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Summary:

Nokia’s abysmal quarterly results weren’t completely unexpected, thanks to a downward revision in May. But after digesting the news, I don’t see how the company’s new strategies will pay off soon, for at least five reasons. The Band-Aid is off, but Nokia is still bleeding.

band-aid-featured

After revising its earnings estimates downward in May, on Thursday Nokia shared abysmal results for the second quarter. The onetime clear leader of the first smartphone era has tumbled down to what looks like the third spot for smartphone sales, definitely behind Apple and likely behind Samsung as well. With a new CEO in Stephen Elop, Nokia is surely in a transition, but a transition to what?

My first reaction to today’s results was twofold: one of sympathy and one of optimism. I thought to myself that one of Elop’s major actions so far, choosing Microsoft’s Windows Phone 7 platform for the future, was akin to quickly yanking a Band-Aid from a wound: Sometimes it’s best to just get the pain over with. But after digesting the news a little more and thinking about the path Nokia traveled to get to its current low point, I don’t see how the bleeding is going to stop this year, now that the Band-Aid is off. Here are five reasons why.

  • Feature phones can’t save the day. Each time I’ve pointed out Nokia’s challenges, the company’s faithful have railed at me and rallied on the general platform of “. . . but Nokia sells more feature phones than most others combined!” While that’s always been a valid point, it’s less relevant as the world transitions to smartphones. Nokia’s own sales numbers reflect this point: Total mobile-phone-handset sales revenue declined 20 percent from the year-ago period and 25 percent from the prior quarter. Combine the sales drop with a 3 percent decline in the ASP of Nokia’s mobile phones, now 36 euros ($51.20), and you can see that Nokia’s bread and butter contributed to its $692 million quarterly loss.
  • Existing smartphones aren’t helping. So as feature-phone sales are in decline, one would hope that high-profit-margin smartphones can help make up the difference. That’s not happening, given that the company didn’t capitalize on the smartphone market like Apple and Samsung, for example. Apple just reported 20.34 million iPhone sales for the quarter, a 142 percent boost from a year ago, while Samsung is estimated to have sold around 20 million smartphones in the same time period. This happened while Nokia’s smartphone sales declined 34 percent from a year ago, with 16.7 million smartphones sold. The ASP did rise 2 percent, but that’s not enough to offset the sales dropoff.
  • A smartphone answer doesn’t exist yet. Nokia is still at least one, if not two, quarters away from even beginning a sales transition to Microsoft Windows Phone 7 devices. Elop today confirmed that Nokia would launch a Microsoft-powered device by the end of the year. That means sales and revenues in the high end are likely to continue declining throughout 2011. And there’s still uncertainty about the first WP7 handsets from Nokia: What will make them different from those offered by LG, Samsung and HTC, for example? Again, the Nokia faithful will chant that Nokia makes hardware second to none. I’d be the first to agree with that, but there are two problems with the mantra. Nokia always made good hardware, and yet that alone hasn’t saved the company. Second: Nokia may not be manufacturing its first Microsoft phones. Instead, it reportedly outsourced the production to Compal, in Taiwan. In other words: Nokia’s smartphone transition is still fraught with risks for many reasons, and it’s going to take time for Nokia to hone its skills on a new platform.
  • Android squeezes at the top and bottom. Clearly, Nokia isn’t competing well in smartphones, given the growth rates shown by devices running iOS and Android. It’s the latter of the two that may have hurt Nokia the most. Why? Google is activating 550,000 Android devices per day — both handsets and tablets, but the vast majority are phones — and that number is composed of devices at both the top and bottom. High-end smartphones are selling well in regions that can afford them. At the same time, cheap Android smartphones are popping up in areas where feature phones once reigned. Think of India and the next 500 million mobile users. Look to China, where Nokia moved 52 percent fewer phones this quarter as compared to the past one. In these areas, inexpensive, low- to mid-tier Android phones are arriving and offering much more functionality for just a little more money over feature phones. We’re even seeing these in the U.S.: This year offered $149 no-contract Androids with expectations of prices dipping below $100 by the end of the year.
  • How much destruction can one brand take? Among the many negative tangible results for Nokia today, there’s a massive intangible one as well: a tarnished brand. Tomi Ahonen illustrates the global branding Nokia has on his blog today, saying “[M]ore people use a Nokia phone than drink a Coca Cola, than wear Levis’s jeans, than tell time on a Timex watch, than wear Nike running shoes, than smoke Marlboro cigarettes, or write with a Bic pen.” As sales of Nokia devices continue to stumble, the brand itself loses value in terms of consumer and investor confidence. With smartphones, the brand is tied not just to hardware but also to software and services: Consumers are purchasing brand platforms and ecosystems when they buy a handset. Think of it this way: When consumers purchase an iPhone, they equate the full package with Apple, a company that arguably sets a high bar for the entire user experience. What will customers think of when they see a Nokia smartphone after the company’s fall from grace?
I still have the same sympathy for Nokia that I had over my first cup of morning java. It’s never good to see a global leader heading toward “has been” status, especially with all the innovation Nokia has brought to so many people around the globe. But the optimism I had dissolved faster than the sugar in my coffee, faster maybe than Nokia’s overall profits and sales.
Image courtesy of Flickr user ecastro
  1. One silver lining is their mapping and navigation grew. Apple needs to improve in this area

