First note, the reason I keep obsessing about the Nokia situation, is that we are honestly witnessing now the destruction of a giant global brand, and worse, the destruction is done voluntarily, by its management. This is history being made. We are witnessing a train wreck and this most colossal management failure in economic history will be studied in MBA classes for the rest of this century, as Stephen Elop's name will be synonymous with wanton destruction of a giant global brand. And what I want, is that those MBA students will still know what Nokia means, that they don't need to be told in their textbooks, that 'Nokia was a company that was once the biggest mobile phone maker.' The management mistakes by Stephen Elop are so severe, they now are threatening the very survival of Nokia. I am not kidding. I am not the only tech blogger who has warned that Nokia may not survive till the end of the year. But I can also tell you why.
We must keep focus. There are two giant problems facing Nokia that are far more important than any others. Yes, there are many issues around Nokia, from its disasterous quarterly results, going from big profits to a huge loss; from the downgrade in the credit rating by Moody's just yesterday; to an increasing voice of analysts saying the current Microsoft strategy is not sustainable, such as Ovum said this week. Nokia has been trying to sell off its loss-making networks unit, NokiaSiemens Networks and those discussions ended in failure - the buyers know Nokia is so badly in trouble, they are better off waiting and buy NSN at a far better price tomorrow. And we hear of all sorts of new problems almost every day. And Nokia's CEO Stephen Elop has a particular type of foot-in-mouth disease in that he seems to be able to push the Nokia share price down with almost any statement he makes these days.
That should not distract us from two giant problems that Nokia now faces. So huge, that either one individually is an existential problem to Nokia. Yes. Either one of those two problems can kill Nokia all by itself. And by killing, Nokia is already a company on the endangered species list - it may disappear this year. And both are problems that have acquired a trajectory of their own - so unless actively stopped, they WILL kill Nokia. So we need to be clear and not lose focus. What are the two giant problems that threaten the very survival of Nokia?
EXISTENTIAL PROBLEM NUMBER 1 - SMARTPHONE SALES BOYCOTT
Stephen Elop caused what is called the Osborne Effect when he announced the end of Symbian and Nokia's shift to Microsoft smartphones on February 11, when he did not have any Microsoft phones to sell instead of the Symbian phones. His words on February 11 caused the collapse of Nokia Symbian smartphone sales. Not that Nokia Symbian phones were good or bad. Not that Nokia customers liked or hated them. Not that Nokia resellers decided to stop selling Nokia. No, it was Stephen Elop, when he uttered those words, that Nokia would switch to Microsoft - combined with the fact he had no Microsoft phones to sell. This is not my imagination. Many esteemed tech writers have independently come to the conclusion that Stephen Elop made one of the costliest management mistakes ever with that announcement. And most of them agree with me, that Stephen Elop's statement on February 11, with no Microsoft phones to sell - did indeed cause an Osborne Effect. On Twitter I even heard a joke saying the scale of Elop's error is so big, the term 'Osborne Effect' becomes obsolete now, and is now known as the 'Elop Effect'.
That is not why Nokia is in trouble. Yes, its a big mistake. It is not the problem today. The problem is, that the Osborne Effect caused the collapse of Nokia smartphone sales - a drop in sales so severe, it is a world record in destruction of a brand's market share - in less than 5 months Nokia's market share plummetted from 29% to 15% (and in the next five months will crash-dive to 7%). And against this catastrophic decline of Nokia smartphone sales, there are no new Microsoft Windows Phone 7 based smartphones to sell. The first such phone won't arrive until just before Christmas and only in limited country availability. That is only a cosmetic market action. The first meaningful 'relief' to Nokia's smartphone sales from Microsoft based smartphones, will not come until Q1 of 2012 at the earliest, most analysts peg it at Q2 or later next year. Please note, even if those phones came to try to rescue Nokia, it is utterly impossible to somehow get Nokia and Microsoft anywhere near the fantasy of 20% market share in the years to come. No, the BEST CASE scenario has Nokia and Microsoft stabilizing during 2012 and growing slightly in 2013 to .. 8% market share at the very best, producing very modest profits, at the very best case.
That is part of the problem, but only part. Here is the missing killer part. Nokia has factories ramping up to manufacture a range of new Symbian phones - no less than 10 new models still to come this year! that are seen now as obsolete due to Stephen Elop's misguided 'Osborne Effect' statements.
