For Microsoft and Nokia, India Is a Critical Market; As Indian Mobile Users Switch to Smartphones, Keeping Nokia’s Customers Is Key

September 4, 2013, 7:53 a.m. ET

For Microsoft and Nokia, India Is a Critical Market

As Indian Mobile Users Switch to Smartphones, Keeping Nokia’s Customers Is Key

R JAI KRISHNA

In Microsoft Corp.’s MSFT -2.13% attempt to turn around Nokia Corp.’sNOK1V.HE +0.55% fortunes in the mobile phone market, India will be a critical battleground. Even though Nokia’s share of the global handset market has tumbled over the past few years, the company still holds a sizable chunk of India’s huge market for basic, low-cost cellphones. Microsoft’s challenge is keeping Nokia’s customers as more mobile users in the country migrate to smartphones.“For Nokia and Microsoft, a market like India provides huge headroom for growth,” said Kiran Kumar, analyst at research firm IDC. These markets, where most people still use basic cellphones with no Internet access, will likely see an explosion in the number of smartphones over the next few years.

India has more than 900 million mobile subscribers. Venture-capital firm Kleiner Perkins Caufield & Byers estimates that there are only about 67 million smartphone users in India this year, accounting for just 6% of all mobile subscribers.

When people replace their basic phones with smartphones, they are more likely to choose brands that they already know and trust, Mr. Kumar said. In India, Nokia still has the potential to become that trusted brand. Attracting the first wave of smartphone adopters in India will be one of the most important tasks for Microsoft as it takes over Nokia’s business, Mr. Kumar added.

Nokia’s strong handset business in India is already showing a sign of decline. In the last fiscal year through March, Samsung Electronics Co. 005930.SE +0.22% overtook Nokia in India as the largest vendor of mobile handsets and revenue, according to Voice & Data, an Indian telecommunications trade publication. Before that, Nokia had been India’s largest handset vendor for over a decade.

Still, Nokia remains a big player in India’s handset market. Samsung held a 31.5% share, while Nokia accounted for 27.2%, in terms of revenue, according to Voice & Data.

Microsoft’s deep pockets could allow Nokia to become more competitive in terms of handset pricing in India, said Canalys analyst Jessica Kwee. That advantage could help Nokia secure its presence in India’s still-nascent smartphone market, Ms. Kwee said.

Ovum India analyst Shiv Putcha said that he expects Microsoft to make some changes to Nokia’s basic cellphones sold in India, as part of efforts to make sure that Indian cellphone users will become more familiar with the Windows Phone experience. Microsoft could, for example, modify the user interface of Nokia’s basic cellphones and make it look and feel more similar to Windows Phones, he said. Such steps could make it more likely for those cellphone users to choose Windows-based Nokia smartphones when they decide to replace handsets.

Still, the marriage between Microsoft and Nokia is far from promising, given that both companies have struggled to compete in the global smartphone market. Microsoft’s Windows Phone mobile operating system accounted for only 4% of all smartphones shipped globally in the second quarter, according to IDC, while Google Inc.’sGOOG +0.57% Android accounted for 79% and Apple Inc.’s AAPL +2.27% iOS took up 13%.

The smartphone handset market, meanwhile, is dominated by Samsung and Apple, while Chinese handset makers such as Lenovo Group Ltd. 0992.HK -1.45% have been increasing their presence.

The success of Apple and Google is due in part to the global ecosystem of smartphone application developers built around each operating system. Both Android and iOS have roughly one million apps each, created by numerous developers around the world. And creating such an ecosystem for Windows Phone has proved to be a huge challenge for Microsoft.

In the smartphone market, Nokia’s success is now solely dependent on the success of Windows as an operating system, said Faisal Kawoosa of New Delhi-based Cyber Media Research. With Nokia as the only major vendor pushing the Windows Phone platform, “I don’t think it can reach far,” Mr. Kawoosa said.

Representatives at the Indian units of Microsoft and Nokia declined to comment.