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Nokia Drops Price of Flagship Windows Phone

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Where did the profit margin go? And who is taking the hit?

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MINYANVILLE ORIGINAL If the smartphone wars was a gunfight, Nokia was the awkward vaudevillian cowpoke who glared, drew from his holster, and comically pointed a banana at his nemesis.

The Nokia (NOK) Lumia 900, the wunderkind smartphone that aimed at taking some of the higher-end of the market from Apple (AAPL), is now in the bargain bin. Today it came out that Nokia is cutting the price of the phone (which had a good start earlier this year) in half to just $49.99 with an AT&T (T) contract.

AT&T representatives haven't gotten back to us yet, so it isn't clear whether Nokia is selling the phone at a steeper discount to carriers or if AT&T is the one maiming its margins, trying to get the Lumia to move.

The reason for this sharp price cut might be related to the infamous Osbourne Principle. Microsoft (MSFT) already announced that the new Windows Phone 8 operating system will be available later this year. Just not for any existing devices. Once that comes out, anyone that bought a Lumia will be holding a device with obsolete software and without a new camera app or Internet Explorer 10.

"This move is a normal strategy that is put in place during the life cycle of most phones," Nokia spokesman Doug Dawson told the Wall Street Journal. It "allows a broader consumer base to buy this flagship device at a more accessible price."

This is certainly the case. At this new price, the Lumia is now the cheapest 4G LTE smartphone available in the US. A lower price point might flood the lower end of the market with quality hardware that can hold its own against the competition for a bargain. Hewlett-Packard (HPQ) saw demand for its ill-fated TouchPad when it sold the tablets in a fire sale for $99, a third of the production cost. The webOS tablets were initially priced higher than the Apple iPad.

Apple's superior supply line and premium brand is what gives it such high margins. This brings to mind this graphic based on iSuppli's teardowns and manufacturing cost estimates.


Practically giving the phone away might even broaden the Windows Phone user base and attract more developers. The carrier's desire for a third player gives it a bit more leverage when negotiating with Apple and other handset makers.

The Lumia failed to revive the Finnish company's stock price. Since the phone debuted in April, Nokia stock has declined by over 60% to a low of $1.77. Nokia will be reporting earnings this week, and cutting the price of its flagship handset. The company will also have about 10,000 layoffs. These factors doesn't bode well for this company whose market capitalization is less than Apple's quarterly profits. Board members and employees tried in vain to convince the company to start working on an Android (GOOG) device to take advantage of the free and more popular operating system.

Twitter: @vincent_trivett
No positions in stocks mentioned.
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