Nokia’s $39 Phone Rebound Wins More Time for Comeback Bid

Nokia Oyj (NOK1V), burning cash as it struggles to revive its smartphone business, is winning time for the recovery effort by gaining more customers for another product: basic mobile phones it sells for $39.

By adding features such as quicker Web and online games to its Asha handsets popular in faster-growing economies including India and China, Nokia boosted its share of the basic-phone market to 35 percent last quarter -- the highest in two years. Unlike the smartphone division, the basic-phone business is profitable and unit sales are increasing.

The more than 70 million cheaper handsets Nokia sells each quarter is providing relief for Chief Executive Officer Stephen Elop as he tries to stem revenue declines and recover from five quarters of losses. The basic-phone division is also winning over first-time users who may stick with Nokia when upgrading to a more expensive device.

“Nokia’s Asha models are selling quite well and that is good news for them since it gives the company a bit more time to get its smartphone business on track,” said Teemu Peraelae, who helps manage $1.5 billion including Nokia shares at Alfred Berg Asset Management in Helsinki.

Nokia’s cheaper phones outsold its smartphones 7-to-1 last quarter and, at 2.29 billion euros ($2.86 billion), brought in 49 percent more revenue for the Espoo, Finland-based company.

Asha Demand

Shares of Nokia have advanced 66 percent since it reported second-quarter results July 19 and rose 2 percent to 2.32 euros at 12:18 p.m. Helsinki time, gaining for a sixth day. They are still down 89 percent since Apple Inc. (AAPL) introduced the iPhone in 2007, a debut that started Nokia’s decline in smartphones.

If Nokia’s smartphone strategy fails, the basic-phone unit may become the company’s most attractive asset for an acquirer because it remains profitable and has a dominant market position in many emerging markets, said Sami Sarkamies, a Nordea Bank AB (NDA) analyst in Helsinki. A buyer would also benefit from Nokia’s strong relationship with carriers in growth economies, he said.

Nokia’s Asha phones are gaining users in the developing markets because they resemble smartphones, yet cost a fraction of the price, Anshul Gupta, an analyst at research firm Gartner Inc. in Mumbai, said in an interview. Some Ashas have full- length touch screens similar to Nokia’s higher-end models and Apple’s iPhone. The underlying operating system is less sophisticated, making them cheaper to build.

India Shoppers

“They have almost all the features a smartphone should have like an application portal to download apps, a touch interface, social-networking integration -- so these devices are completely like a smartphone,” Gupta said.

Nokia added touch-screen handsets to the Asha line in June to meet the surging demand for smartphone features. The Asha 305, retailing at 65 euros, is Nokia’s cheapest full-length touch-screen phone. The Asha 311, featuring a faster touch screen and a 1-gigahertz processor, costs 95 euros.

The company on average sells basic phones for 31 euros each, compared with 151 euros per smartphone.

The 305 and 311 are seeing “fantastic traction” among customers, said Sathish Babu, who owns handset retailer Univercell with about 500 outlets across southern India.

“The new Nokia phones are doing very well,” Babu said in an interview, adding today’s younger shoppers demand slimmer phones with vibrant colors and full touch screens. “The more stock that comes in the more my sales go up and it’s even cannibalizing into other brands. With the touch screen, the balance is tilting toward Nokia now.”

‘Myopic Focus’

Nokia CEO Elop, commenting in an e-mail, attributed rising sales to its devices’ “bold design” and new colors. Nokia’s basic-phone sales climbed 2 percent to 73.5 million units in the second quarter from a year earlier, even as the global market for such devices fell 15 percent to 211 million units, according to research firm Strategy Analytics.

Nokia’s share of the basic-phone market rose to 35 percent last quarter from 29 percent a year earlier. In smartphones, the fastest-growing and most valuable market segment, Nokia, the former leader, has slumped to less than 10 percent.

“People forget how significant it is that we’re selling a million phones a day,” Peter Skillman, head of mobile-phone design at Nokia, said in an interview. “There’s almost a myopic focus on smartphones.”

Samsung Competition

Features helping Nokia’s basic-phone sales include browser data-compression technology, which lowers the cost of Web surfing, Skillman said. Nokia is also benefiting from demand for phones that let users insert two SIM cards, a feature many consumers in developing countries need to make it easier to switch service between carriers as they travel, he said. This month, Nokia said Asha users get Zynga Inc. (ZNGA)’s “Draw Something” and “Zynga Poker” games for free.

Such features are important for a company whose biggest markets last year were China, which made up almost 16 percent of revenue, and India with 7.6 percent.

Nokia’s success in basic phones isn’t guaranteed, as ZTE Corp. (000063), Huawei Technologies Co. and other manufacturers are entering the cheaper market segments with phones using Google Inc. (GOOG)’s Android operating system.

Samsung Electronics Co., which passed Nokia as the biggest handset maker overall this year helped by smartphone sales, also pushes basic touch-screen phones under the Star and Champ names.

The intensifying competition caused Nokia to reduce the average selling price of its basic phones 14 percent last quarter, dragging down revenue even as unit sales rose. Profit margins on Nokia’s cheaper phones also narrowed.

“It’s been a slippery slope for Nokia’s feature phones, but they did see an improvement in volumes in the second quarter unlike their smartphone business,” said Janardan Menon, a Liberum Capital Ltd. analyst in London. “Competing more effectively with low-end smartphones will be key to any recovery.”

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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Source: Nokia

Nokia Asha 305 phones.

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Source: Nokia

Nokia Asha 305 phones. Close

Nokia Asha 305 phones.

Source: Nokia

Nokia's Asha 311 phone. Close

Nokia's Asha 311 phone.

Photographer: Chris Ratcliffe/Bloomberg

A Nokia Oyj Asha 303 smartphone is seen on display at the Mobile World Congress in Barcelona, Spain. Close

A Nokia Oyj Asha 303 smartphone is seen on display at the Mobile World Congress in Barcelona, Spain.

Photographer: Henrik Kettunen/Bloomberg

Stephen Elop, chief executive officer of Nokia Oyj. Close

Stephen Elop, chief executive officer of Nokia Oyj.

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