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Can Nokia pull itself back from the edge?

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Nokia has been the world’s largest maker of mobile handsets and one of the most successful mobile companies on the planet for… well, as long as most consumers have owned cell phones. However, that all seems to be changing: Nokia looks like it’s on the verge of losing its top phone-maker title. Just last week, the company sent out a warning that its financial results for the next two quarters weren’t going to be as rosy as it had hoped. Couple that with a high-profile stumble in its effort to re-enter the European and North American smartphone markets and you have a company that’s not just struggling — it’s fighting for its life.

How bad are things looking for Nokia, and is there anything the company can do to make its Windows Phone strategy work faster — or at least buy time while hoping the numbers finally turn around?

Looking at the numbers

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Nokia will be releasing its financial results for the first quarter of 2012 on April 19, so nothing is official yet. However, last week Nokia announced it was lowering its financial outlook for the first and second quarter of the year. Where the company had previously hoped it would hold steady during the first quarter, now its operating margin for devices and services will be down about three percent. That may not sound like much, but looking deeper into some of the figures reveals cause for concern.

Overalls sales don’t paint an encouraging picture. Nokia says it sold about 12 million smartphones during the first quarter of 2012, down from 24.2 million in the same period last year — that was before it had even brought a Windows phone to market. This quarter, overall smart device sales will be about half of what they were a year ago. That’s not a direction investors want to see. Of those 12 million devices it did ship, some 83 percent were Symbian- and Meego-based smartphones. Symbian is Nokia’s old mobile platform that that company is slowly phasing out in favor of Microsoft’s Windows Phone.

However, there is some positive news: Nokia did sell two million Windows Phone devices during the quarter, accounting for almost 17 percent of all its smartphone sales. Furthermore, Windows Phone devices are lucrative for Nokia.  The average sales price of those Windows Phone devices was €220 each (about $290),  compared to just €125 (or roughly $165) for Symbian devices. So despite accounting for only 17 percent of Nokia smartphones sold, Windows Phone handsets accounted for 26 percent of Nokia’s smartphone revenue.

In other words, Nokia’s overall smartphone business might be doing terribly, but the basket execs have piled Nokia’s eggs into — Windows Phone — is showing momentum in the right direction.

How does the sale of two million Windows Phone in a quarter compare with the other two major smartphone ecosystems, Android and iOS? In February, Google claimed to be activating in excess of 850,000 new Android devices every day, and Apple sold more than 37 million iPhones in the (admittedly holiday-boosted) fourth quarter of 2011. In rough back-of-the-envelope figures, that means Nokia’s Windows Phone sales during the first quarter of 2012 accounted for about three percent of the total smartphone market.

It is important to note that Nokia is not the only maker of Windows Phone devices; however, Windows Phone handsets from other makers are largely designed for Android and reworked for Windows Phone. Nokia remains the only major phone maker designing devices exclusively for Windows Phone. In other words, if Nokia can’t make Windows Phone work in the marketplace, no one can.

What about low-cost phones?

Nokia 103
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Nokia’s smartphone sales might be half what they were a year ago, but its bread and butter business in low-cost phones is also being hammered. Although it may be easy to scoff at the idea of operating a huge business on feature phones, it’s important to remember that Nokia sells a stunning 70 percent of its handsets outside North America and Europe.

During its first quarter of 2011, Nokia sold 84.3 million low-cost phones worldwide. For the first quarter of 2012, Nokia expects that figure to drop to 71 million units: a decline of almost 16 percent. Nokia says the decline is primarily due to “competitive industry dynamics” that impacted sales in the Middle East, Africa, and China. That’s an indirect reference to companies like China’s ZTE, which have been eating away at Nokia’s dominance of the low-cost feature-phone market with even less-expensive devices that care to regional needs — such as phones that support multiple SIM cards so users can hop between carriers more easily as they travel. (Multi-SIM phones are particularly popular in India, and are catching on in other markets.) ZTE is also challenging Nokia on the Windows Phone front: ZTE was the first to bring Chinese-localized Windows Phone handsets to China.

As consumers shift to smartphones, the market for low-cost entry-level phones will decline sharply worldwide, which means the market Nokia has relied upon as its cash cow will quickly wither away. The market will probably never disappear entirely, but it’s not going to be able to sustain Nokia’s current 110,000 global employee base indefinitely.

Declines in both smartphone and low-cost phone sales mean Nokia is likely to lose its crown as top handset maker on the planet. Combined, the 71 million low-cost phones and 12 million smartphones add up to 83 million devices sold in the first quarter of 2012. Samsung is due to announce its first quarter results at the end of the month, and analysts expect it to reveal it has sold between 85 and 92 million devices for the same period.

What are Nokia’s options?

Nokia Head Office (Espoo)
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The grim state of Nokia’s current handset business is having an impact on the company’s market standing: rating agency Moodys has just lowered the company’s debt grade to “Baa3” — that’s just one step above “junk” status. Perhaps more damaging, last week’s warning about results for the first two quarters of 2012 sent Nokia’s stock down 20 percent. On February 24, just after a positive presence at the Mobile World Congress in Barcelona, Nokia stock closed at $5.80 per share; on April 13, it closed at $4.02. The company’s market capitalization stands at under $15 billion. Back in 2000, Nokia’s market capitalization was in excess of $240 billion; heck, as recently as February 2011, Nokia’s market capitalization was over $50 billion.

Recently-installed Nokia CEO Stephen Elop (a former Microsoft exec, let’s not forget) has already taken some steps to try to shore up Nokia’s bottom line. First, of course, he stakes Nokia’s smartphone future on Windows Phone rather than Symbian or MeeGo. Second, he’s already jettisoned about 10,000 employees — the cuts were announced about a year ago, followed by additional layoffs and manufacturing shutdowns in September, and should be largely complete by the end of this year. Third, Elop has also tried (so far unsuccessfully) to sell off a stake in mobile phone equipment maker Nokia-Siemens — last November, Nokia Siemsens announced plans to lay off nearly a quarter of its workforce.

However, Elop is between a rock and a hard place with investors: Although Windows Phone will likely get a strong boost when Microsoft ships Windows 8 (assuming Windows 8 tablet devices and Microsoft’s new Metro world view gain tractio) Elop and Nokia may not be able to afford to stay the course long enough to reap the benefits of a blossoming Windows ecosystem. Nokia will need to take steps very soon to shore up its financial position, and at least convince the market that it can hang on until its Windows Phone bet pays off.

Here are Nokia’s most likely moves:

Nokia CEO Stephen Elop (May 2011)
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Sell off patents — Nokia has developed an immense pool of patents related to mobile technology over the years, many of which have been critical to mobile technology standards and Nokia’s own product line. Nokia’s most famous head-to-head patent bout was probably with Qualcomm, but last year Nokia notched a very public settlement out of Apple. Nokia could generate significant revenue if it were willing to part with some of its patent portfolio, and there would likely be no shortage of suitors: companies like Microsoft, Apple, Google, Samsung, Qualcomm, and more would probably push and shove to be first through the door.

Sell off the low-cost handset business — Although low-cost handsets sold into developing and emerging markets currently represent the bulk of Nokia’s device sales, smartphones and smart devices are Nokia’s future. Although selling off its low-cost handset business to a competitor — like ZTE or Huawei — would have a severe impact on Nokia’s bottom line, it would also enable Nokia to jettison much of its Symbian legacy in one swift move, reducing the company’s operating costs (and, of course, headcount) while bolstering its accounts with a significant cash infusion.

However, it would also leave Nokia in a position much like Motorola Mobility or Sony-Ericsson, which both decided to walk away from their low-cost phone businesses. And neither company is really still around: Google is in the final stages of acquiring Motorola, and Sony is re-absorbing Sony-Ericsson in a bid to stake out its own mobile device future. Nokia could set itself up as an acquisition target if it loses the revenue of its low-cost phone business.

Nokia Siemens HQ
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Sell off Nokia-Siemens stake — Nokia is likely to aggressively pursue sales of a stake in Nokia-Siemens. Although the company hasn’t been able to do a deal yet, Nokia’s market situation may be the motivating factor. It’s not immediately clear who a buyer would be: Motorola Solutions (the spinoff of the former Motorola that’s not being acquired by Google) is a possibility, along with (again) Huawei, although there’s plenty of bad blood between all three companies over patent disputes.

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Sell off Navteq — Nokia bought mapping firm Navteq back in 2007 for some $8.1 billion, and leveraged the technology for its own navigation services and Ovi Maps products. Nokia’s deal with Microsoft means Navteq data has augmented navigation services available via Bing Maps, but Navteq still represents a discrete business unit within Nokia that could attract major suitors — particularly as Google Maps starts to see some high-profile defectors.

Relocate — Nokia has always been identified as a staunchly Finnish company, but Finland isn’t the cheapest place in the world to operate a mobile technology company. There’s been some speculation that maintaining its corporate headquarters in Finland has isolated Nokia to changes in the fast-moving mobile industry. Analyst Lee Simpson of London’s Jefferies International has suggested Nokia should consider shifting its global headquarters to a location with lower costs — although, doing so would likely mean leaving a significant number of key executives and engineering personnel behind.

Get Windows Phone Right

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More than anything, though, Nokia needs to get Windows Phone right — and, so far, the company is off to a rocky start. Nokia launched its first Windows Phone, the Lumia 800, in Europe in late 2011. Although initial response was decidedly muted, response seems to have picked up in 2012 with carriers in Scandinavia and the UK have reporting strong sales. Nokia launched the Lumia 710 in January in Asia and the United States, apparently to respectable reception. But selling two million Windows Phone handsets in a quarter is not a revolution.

With the Lumia 900, Nokia has stumbled. First, Nokia tripped in its partnership with AT&T by launching the Lumia 900 on Easter Sunday — potentially damping initial sales since many retailers were closed. Two days later, Nokia admitted a bug was preventing some Lumia 900 owners from connecting to the Internet reliably; Nokia says a fix is now available (and the fault was theirs, not AT&T’s) and impacted customers are eligible for a $100 credit — which basically makes affected handsets free. Nokia says it’s already making Lumia 900s with the fixed software, and the credit will be available to customers who purchase Lumia 900s through April 21.

It’s good to see Nokia acting swiftly to resolve the problem and try to do right by customers who were quick to embrace Nokia’s top-end Windows Phone offering, but it’s not the kind of seamless launch Nokia would have wanted. Now, instead of consumers thinking “Hey, Nokia’s back with a really hot Windows Phone, and it’s only $99!” consumers are thinking “Hey, Nokia’s new $99 Windows Phone has some sort of connectivity problem.” That leaves Nokia reduced to mocking other phones because they “all look alike.” To win over consumers, Nokia needs to prove its Lumia line offers significant advantages over Android devices and the iPhone. Crowing that they’ve made a phone that doesn’t look like a carbon copy of an iPhone isn’t going to be good enough.

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Geoff Duncan
Former Digital Trends Contributor
Geoff Duncan writes, programs, edits, plays music, and delights in making software misbehave. He's probably the only member…
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