-grown Symbian OS (operating system) in favour of Windows Phone for smartphone devices.
The ex-Microsoft man also wound down other lines of Nokia business, including advertising and mobile money, to focus on clawing back market share in the global handset market. He has not been able to stop the rot. Since the arrival of Apple's iPhone in 2007, followed by the surging popularity of smartphones based on Google's Android system, Nokia has seen its share in the global handset market nosedive from 40 per cent to 20 per cent.
Mr Elop is now counting on Nokia's flagship Lumia smartphones to revive the company's flagging fortunes. Lumia 920 and 820 spearhead Nokia's Windows Phone 8 push, and the two models should be available soon after Microsoft launches its latest mobile OS on 29 October, although Nokia has not revealed which markets it is targeting first. How consumers will react to them is not yet clear either, but some analysts have already made up their minds.
Pierre Ferragu, a senior analyst at Bernstein Research, thinks it unlikely that Windows Phone 8 will disrupt the mobile OS space that Google's Android dominates (see table). According to Mr Ferragu, the best Microsoft can hope for is a 6-7 per cent share of smartphone users over the next few years. There's no room, he argues, for a third eco-system to challenge Android and Apple’s iOS. "Unless there is a huge breakthrough - and I don't see one - Windows Phone 8 will not mount a serious challenge," says the Bernstein analyst. "Microsoft has missed the boat."
Global smartphone market share by platform
| Platform | Q2 2012 shipments (m) | % share | Q2 2011 shipments | Q2 2012/Q2 11 growth |
|---|---|---|---|---|
| Android | 107.8 | 68.10% | 51.2 | 110.40% |
| iOS | 26 | 16.40% | 20.3 | 28% |
| BlackBerry | 8.5 | 5.40% | 12.5 | -32% |
| Symbian | 6.4 | 4.10% | 18.1 | -64.60% |
| Windows Phone | 5.1 | 3.20% | 1.3 | 277.30% |
| bada | 3.3 | 2.10% | 3.1 | 5.10% |
| Others | 1.2 | 0.80% | 1.1 | 15.20% |
| Source: Canalys estimates | ||||
Application developers have flocked to Android and iOS because these platforms are popular with customers. In turn, this has increased their attraction. A virtuous cycle, says Mr Ferragu, which Windows Phone 8 will struggle to break. Nor does he buy into the idea that the prospect of easily using Office and other PC-type apps on Windows Phone 8 will be a game changer, pointing out that Office availability on Windows 7 failed to trigger much consumer interest. "Very few users value access to advanced applications like Word and Excel on a smartphone, and as for other applications, they would be available on the Android and Apple app stores anyway," continues Mr Ferragu. "OS-level integration [with PCs and tablets] on Windows 8 doesn't add value to the smartphone user." Far from expecting a share price boost from Windows Phone 8, Bernstein Research maintains an underperform rating on Nokia with a €1.20 ($1.57) share price target.
Peter Cunningham, principal analyst at Canalys, a research firm, is much more optimistic than Bernstein Research about the Windows Phone platform. He reckons Microsoft will have a 15 per cent share of the mobile OS market by 2016, a shade behind Apple's 18 per cent, but still some way off Android's 57 per cent cut.
Since Nokia's third-quarter results, however, Mr Cunningham has become more pessimistic about the Finnish company's chances of using Windows Phone 8 as a springboard for revival. "The 63 per cent year-on-year drop in unit sales of higher-margin smartphones was bigger than I thought it was going to be," he says. Although Nokia managed to boost quarter-on-quarter sales of its Asha series of smartphones, which are targeted at emerging markets, these carry lower margins than high-end versions.
Another worrying sign is that sales of Lumia handsets using Windows Phone 7 dropped from 4m units in the second quarter to 2.9m units over the following three months. "Nokia faces stiff competition in the Windows Phone 8 market from other handset manufacturers, such as HTC and Samsung, which don't want to be tied just to Android," adds Mr Cunningham. "Nokia has got some difficult quarters ahead and little margin for error."
Tablets might help
Microsoft's push on Windows 8 touch tablets - to offset declines in PC sales - may give the smartphones a boost. Three days before the Windows Phone 8 launch, Microsoft's Surface tablet goes on sale using Windows 8. A touch device optimised for Office applications, and using a tile-based interface - app icons displayed in rows and columns with no space between them - Microsoft's Surface will initially be available in eight countries, including the UK. The 32GB Surface version, without a keyboard cover, has a retail price of £399.
"One of the things that's great about Windows 8 is that it is hugely differentiated in the way it looks and operates, but that's also one of its problems," says Dr Windsor. "People have to be bothered to get used to it. If they can, the smartphone version, with its similar user interface, has a much better chance of gaining consumer acceptance."
Rick Sherlund, an analyst at Nomura Securities, believes the prospect of having Office applications synchronised on a touch tablet or ultrabook, which also has consumer-friendly apps on it, will resonate in the workplace. "People use iPads at work, it's true, but Office synchronisation is compromised," he says. Mr Sherlund anticipates a device replacement cycle in the workplace over the next year, courtesy of Windows 8, and has a target price of $37 for Microsoft, which carries a potential upside of 25 per cent. He is uncertain how tablet traction will affect smartphone sales. "Windows Phone 8 doesn't show up in analysts' earnings models because it hasn't been material so far," says Mr Sherlund. "Any success there will be an upside as far as analysts are concerned."
Nokia is in desperate need of a lift. Third-quarter results, while better than some analysts expected, show a company that is a shadow of its former self. Pre-tax loses widened to €969m from €68m, and revenues slid 19 per cent to €7.24bn. Painful restructuring costs are also eating into the company's cash pile, which shrank from €4.2bn in June to €3.6bn three months later.
How consumers react to Windows 8 and Windows Phone 8 will largely determine if Nokia can mount a comeback. "Nokia has bet heavily on the Microsoft platform and is going to live or die by it," says Mr Cunningham.
