Opinion: Finnish phone giant must phase out Symbian or die

The situation at the world's largest phonemaker Nokia Oyj. (HEX:NOK1V) has deteriorated substantially in the last year and a half.  Unable to compete against Google Inc.'s (GOOG) Android and Apple, Inc.'s (AAPL) iOS in the lucrative smartphone market, Nokia made a bold gamble and partnered with Microsoft to deliver Nokia Windows Phones.  

I. Another Brutal Quarter for Finland's Nokia

The deal was presumably first conceived with the installment of ex-Microsoft Corp. (MSFT) VP Stephen Elop in September 2010, just a month before Microsoft's formal launch of Windows Phone 7.  The pact was formally announced on Feb. 11, 2011.  As part of the pact, Microsoft pledged to pay Nokia billions divided into a series of quarterly payments, the first of which began to trigger last year.

Nokia on Thursday reported [PDF] its financial results for Q1 2012, a key barometer of the deal and the company's overall health.  The results were slightly worse than expected.

Financial Times information indicates that of the 27 analysts surveyed Nokia was estimated to make $7.45B USD.  Actual sales came in at $7.34B USD -- appr. 1.5% lower than expected.

Nokia's problems are numerous.  Smartphone sales fell in half on a year-to-year basis (51 percent).  But Nokia's feature phone sales also fell by 16 percent (with a 32 percent revenue erosion), thanks to fierce competition by Samsung Electronic Comp., Ltd. (KS:005930) which is pushing hard to become the world's top seller of mobile phones (both feature and smartphones) in 2012.

There are, however, some promising signs from Nokia.  The company has commited a lot of effort overhauling its feature phones with the new Asha lineup based on the lightweight S40 operating system.  Likewise Nokia's Lumia 900 is by some indications close to becoming Microsoft and Nokia's first major sales hit in the U.S. -- despite difficulties in Europe.

Lumia 900 in Hand (3/6)
The Lumia 900 LTE (Click image to enlarge) [©: Jason Mick/DailyTech LLC]

Nokia's smartphone sales have fallen to 11.9 million units for the quarter (which closed in March, before the Lumia 900 LTE launch).  

The issue appears to be all about execution.  Nokia's Lumias are one of the most promising product lines on the market, but it started with its lowest end models first, only bringing more exciting models to bear this spring.  The result is that the public were conditioned that Lumia is synonymous with low end hardware -- not exactly the best image to cultivate.

Likewise Nokia has allowed the Symbian lineup to linger around far too long.  Customers know this is a dying platform and few are signing up.  Nokia has put itself in a problematic situation.  First it has committed to Microsoft which demanded a certain uniform set of standards (in terms of hardware spec, including device buttons).  At the same time Nokia has a broad lineup of Symbian devices that do not meet those standards.

Nokia's response is to essentially do nothing and hope to slowly rebuild its lineup via brand new Windows Phone models.  While this approach certainly breeds some bold designs, it also does not speak to the reality of the sales crunch facing Nokia.

The just-slightly-worse-than-expected quarter did trigger a bit of a reaction from Nokia.  The company demoted veteran sales Vice President Colin Giles, two year after his rise to the position.  Mr. Giles will not be replaced -- Nokia plans on "reducing a layer of sales management" -- shrinking its core management echelon (the Nokia Leadership Team) from 14 (with Giles) to 13 (without).

III. Analysis: How to Fix the Mess

At this point it is imperative for Nokia and Microsoft to work together to relax Windows Phone's requirements enough to allow Nokia to transition its Symbian line to Windows Phone within a quarter or two.  

Nokia is at least well positioned to weather the storm with $9.8B USD in cash.  While the net loss of $1.34B USD for the quarter helped to chip away at that war chest, it's not to late for Nokia to make the necessary changes.  

Nokia wide
[Image Source: TechnoBuffalo]

The company is at a turning point.  From our perspective if it does four key moves, it will turn around and (re-)experience success.  To recover it must:
  1. Swap out Symbian NOW.
    Launch a new brand, and place all Symbian phones in this brand, transition them to be budget Windows Phones within 1-2 quarters via a relaxation of the spec.

    Symbian is dead.  Face it.  Nokia should just count these as lost sales if it cannot convert them to Windows Phone.  A handful may dispute this, but they're in denial of reality.
  2. Use Lumia as a Premium Brand
    Continue to push Lumia as the premium Windows Phone brand.

    The Lumia line is not Nokia's problem.  In fact, though the marketing has been somewhat poor, it has many impressive models.  Nokia needs premium models to compete with Apple and Samsung.  Growing Lumia alongside a new low-end Windows Phone brand that swaps Windows Phone into existing models makes perfect sense from this differentiation perspective.
  3. Put 41 MP Camera Phone on Verizon
    Launch the PureView Windows Phone variant on Verizon Wireless -- a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group Plc. (LON:VOD).

    America was recently bumped to the second largest smartphone market in the world, but it still is the world's most lucrative market.  Thus U.S. market success is as critical now as it ever has been.  Nokia did a good job placing a high profile model into AT&T's lineup.  AT&T is America's SECOND largest carrier.  Now to complete its push, it need a Verizon Lumia.  Verizon loves exclusive handsets -- the Pure View would be the perfect model.  The price of admission will simply be putting an LTE modem onboard.
  4. Win Chinese Smartphone Buyers
    Move aggressively to bring, push the full Lumia lineup to China.

    While the U.S. market is still perhaps the most critical market, for the reasons outlined above, China is now the world's biggest market.  And it's a market Nokia has traditionally excelled in.  A big China push will help compensate for poor sales in Europe.
  5. Don't Forget About Feature Phones
    Improve feature phone marketing efforts and turn back Samsung in developing markets.

    If Nokia feature phones were booming, things wouldn't be quite so bad for the Finnish phonemaker.  As is, the situation is dire not just due to plunging smartphone sales, but also due to the drop in both feature phone sales and profitability.  Feature phones are Nokia's revenue workhorse.  Smartphones may be the 3 point shot, in basketball terms, but Nokia must not neglect the easy layup -- feature phones.
If Nokia does these three steps, again, I see it returning to success. If it does not, the likely outcome will be death and marginalization.  That would be a very tragic outcome, given the promise that this company has.  But recall, I predicted Hewlett-Packard Comp.'s (HPQ) phone market exit, literally one day before its Palm unit was shuttered (and, no, I had no inside knowledge, just was looking at the big picture).

The reality is that the smartphone market is among the world's most competitive businesses to be in.  HP learned that the hard way.  Research in Motion, Ltd. (TSE:RIM) continues to learn that the hard way, and is very likely to vanish from the market within a year.  Nokia is in a similar position to the Android phonemaker HTC Corp. (TPE:2498) -- it's hurting, but not out of the game yet.  But like HTC, Nokia has little margin for error if it hopes to avoid following in the footsteps of Palm and RIM.

Sources: Nokia [Earnings; PDF], [Sales VP resigns]

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