Now you understand the problem? It doesn't matter one iota, if you or I think that Symbian is bad or good as an operating system. If Nokia's smartphones are obsolete or modern. If Nokia's Ovi store is user-friendly or lousy. If Nokia's developers hate or love Symbian etc. Nokia's hands are tied.
Nokia will be releasing 10 more Symbian phones, and has to sell tons of inventory of current models including premium Nokia Symbian devices like the E7 and X7 etc.
Nokia cannot in any way suddenly flick a switch, and convert those factories to produce Windows Phone based Microsoft smartphones (or Androids or any other). Nokia has to produce those Symbian phones and to desperately try to market and sell them, to an ever more hostile consumer base who believe Symbian is obsolete, and rejected by a sales channel who do not want to waste their time attempting to push obsolete handsets to customers who may return the next day complaining and demanding to return the handsets.
You see Nokia's problem. It doesn't matter if Symbian S^3 or Symbian Anna is 'nearly as good' as some other OS or not. Nokia has no choice. They have to sell those new Nokia Symbian phones now, while their factories are making them and to try to sell as many as they can, at as high a price as Nokia can, to try to generate some modest profits, or at least to reduce the amount of losses generated - until the 'cavalry arrives' in the form of Microsoft WP7 based phones, shipping finally in mass market volumes sometime in the Spring of next year.
This is a problem that is 100% caused and created by Stephen Elop. It is a voluntary problem, it didn't have to happen. It is not like the earthquake and Tsunami that hit Fukushima nuclear plant in Japan. It is not an 'accident' like the grounding of the giant oil tanker Exxon Valdez in Alaska, or more recently, the BT oil spill. Those were accidents where perhaps some management was also at fault. But this Nokia situation is totally different. This was a deliberate act by management that did not have to happen. It is 100% what is called a 'self-inflicted wound' and as to management activity, it was 100% voluntary, Elop did not have to make that statement on that fateful day on February 11.
But he did and now Nokia is in dire straights. Why? Because of Elop's statement, the Osborne Effect is far more severe than anyone (including me) was able to predict. Elop was so clueless he now admits, he did not see the Osborne Effect even coming. But many tech experts in mobile did. People like Horace Dediu calculated how immediate and steep would be the crash in Nokia sales. The Osborne Effect was obvious for anyone competent to tech marketing and sales. But nobody saw how severe Nokia's crash would be.
The amount of misguided statements by Elop - starting from the detrimental Burning Platforms memo - and added by repeated mis-steps such as the launch of Dual SIM phones (angering the resellers, specifically the mobile operators) to praising Microsoft for acquiring Skype and promising (some would say 'threatening') to put Skype on Nokia Microsoft phones as standard - all these things make the reseller boycott more severe, and the collapse of Nokia's smartphone sales ever more steep.
It has had the further unanticipated negative side-effect, that while the 'featurephones' ie non-smartphone (what we often call 'dumbphone') division sales for Nokia were to be immune from any Microsoft effects like the Osborne Effect, Nokia has seen a massive decline in the featurephone division sales as well. Since February 11, the revenues of Nokia featurephones division have fallen by 43% !!!!
Nokia's handset unit generated 8.5 Billion Euros (11B US dollars) of revenues in Q4 with about 1 Billion Euros of profit. So if we ignore Nokia's networking unit NokiaSiemens Networks - a division that Nokia has been trying to sell for half a year now but is finding nobody willing to pay the price for the loss-making unit - the handsets business of Nokia, Smartphones and 'Featurephones' was the size of 44 Billion dollars on an annual level, just six months ago.
Now where are they? The handsets unit reported total revenues down to 5.5 Billion Euros (7.5 Billion US dollars) and a loss of a 247 million Euros (321 million USD). So Nokia's handset business annual sales are now at the size of 30 Billion dollars on an annual level. So under Stephen Elop's so-called 'leadership' and his foot-in-mouth disease, Nokia total size of its core business, the handsets side that clearly Nokia wants to keep - Nokia has already shrunk - 32% ! In five months ! If the malaise was only in one unit of the three big divisions of a corporation, the other two could sustain the company. But right now, Nokia is disappearing before our eyes!
I had projected the loss of market share in my revised best-case scenario that Nokia will end this year with 7% market share in smartphones. And I projected that Nokia revenues in the smartphone unit will be down to 1.5 Billion dollars. If we now assume that somehow the troubles in the featurephones division stop. And Nokia can stabilize its decline in featurephones sales. And keep the featurephones sales the same for Q4 as they are now - even in this ultra-rosy scenario, Nokia's handset business will have shrunk to the size of 4 Billion Euros per quarter (5.2 Billion USD) and Nokia's total handset division size down to 21 Billion in annual sales. Nokia's core business will lose 53% of its size in only ten months! And this - with the unbelievable assumption, that the featurephones unit will not bleed anymore, only the smartphones unit will continue to suffer.
