When Microsoft Corporation (MSFT) decided to buy Nokia’s (NOK) devices and services unit in 2013, the $7.2 billion blockbuster deal brought the Windows Phone 8-powered Lumia smartphones under Microsoft’s umbrella.
What many people didn’t realize is that under the terms of the deal, Nokia wasn’t barred completely from selling other consumer electronics gear.
The fact that NOK is still in the game became very obvious when it dropped the surprise announcement that it is releasing the Android-powered, Nokia N1 tablet.
Given that Microsoft is still offering a Nokia-branded Lumia 2520 Windows RT tablet, this could get confusing.
Worse for Microsoft, there could be smartphones bearing the familiar Nokia logo on the market as soon as 2016, competing against the Lumia Windows Phone 8 devices it bought from Nokia.
The Agreement
On the surface, the Nokia deal appeared to give Microsoft control over the Lumia smartphones that represented the vast majority of its Windows Phone 8 market share and effectively cut Nokia out of the mobile consumer electronics game.
However, that wasn’t quite the case.
According to The Verge, the deal prevents Nokia from using its brand on feature phones for 10 years, but it can begin releasing Nokia-branded smartphones by the end of 2016. The Nokia brand has no restrictions in other consumer electronics applications, thus the Nokia N1 tablet.
Microsoft might have bought that devices and services unit (and subsequently laid off half the 25,000 Nokia employees that came with it), but Nokia can start cranking out smartphones once again in just two years. Only this time, it seems likely the company will embrace Android and join the array of companies competing against Microsoft and Windows.
One problem, though: The Microsoft deal did gut Nokia’s ability to design and manufacture mobile consumer gear in-house. However, there are ways around this issue, as illustrated by the Nokia N1 tablet.
Foxconn
While it’s probably best known as the company that churns out Apple’s (AAPL) iPhones, China’s Foxconn is the world’s largest contract consumer electronics manufacturer. It works with many other companies besides Apple and it doesn’t just manufacture products, it can help design them as well. For example, Foxconn has been involved in both joint design and production of smartphones for BlackBerry (BBRY).
In 2013, Nokia — unhappy with the market share its Windows Phone 8 Lumia smartphones had managed — worked with Foxconn on an Android-based Lumia and had 10,000 of the devices on hand before the Microsoft acquisition. The two companies have worked together before on an Android smartphone.
The Nokia N1 tablet was jointly engineered with Foxconn, who will build and sell it, paying Nokia a royalty fee.
Does the Nokia N1 Tablet Signal Trouble for MSFT in 2016?
The Nokia N1 tablet is one thing. It joins a legion of other consumer-focused Android tablets that compete more against Apple’s iPad or Samsung’s (SSNLF) Galaxy tablets than Microsoft’s Surface Pro tablet.
At this point, with a huge tablet sporting a desktop PC processor starting at $799, the Surface Pro 3 is firmly targeting enterprise and professional users. Yes, it’s confusing that Microsoft also offers a Nokia branded tablet, but expectations are that device will soon be discontinued.
However, the Nokia N1 tablet does signal that Nokia doesn’t seem interested in quietly leaving the consumer electronics industry for telecom networking equipment and mapping. After all the Nokia brand is still worth something — it was the world’s most popular mobile phone manufacturer for 14 straight years — and much of the blame for the failure of its Lumia smartphones was laid at the feet of the decision to go with Windows Phone instead of Android.
Tablets may be the start, but Nokia’s CEO refuses to rule out the possibility of seeing Nokia-branded phones at the end of 2016. The company wouldn’t make them itself, but would have a hand in the design and collect royalties in a deal similar to that worked out with Foxconn for the Nokia N1 tablet.
With the prospect of Nokia engineers and designers working with Foxconn to produce the Nokia smartphone that many consumers wanted — one that runs Android — Microsoft’s $7.2 billion acquisition is feeling more like a three-year reprieve than a long-term solution.
Bottom Line for Nokia
Nokia still has many engineers and designers, and you can bet they’re hard at work at designing a device that combines the best of the Lumia’s features with the capabilities of Android and a nod to Nokia’s most recognizable phones from the past.
Consumers have already voted with their wallets overwhelmingly in favor of Android over Windows when it comes to smartphones. So in 2016, the danger of the precedent set by the Nokia N1 tablet to Microsoft’s Windows Phone business is likely to come down to whether the Nokia brand name holds more cachet or nostalgic appeal with smartphone shoppers than Lumia does.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