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    1. Chris, you get bonus points for sifting through all of the negative numbers and finding the positive in Navteq. ;)

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  2. The big question is, “Will Microsoft save Nokia?”

    Basically, if a big-company-that-bet-the-farm-on-Windows-Phone dies, that might take windows phone with it. To prevent that, Microsoft might have to do something.

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    1. “To prevent that, Microsoft might have to do something.” Possible of course. An outright purchase of Nokia by Microsoft? Perhaps. But that would fundamentally change Microsoft’s business model as it would effectively be competing against its licensees. If that happens, they likely defect to Android or something else.

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      1. Kevin, WP7’s sales seem to suggest that licensee defections might not hurt that much. I’d guess that both sides of this partnership are desperate at this point, making anything possible.

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        1. Very fair point, Paul, and that could open up the door to such a purchase in the future. I still wonder about it though because it’s not in Microsoft’s DNA to build and sell hardware. The two notable exceptions (not counting keyboards, mice and the like) are the Xbox and Zune products. But you’re right: desperate times call for desperate measures!

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      2. TWiT Commander Monday, July 25, 2011

        “it’s not in Microsoft’s DNA to build and sell hardware”

        Dear Xbox,

        It’s just a bad dream. No one said that.

        ktankbai.

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  3. This is sad. Let’s hope something unexpected comes along to help Nokia.

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  4. The thing that sits in my mind is that given their amazing hardware capability, their only remote chance is if M$ can deliver a superlative user experience that exploits those hardware chops!

    If not RIP Nokia, I will always miss the potential and promise of the early tablet and Meego days.

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  5. I don’t fully get the argument. Nokia currently has not one decent smartphone and yet it’s still selling a lot of them. If it had a smartphone that was, in fact, half decent, it could sell a lot more.

    It’s easy to forget how fickle people are. Some of Nokia’s biggest sellers in the early days were no different to any other phone, they were just a bit more stylish. Nokia and Microsoft together can create a phone as good as an iphone or high-end Android. It doesn’t need to be better for a lot of people, it just needs to be different. The market is huge as are the margins. Nokia won’t rule the world again but if they get it right they can do okay.

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    1. Jon, you’re correct that Nokia still sells a lot of smartphones (and non smartphone for that matter). But it sells them all at a far lower average selling price than competitors and it’s selling fewer phones each quarter than the last at a time when the general market is fast growing. So sales are declining on a product that’s not making them money; hence the large financial losses. Market share has tumbled and that turns off 3rd party developers. Now the company is going to be just another Windows Phone 7 licensee, so it has lost the competitive advantage it could have had by using its own operating system. Simply put: Nokia didn’t adopt fast enough to the smartphone market of today and when it tried to, it spent so much on R&D (for marginal products and services) that it started to become unprofitable.