The factories were built to support a company that sells more than a million phones per day. They will sell half that. The subcontractor contracts for parts are all volume-based. As Nokia misses its volume targets - its prices go up! The loss in profitability of Nokia is crushing it already now, as Nokia went from profits to losses. The losses will mount ever bigger simply as Nokia suddenly loses half its size!
And this all happens while the handset industry is facing strong growth! And while the smartphone side of mobile phones is in hypergrowth stage. All other rivals report shortages - shortages - in parts and supplies. Nokia has factories sitting idle. If you think half a billion Euros per quarter is 'a big loss' - wait until you see Q3 and Q4. Nokia is dying.
Now, we've seen this film before. Remember a company called Motorola? Their Razr was the hit phone all around the world two years before the iPhone. Motorola was 'back' and growing market share hitting a peak of 21% and challenging Nokia's number 1 position. Then things went wrong for Motorola. When it started to lose its big sales, everything started to collapse and Motorola's actions only made things worse. it went into deep loss-making, ever worse, as its sales vanished, it retreated from most markets, tried desperately to stop the bleeding and ended up dead. The company was split and many parts sold. That was not an original screenplay. That itself was a replay. There was once a giant handset maker - and early smartphone maker - named Siemens. They were a top 3 manufacturer. They suddenly started to see sales declines, and the sheer mass of the top-heavy organization pushed Siemens's handset unit rapidly into perennial losses, and the unit was finally sold.
As Nokia loses half of its handset sales this year, and its market share in the future of mobile phones - the smartphone division - collapses to one fourth of what it was only ten months earlier - this is an irreversable death journey. There is no comeback. No magical superphones from Microsoft can ride in from the sunset, and save the day. If Nokia handsets are so totally devastated by Christmas, it is the end of Nokia. The collapse is exactly the same as Siemens and Motorola (and Palm) but much much much faster. It is like a Charlie Chaplin film, when the speed is increased..
Because the smartphone side of the handsets business is far smaller than the dumbphones ie 'featurephones' - even if a Windows phone based strategy somehow produced hit phones in 2012, they cannot compensate for the top-heavy organization crushing Nokia. This strategy is suffocating Nokia now. Nokia has cash reserves, it can sustain itself without making profits, but the market share that is voluntarily given away now to rivals, will not be able to be fought back except in very slow and costly ways. Look at Motorola. It had 21% of the global handset market in 2006. It has under 2% now. Do you seriously think that Nokia even with Microsoft's help, can somehow sustain 5 years of loss-making, and after that, emerge with 3% of the global handset market, with a size ranking of about 15th? No. On this path, Nokia dies in a matter of a few quarters from now. There will never be a Microsoft Miracle to save Nokia on this path. Because Nokia is committed to, and cannot switch away from its Symbian path, this is an unstoppable train, that is proceeding on the tracks to the bridge that is broken. We know this results in death. And the sad thing is - the guy who broke that bridge is Stephen Elop.
EXISTENTIAL PROBLEM NUMBER 2 - SHARE PRICE TOO LOW
That was existential problem number 1. And unfortunately there is a second existential threat to Nokia. In the train analogy, now we also find there is a ticking time-bomb on the train. A nuclear bomb. It will go off even before we get to that broken bridge that we can see..
Nokia's share price has now fallen below the danger level. Financial analysts hold the danger level for share prices to be that low, by which it becomes more valuable to buy the shares to break up the company and sell its parts, than the value of the company as a whole. Nokia crossed that threshold about two months ago. Any day now, some investor group might emerge who have put together a financing package that simply buys up all outstanding Nokia shares. Then they take control of Nokia, and sell its parts. The networks unit (NokiaSiemens Networks) could be sold to Huawei of China. The smartphone unit could be sold to HTC of Taiwan. The Navteq navigation unit could be sold to some West Coast USA investor interested in location-based services and advertising, lets say for example Yahoo!. The patent portfolio would be one of the most valuable resources, could be sold say to Google. And the dumbphones unit could be sold to say LG who would instantly become 'as big as Samsung'...
