Ah, that was fabulous news to discover when returning online after two days out of coverage. All readers of this blog already knew what I just discovered.. And let me say that essentially all you ever wanted to know about how will this new Nokia deal work, and the sensible analysis about it, is already on this blog, but written by my readers in the comments section (thank you!). I don’t really need to write my own analysis, I could just quote my regular readers.
What is the deal. Microsoft quits its disastrous play into handsets via the purchase of the Nokia handset business. After firing most of the people they brought in, now part of the remains are sold, kind of, back to Nokia. The hopeless venture into ‘Lumia’ brand and Windows based smartphones will be terminated and some of the resources Microsoft had acquired will transition to the Surface tablet (and phablet) business. The end of this to Microsoft branded consumer handsets is going almost as totally a catastrophy as Microsoft’s previous attempt when they bought Danger who had been making the highly popular youth phones branded ‘Sidekick’. Yes, obviously, its also exactly as I predicted when the Nokia-Microsoft sale was announced in 2013, and what I reaffirmed when the deal was completed in 2014 and reminded that Microsoft handset venture continues to be dead, last year in 2015 when Microsoft fired Stephen Elop and gave this project one last chance.
There was that rumor a few days ago that Hon Hai aka Foxconn (makers of iPhones) was buying the remaining Nokia business from Microsoft. I wrote my initial analysis of that rumor. I also argued that it would make sense for Microsoft to sell the remaining ex-Nokia handset business back to Nokia (instead of Hon Hai/Foxconn). I pointed out that Nokia was already coming back to smartphones and Nokia could/should be able to make this loss-making unit turn back into a profitable and growing business (part of Nokia’s core competence is to turn loss-making telecoms businesses back into profits, see Siemens and Motorola networking businesses, plus now the project with Alcatel-Lucent). I speculated that if there now was a deal in the works with Hon Hai/Foxconn then there must have been at least serious talks between Microsoft and Nokia. As the new CEO of Microsoft, Satya Nadella was not involved in the Nokia purchase (that was done by ex-CEO Steve Ballmer) there was no personal reputation or political investment in that decision. Similarly, Microsoft had already written off the total purchase in its accounting books last year, so the sale of the handset business could be done without a penalty in an accounting/finance sense.
Obviously as it turns out, there had been talks with Nokia and the deal is a complicated three-way (four-way) deal where part of the ex-Nokia business is sold to a new Finnish entity, HMD, which now acquires Nokia handset branding rights from Microsoft and handset design aspects. Meanwhile Hon Hai/Foxconn has set up a company called FIH, which will acquire the ex-Nokia featurephone factories, and handset sales and marketing from Microsoft. Because Nokia already had by the original sales contract from 2013 the rights to return to sell smartphones now, this new partnership of HMD and FIH will become a Nokia brand full portfolio company, designing, manufacturing, marketing, selling and distributing smartphones, dumbphones and tablets under the Nokia brand (exclusively) and using what remains of the original Nokia design, manufacturing, marketing, sales and distribution of ‘original’ Nokia. The part left out is Windows smartphone OS and it will be replaced (we all rejoice) with Android. Nokia retains a licencing agreement with this partnership ie the Nokia brand and some share of its market success, without taking much of a risk in two very volatile businesses.
WHY THE DUMBPHONES?
The traditional handset business (dumbphones aka ‘featurephones’) was a 1 Billion handset business sold annually a few years ago but last year sold only 500 million and this year will sell 400 million and the business will be down to near zero handsets sold by year 2020. A dying business, where Nokia’s brand even under Microsoft ownership was still holding a large market share and fierce loyalty among loyal customers in mostly Emerging World countries from India to Nigeria. Nokia brand offering in ‘featurephones’ extended to near-smartphone class with the Asha series of dumbphones that had good cameras, touch-screens, 3G and WiFi connectivity and of course the full internet; they even could take apps that were written in Java such as Angry Birds, Facebook etc. Before then-CEO Stephen Elop (worst CEO in any time among any Fortune 500 sized company in any industry) decided to destroy the Nokia handset business the Nokia handset business was vibrant, highly profitable, growing faster than Apple’s famed iPhone business (yes, its true) with high customer loyalty and a powerful sales and distribution asset.
Stephen Elop (did I say, worst CEO in history, of any industry) did yes destroy the goose that layed the golden eggs. He did that to collect a bizarre bounty on his CEO contract which ended up being an incentive for demolishing the most profitable part of Nokia’s business). A key point to note, was that Nokia was the best among ‘legacy handset manufacturers’ (handset manufacturers who sold both dumbphones and smartphones, as distinct from newer handset makers who only sold smartphones like HTC, Blackberry and Apple) to MIGRATE its dumbphone customers to smartphones. While Motorola, Samsung, LG, SonyEricsson, Huawei, ZTE and others had to accomplish this tough transition, moving customers from relatively modest-cost and modest-capability phones to full smartphones, the others struggled so badly in that transition that every one of Nokia’s rivals had quarters where they produced losses in their handset unit, and their resulting market share in smartphones was WORSE than the share in smartphones. Nokia (up to when Elop - worst CEO of any industry ever - decided to destroy the business) was the only one of the legacy handset makers to report every single quarter of that transition a profit - and the only one whose resulting market share in smartphones was higher than its share in dumbphones. Yes, Motorola, SonyEricsson, LG, Samsung etc all saw a loss in market share when they tried to move their customers to smartphones but not Nokia. Nokia was able to GAIN market share while executing this tough and expensive transition. And only Nokia was doing that profitably.
So on the dumbphone business, its not a totally dead duck that this new Nokia-HMD-FIH partnership is reacquiring. It is an interesting asset which is actually profitable and still sells in the range of 80 million dumbphones per year, and which is the type of business, that Nokia once was the best in the business, at transitioning to smartphones. Its not inconceivable that Nokia is able to transition all of this last 80 million dumbphone customer base to smartphones in the next 36-48 months. These would be extremely low-cost smartphones of course, but still they would be smartphones. 80 million handsets is a 4% market share of total handset market. 80 million smartphones would have been a 5% market share last year in smartphones, and would put this unit in contention for roughly a 4th place finish in the Top 10. That is IGNORING the top-end and current Lumia etc smartphone potential. This is why this new partnership actually WANTS the old dumbphone unit ‘back’ from Microsoft. They are genuine Nokia mobile phones with excellent market share, a strong global sales and distribution organization and a high volume of handset production in very modern factories, with very competent component sourcing, etc. It is a good foundation to start from.
Note that this ