3 reasons Microsoft and Nokia should go all in with phablets

Phablets offer Microsoft and Nokia an even greater upside than estimated

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After closing out its annual Nokia World event a couple of weeks ago, it was apparent then that Nokia's  (NYSE: NOK )  new phablets — the high-end Lumia 1520 and the less-expensive 1320 — were a huge opportunity just waiting to happen. As the article posted shortly after Nokia World noted, phablets could be a key component of Microsoft's  (NASDAQ: MSFT)  mobile presence after completing its US$7.2 billion acquisition of Nokia's devices and services unit.

Based on new data from research firm Canalys, phablets offer Microsoft and Nokia an even greater upside than estimated — and that's saying something. Expectations were for the phablet market to generate about US$46 billion in sales this year and move about 150 million units. And those impressive sales figures were expected to double in the next few years. But if 2013's third-quarter results are any indication, those predictions don't do the phablet market justice, and that's where Microsoft and Nokia enter the picture.

Phablets ready to explode

In the recently completed third quarter, phablets enjoyed a 24% jump in sales compared to what was an already impressive 45 million units in the second quarter. The 56 million phablets sold in Q3 — equal to 22% of all smartphone sales-demonstrates what insiders have known for some time: Phablets are the next big thing. What the insiders and mobile industry pundits got wrong, was just how fast the market would take off.

IHS iSuppli is widely recognised as a leading analytics firm, but even it got phablet growth wrong, by a wide margin. In January of this year, IHS predicted phablet shipments would more than double from 2012's volume; jumping to 60.4 million units this year. Now, with the holiday shopping season nearly upon us, it's likely phablet sales will exceed 60 million units in Q4 alone.

No Apple

Apple's  (NASDAQ: AAPL)  smartphone dominance, particularly domestically, is irrefutable. After breaking its own record for weekend sales after unveiling its new iPhone 5s and 5c models — selling nine million in all of three days — it's pretty clear why Nokia's high-end Lumia lineup is just now beginning to gain some traction. Playing in Apple's sandbox makes sense, of course, but Nokia and Microsoft must know that making a significant dent is a long-term objective. But that's not the case with phablets.

Rumors and Apple go hand-in-hand; always have, always will. So it's not surprising the rumor mill includes the possibility of not one, but two, new Apple phablets coming next year. Naturally, Apple has no comment, but as of now the Lumia 1520 and 1320 phablets head into the holidays with Samsung as the prime competitor, Apple's chosen to stay on the sidelines.

With Apple out of the game, there are gaps to be filled in the exploding phablet market, and it's time for Microsoft and Nokia to go all in. Unlike smartphones that are dominated by the two heavyweights — Samsung and Apple — there's still plenty of room for Microsoft and Nokia to make a serious dent.

Growth in established markets

Another factor working in Microsoft and Nokia's favor is the Asia Pacific region's love of phablets. In Q2 of this year, for example, phablet sales equaled both tablet and smartphone sales, combined (excluding Japan). China and India are seen as two key phablet markets, and Nokia has a strong presence in both. Though China is still a work-in-progress, Nokia's deal with the country's largest mobile carrier, China Mobile, is a big step in the right direction. As for India, Nokia has a long, successful history with smartphones in the country, and it's easy to see that transitioning to phablets as well.

Low cost phablets are also big in the Asia Pacific region, and expected to get bigger, which ties in nicely with Nokia's new US$339 Lumia 1320.

Final Foolish thoughts

Phablets should become a primary driver of Microsoft's transition to a device-driven company, regardless of who ends up running the show once CEO Steve Ballmer exits the scene. But it's up to Ballmer and Nokia's interim CEO Risto Siilasmaa to act quickly and decisively, because the time to go all in with phablets is now.

A version of this article, written by Tim Brugger, originally appeared on fool.com

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