      I agree that “Nokia and Microsoft together can create a phone as good as an iphone or high-end Android” but I question if it will happen and if it does, will it be too late? Nokia can still survive, but we’re watching it systematically be de-throned… something we’ve been saying for several years.

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      1. Nokia does not sell smartphones. They sell feature phones, and advanced feature phones. Just like RIM. They’ve been calling them smartphones for years (and before that, “multimedia computers”) but they really aren’t smartphones in the way that iOS and Android devices are. It really is an apples-to-oranges comparison.

        The day that iPhone launched in 2007, Nokia needed to realize that the definition of “smartphone” had changed forever. They did not — they clung to their sales figures, touting “we sell more smartphones in a month than Apple in 1 year”. In truth, they have never actually been in the (new) smartphone game.

        It is truly sad to watch a once-great company in this state. But Nokia has always sucked — with a capital “S” — at software. The advent of the (new) smartphone age signified the triumph of software over hardware (or in the case of Apple, software married with hardware). Not being a software company, Nokia never grasped this fundamental fact.

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  6. This is an a very bad moment for nokia, hope they are trying to mend the disjointed policies else they are out

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  7. Wow, you really sounded the gong of death on that company :) Personally I like Nokia, and I’m going to upgrade to Nokia the moment they launch a W7 phone. Nokia’s antenna is really really good, and I’m wary of trusting any other company with my money… especially because Apple products are expensive enough in India to leave me with googly-eyes… there’s a lot of trust out here on the brand, let’s hope Nok will be able to replicate it and exploit it over here and other places globally…

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  8. Yet another doomsday article about Nokia. These are getting old.

    Nokia performed better than expected. Anyone that was actually waiting for actual good news from Nokia this quarter knows next-to-nothing about the mobile industry. Of course Nokia lost money this quarter. They said as much with their “things are more grim than expected” profit warning back in May. Just by walking into a store and asking what they recommend would give one the insight to realize that Nokia’s sales weren’t going to be anything remotely close to good enough. In fact, the 3rd quarter will likely have more of the same.

    As for the Symbian->WP7 transition, I grantyou that Nokia should have handled the transition much better. Hindsight is 20/20. On the other hand, had Nokia given some squishy announcement in February about Symbian being alive and well while migrating to WP, the tech press would have been all over them like stink on s#!t. It’s a classic case of damned if they do, damned if they don’t. Had they adopted Android, everyone would have scorned them for being unoriginal. Had they recommitted to Meego, they would have been chastised as bunch of Finnish crazies.

    So now, let’s be fair to the once great Nokia. They will have a VERY bad 2011. That is already in the stock price, though. It has been for quite some time. However, it will take considerably longer than another year for Nokia to meet its demise…or for the price to fall enough for someone to want the headache of acquiring it.

    I think the future holds great things for the company. It won’t be the same company of the 1996-2007 time frame, but a great company none-the-less.

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    1. Nokia performed better than expected on downward revised numbers. If you find that positive, more power to you. ;)

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    2. I beg to differ. This article has it spot-on. If anything, it understates the pressure on Nokia.

      Missing from the article is that, in addition to the assault on Nokia from iPhone (at the high end) and Android (at the mid-range and high end), they are getting killed in China, India, Indonesia and elsewhere by Chinese handsets built around the MTK chipset. It’s happening very, very quickly.

      Decreased market share in feature phones will disrupt and diminish Nokia’s distribution network, further weakening their ability to sell smartphones.

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  9. “Apple, a company that arguably sets a high bar for the entire user experience”

    Except for actually making phone calls, that is.

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    1. If Apple phones can’t make phone calls, why is Apple selling so many phones?

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      1. the phenomena you speak of is called marketing.

        people only find out that they purchased a piece of garbage after buying it.

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  10. In their mobile phones area, I wonder if the introduction of their dual-sim phones will help stem the tide in developing countries. Though announced over a year ago they are just now being sold. I’m hoping they’ll offer a qwerty dual-sim phone. Hopefully the N9 starts to be sold during Q3 so that it’s potential impact can be felt.

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