Nokia’s masquerade

One reason for Nokia’s (NOK) surprisingly strong share price rebound over the past two weeks is the success of its new Asha feature phones in Asia. According to our sources in Delhi, the Asha 305 sold out in several stores soon after its debut… even before the marketing campaign kicked in. Is it a coincidence that major Asian newspapers like The Philippine Star and Singapore’s The Sun Daily describe Nokia’s new Asha models as “smartphones”? No. Nokia has done its very best to dress up its cheap new feature phones as something far more aspirational — to the extent that devices like Asha 305 are now widely depicted as smartphones across Asia and Africa. This is a critically important maneuver.

Nokia managed to sell 4 million Lumia phones in the second quarter this year, but it is widely expected that low-end Windows Phone models won’t be out until the second half of 2013. For the next year, Nokia must mask its feature phones as smartphones and hope that consumers in cities from Capetown to Bangalore will play along.

Android phone prices are coming down rapidly, but the sub-7,000 rupee category in India still belongs to feature phones. And it is in this niche where Nokia has launched its chameleon project.

The company’s latest Asha phones still use the ancient S40 feature phone software platform and are quite far from actually qualifying as smartphones, but Nokia has managed to slather the devices with a sheen of smartphoniness. Devices come out of the box with as many as 40 free Electronic Arts games (including strong franchises like Bejewelled, Need for Speed and Sim City), Facebook and Twitter apps, Google Talk, an improved browser, a fairly advanced email system, and more. Swipe gestures and a notification bar at the top of the display are more deliberate moves to trick the consumers into believing they are using a smartphone.

This improved software suite is made possible by slotting a 1GHz processor into budget models. That in turn was made possible by the rapid price erosion of powerful single-core processors that occurred recently as the smartphone industry pivoted towards multi-core chips. To keep the BOM at a rock bottom level, the Asha 305 features a 2-megapixel camera and a 3-inch screen with 240 x 320-pixel resolution. These are Jurassic-era specs for Western smartphone fans, but a big leap for many feature phone owners in emerging markets.

The Asha 305 debuted in India in July at 4,600 rupees — a fraction of the price of true smartphones like the Samsung (005930) Galaxy S III at 39,000 rupees.

The previous wave of Asha models enabled Nokia to deliver a surprise sequential feature phone volume increase in the second quarter. The feature phone market is now shrinking globally, so Nokia’s only chance to maintain stable volumes is to claw market share gains from white label rivals… and low-end Android phone vendors.

The Asha 305 gives us a sense of how Nokia’s phony smartphone strategy is supposed to work. Let’s compare it to the “Stellar Craze,” the cheapest new Android phone from Spice debuting nearly simultaneously in India to see how the gambit works. Spice is one of the new crop of Nokia’s lethal rivals in Asia, a nimble Indian upstart vendor that blindsided Nokia with its broad selection of dual-SIM phones in 2011 when Nokia still relied on a single-SIM product range.

Nokia’s Asha 305 is in most ways far cruder device than the Stellar Craze. But it weighs less, looks sleek and has a snappy new UI. And in most parts of India, the lack of 3G support is not a problem.

Over the next four quarters, Nokia’s battle for survival is going to be waged in the streets of Rio De Janeiro and Mumbai, where blue-collar consumers will compare the Asha 305 to devices like Stellar Craze. Will they accept a sleek feature phone with a 3-inch screen and a low price that represents a big improvement in display and software quality over the previous budget phones? Or will they spend 40% more to reach for an Android device like the Stellar Craze, with four times the pixel count, 3.5G support and a fancy 5-megapixel camera?

Nokia’s new Asha models are a big leap over the previous generation of feature phones, with touted 2.4-inch, non-touch displays. But they are also a big step below the new wave of budget Android models. It’s that 40% price gap that Nokia must turn to its advantage if it wants to avoid a feature phone volume collapse next winter.

This is going to be a heck of a turf war.

Rajat Agrawal contributed to this article.