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TheStreet Open House

Nokia Enters China, Responds to Apple and Samsung

Stock quotes in this article: MSFT, NOK, GOOG, AAPL, SSNLF, LNVGY, CHL, SI

NEW YORK ( TheStreet) - Questions were raised when Microsoft (MSFT) announced that it was acquiring Nokia's (NOK) mobile phone business.

The deal, which included Nokia's strong patent estate, was for an estimated 5.44 billion euros ($7.2 billion). Some investors were stunned. But this deal was in the works for more than two years. Contrary to popular belief, Nokia wasn't giving up.

The company was looking to transform itself. And with Nokia stock trading up almost 30% since the announcement, I have to say that it has. Nokia shares closed 3.63% lower on Friday and are down 11.59% year-to-date, including a 5% decline in a five-day span. But things are about to change.

Nokia will launch a new phone Monday in mainland China called the X-phone. This is Nokia's first device powered by Google's (GOOG) Android platform, the world's leading mobile operating system. Management is placing a strong bet in China and hoping that the device will add a boost to revenue.

Given that the Chinese smartphone market accounts for roughly 40% of the global market, management's bet seems well-placed. Nokia's phone business, which has struggled to compete against Apple (AAPL) and Samsung (SSNLF), has been a relative disappointment.

As it stands, in terms of China sales, Samsung is far and away the leader, with a market share of over 20%. Lenovo (LNVGY) comes in second, with a 13% share. Investors need to look outside of the top 10 to find Nokia. But there are reasons to be optimistic with the X-phone. The device just may become an x-factor in this competitive equation.

As with Apple's recent launch with China Mobile (CHL), there have been a reported 7 million registrations for the X-phone. If these registrations turn into actual sales, Nokia will be well on its way toward narrowing the market share gap. To do so, management must also decide how much of a bite it wants of the low-cost-phone pie.

Assuming the launch is successful, these so-called entry-level phones, which will be priced at around $100, may not contribute handsomely to Nokia's bottom line. And I don't believe that's what management is focusing on at the moment.

Over the past couple of years, Nokia has been in an extensive cost-cutting mode in an attempt to clean up its books. To that end, the company is no longer strapped for cash. And it now has the flexibility to do just about whatever it wants, including sacrificing near-term margins for market share.

Let's not forget, after spending $2.22 billion to buy the remaining portion of its joint venture with Siemens (SI), called Nokia Siemens Network (NSN), Nokia now owns 100% of a business that is producing significant cash flow. NSN kept Nokia afloat as it tried to fix its phone business.

All told, the company continues to do an impressive job of executing the sort of turnaround that many analysts doubted was possible. And with Microsoft now out of the picture, Nokia is in a position to diversify its smartphone market abroad. No longer hamstrung by Microsoft, with the X-phone, Nokia is wasting little time exploring the market-share opportunities Android may bring beyond the Windows platform.

The real winners here will continue to be Nokia's investors. Beyond the prospect of a higher share price, the company is moving toward a point where it will no longer be pushed around by Apple and Samsung. All it had to do was say goodbye to Microsoft and hello to China.

At the time of publication, the author was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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