What’s the best-case scenario for Nokia?

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Nokia’s transition to Microsoft Windows Phone 7 software will cost Nokia far more market share and profits than it will ever gain by dumping the Symbian operating system. So says Tomi Ahonen, a former Nokia employee turned analyst/blogger in the mobile space. Ahonen outlines Nokia’s performance prior to the company’s February announcement of its partnership with Microsoft and sets expectations through 2013. His analysis follows Nokia’s news last week of tumbling market share, sales and revenues.

Until Stephen Elop left Microsoft for Nokia in September of 2010, however, Ahonen appeared convinced that Nokia’s Symbian strategy would eventually pay off, a scenario I disagreed with. The company’s hardware always impressed me, but in my opinion, it always lacked in user experience and software. That held true in my review of the Nokia N8 handset. Others would disagree, of course; more Symbian-powered smartphones have sold than any other platform, at least until last quarter, when Apple and Samsung both sold more smartphones than Nokia. And HTC is fast growing sales as well, thanks to its early adoption of Google Android

Ahonen is still justifying his original belief in the Symbian strategy, saying that the platform had already improved enough to help grow sales:

Then came the new Symbian S^3 on several phones, led by the new flagship phone N8 which set a Nokia record for fastest sales in a quarter. All declining trends were turned into growth – this tells us the market loved Nokia’s new smartphones on the new Symbian S^3 operating system and this is absolute proof that Nokia was on a come-back. Whatever you may have thought of Symbian prior to Q4 of 2010, became obsolete. Nokia had indeed on its hands, a true hit series of phones and a hit operating system  with the N8 setting internal Nokia records for new phone sales. Look at the facts. [Emphasis added by Ahonen]

I won’t argue with the numbers that Ahonen lays out, but I will point out that he’s missing one key number: overall market growth for smartphone sales. “A high tide will lift all boats” is a common phrase that applies, and even leaky boats will rise with the tide. Smartphone adoption is increasing around the world, and even the less competitive market players can see gains. Nokia’s smartphone sales in the final quarter of 2010 rose 7 percent, partially for this reason. But the overall market grew faster: IDC suggests that year-over-year growth in smartphone sales for all vendors was up 87.2 percent; Nokia accounted for the least growth out of the top five handset makers.

But Nokia’s Symbian past has little to with its Microsoft Windows Phone 7 future, and Ahonen’s model — meant to be simple — suggests that in a best-case scenario, for every WP7 phone Nokia sells, it will be offset by the loss of a Symbian sale. Essentially, the platform transition will be an even sales swap and by the end of 2013, Nokia will have a far lower market share than it has now:

So taking the very best case of 2012, using the best ramp-up ever, and then using the best case of growth in mass market scale, we get Nokia’s Microsoft Windows Phone 7 based smartphones – the very very best case scenario – to hit 20.3 million smartphones not at the end of 2011, not at the end of 2012, but the end of 2013. By that time, Nokia’s smartphone market share will be at . . . 8%.

The 20.3 million smartphone sales ten quarters from now seems low to me for two reasons. One is the growing smartphone market I made reference to earlier, which will help all smartphone platforms to some degree. The other is the timing, because the smartphone market is changing so quickly. If you don’t think so, look at Research In Motion, which is working through a transition of its own; the company is changing fast and as a result faces declining sales. It just reduced its workforce by 10 percent. When you’re in a fast-growing market and have to eliminate jobs, that means you’re either not competitive, not profitable or both.

In the end, Ahonen blames Elop’s decision, saying,

Before Stephen Elop killed Symbian, Nokia’s smartphone market share was 29%. Nokia towered over its rivals and was growing smartphone sales with highly desirable new smartphones. Today just five months after his ridiculously-timed announcement of Microsoft, Nokia’s smartphone market share is down to 15% and collapsing.

I agree with Ahonen that Nokia’s market share is collapsing; we’ve already seen evidence of that. And by publicly stating that Symbian was a dead end, Elop may have added more stress to an already fragile public perception. But I think it was the right call. Had Symbian continued along a path where it underwhelmed, Nokia would run the risk of having that negative vibe transfer to new Microsoft-powered phones. In fact, I wonder if Microsoft made this part of the overall deal, simply to avoid such a scenario?

Regardless of my different reasoning from Ahonen’s, I think we can both agree: No matter how sad it is to see the mighty fall, Nokia’s best days are behind it.

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