If your company was honestly interested in Nokia for only one of its parts - lets say for example, that you were ZTE and wanted only Nokia's sales and distribution network and the Nokia brand, as a kind of 'luxury brand' for your company, a little bit like Tata Motors of India bought Jaguar - then ZTE could put together the financing to buy all of Nokia, and immediately auction off the other parts as per above - and keep the Nokia brand and sales organization at a HUGE discount.
You see what I mean? This is exactly that 'greedy' Gordon Gekko style predatory share buying that Wall Street was famous for in the 1980s and the movie Wall Street chronicled. Nokia is exactly at that stage now. An obvious target for any greedy shark on Wall Street, or any eccentric billionaire who ever wanted his own phone maker etc. Buy Nokia, keep only its brand and a bit of premium design (the best guys, from Finland haha who designed the N9 and MeeGo etc, not from the Stephen Elop admired West Coast designers haha) and then again, sell off the other parts, keep only 10% of Nokia, and get it essentially for free, as if you sell 90% of the rest at their real value - you do get to keep the part you want, more-or-less for free. Haha, a new vanity symbol, whose the daddy now. Who owns his own phone factory..
Before this danger level for any share price, the major threat to a buy-out is by a major rival who is rich. In technology that kind of rivals today for Nokia would be say HP or Apple or Microsoft, that kind of very wealthy company who might be interested in acquiring essentially all of Nokia for whatever reason (or not, like almost certainly Apple would not really care to own any of Nokia haha). So a giant global corporation the size of Nokia with 120,000 emploees would not typically need to fear a take-over by a tiny rival say the size of HTC of Taiwan. But when the share price has fallen below that danger level, suddenly the game has changed.
And after the theory lesson, now the bad news. Nokia's share price is likely to fall far more than where it is now. What kind of news has caused Nokia price to fall from its 12 month peak early in February of this year? Almost any talk of Microsoft with Nokia has spooked the investors to begin with. Almost any mention of Microsoft in conjunction with Nokia has caused the share price to fall. Can we see more of that? The news from the Microsoft side is so dismal with the smartphone OS Windows Phone 7, that Microsoft is not willing to even tell the world in the Q2 results, how many WP7 based phones were sold by Microsoft's handset partners. So the news from Microsoft's mobile handset softaware division is truly horrid and getting worse. Just in the past month or so, we've heard for example Microsoft's head of WP7 tell the world that smartphones on Microsoft's OS have fallen in price to half what they were one year ago, and that they will fall to half of where they are now! That also speaks to rather comprehensive market rejection of Microsoft's offering. And we hear from the biggest manufacturer of Microsoft based phones - HTC, that they now sell more than 90% of all of their phones on Android and because Windows based phones are selling so poorly, HTC is shifting even more of its production away from Microsoft. Thats not good. And yesterday we got LG's results. They celebrated Android smartphone sales, not one mention of any WP7 phones, what was only last year their 'strategic direction' with Microsoft.
So what else is spooking the investors? The market share decline. No. I didn't mean to say decline. I meant suicide. Whenever whatever Nokia news has come out about market shares about Q1 or Q2 or preliminary views to Q3, the news is always worse. Whether actual sales or consumer surveys of what they have or surveys of what brands they want, Nokia is consistently doing worse. Take China (the world's biggest mobile phone market, with more than twice as many consumers with cellphones than the USA). Last year we heard that 76% of smartphones sold in China were Nokia branded. Then this Spring we heard that had crashed to 22%. That kind of bad news, dripping in, day out, day in; week out week in. Now we await the final numbers for Q2 results. I am certain most Nokia investors have no idea how bad it was. The Q1 results were that Nokia's smartphone market share had fallen from 29% to 24%. It would be fair now to expect market share of perhaps around 20%. When investors find out - first days of August this will be in the news - that Nokia's market share crashed to 15% - there will be many who ask, has any brand ever fallen from 29% to 15% - essentially to half - its market share this rapidly - over two quarters. And this will spook investors even more.
Then there is trust in Nokia as a perennially safe bet. It was always the biggest. Well, it is no more. First time in 15 years since Nokia invented the smartphone, it is no longer the biggest smartphone maker. Apple has already passed it now, numbers came out a week ago. And to add insult to injury, its very likely that when we hear from Samsung on Friday, we find that Sammy also has passed Nokia. What a disgrace! Just six months ago, Nokia smartphones unit was so huge, it was bigger than all Apple iPhones and all Samsung smartphones added together. Now its been passed by both. Expect this story to be in the news around the first of August and beyond. And a kind of certainty about Nokia's domiance will disappear. Will this hit Nokia shares a lot or only a little, who knows. But it will not help.
