Microsoft paid $7.4 billion for Nokia and all they get is a cheap Android phone?

Numerous sources report that the unthinkable is true: Nokia will be releasing an Android phone. Is this what Microsoft gets for paying $7.4 billion for Nokia's handset business?

The Wall Street Journal yesterday reported that Nokia will roll out a Android phone at the upcoming Mobile World Congress tradeshow in Barcelona late this month. Rumors about it have been circulating for quite some time. It will be a low-end device, aimed at price-sensitive developing markets, and so won't compete again higher-cost Windows Phone devices such as Nokia's current Lumia line.

Why would Nokia release such a device? Because it's being killed by low-cost Android phones in what used to be its stronghold, developing markets. There was a time not long ago when cheap Nokia Symbian-based phones ruled the developing world. No longer. Android has taken over those markets. The Wall Street Journal writes:

Nokia was once the king of cellphones in emerging markets. But it has lost ground because it was slow to respond to Android's popularity in many countries. In India, where Nokia's Symbian-powered phones held a big share of cellphone sales just a few years ago, Android was installed on 93% of new smartphones shipped there last year, according to estimates from research firm IDC.

The Journal then quotes Neil Mawston, an analyst at research firm Strategy Analytics as saying:

"Android has the entry-level smartphone market almost all to itself. Microsoft's missteps in the low-end smartphone market are costing it and Nokia huge amounts of lost volume."

The latest Nokia earnings report show how much trouble the company is in. It lost $34 million in the fourth quarter of 2013, in good part because of lost sales in the developing world -- and because Windows Phone sales lagged as well and couldn't come close to picking up the slack.

So it's clear why Nokia would release a low-cost Android phone, as a way to gain headway in what used to be its strongest markets. But why would Microsoft allow Nokia to release an Android phone? That's a head-scratcher, but if you look closely enough, there is some logic there.

The hardware requirements for Windows Phone are higher end than they are for Android. Because of that it's tough, if not impossible, to build a Windows Phone at a low enough cost to compete in emerging markets. So Windows Phone isn't likely be able to compete in extremely price-sensitive markets. That means that releasing cheap Android phones into those markets won't hurt Windows Phone.

In addition, the Nokia Android phone won't come with the usual Google services baked into it. The Wall Street Journal reports that it won't be able to access the Google Play app store. The phone will also have Nokia's Here maps instead of Google Maps. No other details are available, but don't be surprised if after Microsoft takes over, instead of Google Search, Bing becomes the default search on the phone, and the default email service instead of Gmail. As Carolina Milanesi, an analyst at Kantar WorldPanel, told Computerworld:

"Whatever Nokia is doing, you can bet it will not lead back to Google when it comes to the Google ecosystem. It's yet another vendor using Android, but not helping Google monetize Android or drive ecosystem stickiness."

Theoretically, then, Microsoft could gain revenue from the sale of Android devices in emerging markets by people's use of its services, such as Bing, mapping, and email.

Beyond that, Microsoft and Nokia will likely use the low-end device as a kind of gateway to Windows Phone. Emerging markets will be giving birth to massive numbers of people moving up the economic chain, and if they're loyal Nokia customers, Nokia will try to move them to Windows Phone once they can afford it.

The Journal quotes Steve Ballmer as saying back in September that low-cost phones:

"...are often the first connection with technology that people in many places in the world have with any kind of communications or information technology device. We look at that as an excellent feeder system."

Of course, if Microsoft had a version of Windows Phone that could power inexpensive handsets, all this would be moot. But it doesn't. So by releasing a low-cost Android phone, Microsoft and Nokia may be trying to make the best of an all-around bad situation.

Copyright © 2014 IDG Communications, Inc.

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