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Nokia's Feature Phones Could Benefit Microsoft

Stocks in this article: MSFT NOK AAPL GOOG

NEW YORK ( TheStreet) Microsoft's (MSFT) announcement to acquire Nokia's (NOK) handset business could dramatically help other Microsoft-owned businesses such as Skype, Office, Sky Drive and Xbox gaming.

Nokia built its cell phone business on what are now known as feature phones. Feature phones, are not as advanced smartphones, with many of them being able to just make phone calls and send text messages. Once the world got a taste of Apple (AAPL) iPhones and Google (GOOG) Androids, buyers wanted cell phones to do a lot more than make voice calls.

However, there are still places where buyers can't afford costly smartphones, some of which run as high as $800 per phone. In those markets, potential customers could buy feature phones outright for less than $100, with some popular models selling for less than $50. Nokia's Asha line of feature phones became big sellers in Asia and Africa. Nokia sells 200 million of them a year.

That could turn out to be millions of potential feature phone users who could be brought into the Microsoft's ecosystem. While Nokia Asha phones operate on a simple, non-Microsoft operating system (not iOS, Android or Windows Phone), Microsoft should be able to introduce products such as Skype, Office, SkyDrive and even Xbox gaming to a huge audience that was never able to afford the hardware needed to run these services.

The potential to reach this untapped audience is huge, but that might not be the way things turn out. Recently sales of Nokia feature phones have begun to slow as prices for more sophisticated smartphones continue to fall. Despite that slowing trend Nokia still managed to sell more than 50 million feature phones in the third-quarter of 2013.

Feature phone sales could continue to drop before the Microsoft-Nokia deal is finalized (Microsoft expects it finalize in early 2014) and provide the desired marketplace. But the addition of new feature phone apps - especially Xbox gaming - could reverse the trend.

As feature phones become more and more sophisticated, and as smartphones continue to become more affordable the perceived line between the two types of products will continue to blur. It will be interesting to see whether Microsoft decides to blurs that line even further or sells the Nokia feature phone business to a third party.

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