Then there is revenues. Nokia's smartphones unit generated 4.4 Billion Euros of revenues per quarter just six months ago. That is nearing half today and will be far less by Q3 and even worse by Q4. It is dismal news there.
And profits are even a worse story. I cannot imagine what possessed Stephen Elop to make the outrageous promise that Nokia will be at near-zero profit in Q3. That sounded nice, yes, after Nokia posted half a billion Euros of a loss in Q2. But consider this - NokiaSiemens Networks has nothing to suggest it will suddenly turn profitable (it made a loss in Q2). The Nokia featurephones/dumbphones unit has nothing to suggest it will suddenly turn profitable - it is infact suffering from a reseller boycott and severely diminishing sales. Nokia's response to that was to cut prices across the product line! So does that help turn losses into profits. No. That makes the losses even bigger.
And the beleaguered smartphones unit. Yes, it is already generating a big loss. And Nokia has already cut prices - by about 15% already - which will boost... losses.. to be even bigger losses. I do believe that Nokia cannot turn this turkey into making zero profit by Q3. I do believe it means there will be another profit warning in a matter of weeks from now. Look how spooked the investors were with the first profit warning. If a second warning comes within only months, that communicates a severe lack of sound management judgement. I think it would be worse the second time.
And then the ever more painful paper cuts start to dig in. HTC will pass Nokia for 3rd biggest smartphone maker. RIM will pass Nokia for 4th biggest smartphone maker. LG will take 5th if not in Q3 then definitely by Q4. Then SonyEricsson and ZTE will also pass Nokia in smartphones.
And the ultimate fall from grace, by Q3 Samsung will be passing Nokia for the world's biggest mobile phone manufacturer overall, counting featurephones and smartphones. Nokia took the crown from Motorola in 1998. Now, thirteen years later, Samsung topples Nokia as the biggest handset maker. Just six months ago Nokia towered over Samsung at 53% bigger! And when that news hits CNN and CNBC and Bloomberg, many who have always trusted Nokia will indeed be crushed. They will never trust Nokia again.
This year will be a symphony of despair in investor news about Nokia. Every analyst will fall over themselves explaining how Nokia is actually headed for even worse times - as it will - and why the bad news wont stop - as it won't - and why things can get worse still - as they will. Thats not the kind of coverage that helps stem a decline in share prices.
So Nokia is already below the danger point. And the trend continues down. Last week Nokia hit a 14 YEAR low in its share price. And most Nokia analysts project the share price is headed further down. Moody's just yesterday downgraded Nokia (again) now to just two notches above junk status. And major analyst houses like Ovum are now saying the Microsoft strategy is not sustainable. There is no good news for Nokia on the path it is on. But there is an avalanche of bad news. That will push the share price lower, and that brings the sharks. Any day now we will hear of some Gordon Gekko who decides, lets cut up Nokia and sell its parts. That will be the end of the company as we know it. And that death was caused solely by Stephen Elop, the biggest CEO disaster ever seen in a Fortune 500 sized company.
So when we talk of Nokia problems, there are many problems yes, but keep your eyes on the two existential problems. Nokia's Symbian phones are in reseller boycott which will strangle Nokia before next year's mass market Windows phones have time to arrive. And while the damage to Symbian has been enormous, there still is time to undo the deadly damage, if Nokia switched back to its stated MeeGo based startegy - the one with the migration path - Nokia would return to profits still this year. Stephen Elop's misguided obsession with the doomed Microsoft strategy will kill Nokia, his stubborness is now costing Nokia 10 million dollars per day of abandoned profits - yes, Nokia is bleeding 1 Billion dollars of profits abandoned forever, for every 4 months that the Nokia Board waits before firing Elop. But we will not get that far. As we see, there is now the second existential problem, the share price is now too low, and Nokia will be soon bought by someone just for one part of its assets - my guess, the patent portfolio.
And sadly, this second problem started on February 11 when Elop announced his misguided Microsoft strategy and it is only getting worse every day. This was also a totally self-inflicted wound. This is not like Dick Cheney the former US vice president shooting his friend while hunting, in the face. That was an accident. This is like Cheney saw saw his friend later in the hospital, took out his shotgun, aimed carefully at his friends face, and shot him - deliberately. And then, took aim, and shot his friend again! That Nokia very survival is now at stake, is wholly and totally the cause of Stephen Elop. He is destroying Nokia and he must be stopped now. This farce has gone on long enough. Stephen Elop has to be fired, now, while there still exists a Nokia Corporation to salvage any life into the future.