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Why Microsoft needs to make $25 phones

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The Nokia 130 is just business 101

Microsoft surprised some by introducing a cellphone running Series 30 yesterday, just weeks after a leaked memo detailed the company's plan to wean itself off of anything but Windows Phone. With its focus elsewhere, why bother with basic cellphones priced at just $25?

Microsoft’s initial explanation is that it simply "doesn’t have any other project that can reach these consumers," which is mostly true at the moment. Although Windows Phone has been continually pushing down to lower prices, it’s still not at the $25 handset level, nor does it cater to every specific need of emerging markets that these basic feature phones typically target — Windows Phone only very recently started supporting dual-SIM devices, for example.

These "first" phones introduce people in emerging markets to mobile phones for the first time. While smartphones have started outselling feature phones, some estimate that there’s still a billion people worldwide who haven’t owned a mobile device yet. "[This] is a huge opportunity for Microsoft to introduce people, primarily in emerging markets, to their first mobile experiences," explains a Microsoft spokesperson in a statement to The Verge. In these markets the phone, rather than the laptop, can be someone’s primary computing device to access the internet.

Nokia 105 560px

Nokia's 105 basic phone.

Microsoft sells 1 million Nokia 105 devices a week

The opportunity is evident with the Nokia 105: Microsoft claims it sells on average 1 million units per week. That’s more than 50 million $30 handsets a year in emerging markets where Microsoft faces stiff competition from Samsung, carrier devices, and Chinese companies like Xiaomi, Lenovo, and Huawei. This leaves Microsoft with a tough decision: either ignore basic phones and cede future markets to Samsung and others, or try and use them as a vehicle for its cloud services.

Benedict Evans, a partner at venture capital firm Andreessen Horowitz, believes Nokia’s large feature- and basic-phone business might hold the answer to Microsoft’s decision. "When Nokia was still disclosing the numbers, the feature-phone business actually had about the same gross margins as the smartphones business: 20 to 25 percent, though that’s partly because the smartphone business was underperforming," explains Evans. "They have the business, it’s (presumably) profitable or at least not losing too much money, it has significant shared costs with smartphones and also shared expertise. And shutting it down overnight would be very expensive too. So you don’t just kill it today."

Microsoft could push its services on future devices

Microsoft also believes people using its latest Nokia 130 handset "will create a Microsoft account and become part of the Microsoft ecosystem," another reason to keep focusing on these particular handsets. That’s clearly not going to happen on its latest basic Nokia 130 cellphone, which doesn’t access the internet, but it could be a path for Microsoft to push its services and apps at similarly priced, but feature heavy, cellphones in the future. "I’m not sure how much I believe that," says Evans, who is clearly unconvinced of Microsoft’s initial ability to leverage its accounts and services on these devices.

Whether it’s financials or simply a cloud strategy that makes sense for Microsoft to keep these phones alive, it’s hard to imagine them not running a version of Windows Phone, or at least software that truly pushes Microsoft’s apps and services in the future. As smartphones and feature phones continue to push closer together in terms of their price and functionality, Microsoft will be eager to do everything possible to avoid letting some cheap Android handset maker take over emerging markets.