Interview with Murtazin - Will Microsoft Buy Nokia's Smartphone Unit?

Legendary Russian tech blogger Eldar Murtazin made a big splash on Thursday with his widely reported claim that Microsoft is preparing to buy Nokia‘s smartphone division. His comments in combation with a favorable Credit Suisse report drove the share price of Nokia up 6.5% in a day.

Nokia denied the smartphone unit sale speculation bluntly and specifically on Thursday. I interviewed the controversial mobile expert on his views on Thursday evening.

According to Mr. Murtazin, Microsoft and Nokia began discussing the sale of the smartphone unit in May 2011, but the conversation tapered off over the summer. However, the weak early sales figures of  Lumia models combined with negative carrier feedback pushed Microsoft and Nokia into restarting serious talks in November. Mr. Murtazin claims that the tepid attitude of Samsung and HTC towards the Windows OS evolution is another factor influencing the talks.

The scenario of Nokia selling its smartphone unit when global handset sales continue migrating rapidly from feature phones to smartphones seems highly unlikely to most analysts. Yet it’s worth noting that Nokia did deliver 10% non-IFRS operating margin on basic phone sales in its most recent quarter – while smartphone operating margin was a negative -6%. Nokia has managed to show surprising profitability with its feature phone unit even as the handset Average Sales Price (ASP) has tumbled to rock-bottom 32 euro level.

What could Nokia’s narrative to investors possibly be if it opted to sell the smartphone division? According to Mr. Murtazin, the long-rumored, Linux-based Meltemi operating system could be brought in as a truly open mobile OS for value smartphones, leading towards a future where ultra-cheap feature phones would switch to Meltemi over the coming years. Nokia could thus theoretically get rid of the high-end smartphone business entirely, extend the use of Symbian OS in mass market models to emerging markets and then roll out Meltemi phones in coming years.

This scenario does sound far-fetched – if only because the reputation and brand of Symbian was damaged so profoundly in 2011 that attempting to extend its lifespan would be a tall order indeed. But I must say that in Scandinavia, talk about Nokia’s increasing commitment to Meltemi development has been growing in recent months.

Despite the fact that Mr. Murtazin is a highly polarizing figure when it comes to predicting corporate strategy, his track record in analyzing the Russian handset market is formidable. Many of his past comments about Russian phone market share shifts have turned out to have real predictive value in analyzing the entire European market. And on Thursday, he had some very interesting comments about the launch sales of Nokia’s Windows models. Mr. Murtazin believes that during the first two weeks of Lumia sales in Russia, Nokia only sold 2’000 units. He states that due to aggressive marketing, sales rose to 1’500 units per week, and thinks the December total is going to be around 6’000 – 7’000 units, likely to slide to 5’000 in January.

If these numbers are correct, they are alarming. Russia is an important handset market on its own and something of a bellwether for the Eastern European market. It is possible that Nokia’s summer wave of new Windows models will fare better than the contract models it chose to debut in late 2011. But I believe it’s vitally important for Nokia to find mid-range smartphone traction in markets like Russia, Brazil, India and Middle East before the Android wave swamps the Symbian legacy models.

Nokia investors are now caught in the crosscurrents of M&A speculation and Windows sales projections. 1Q12 sales guidance from Nokia is going to be vitally important for getting a sense of the actual Lumia sales trends right now.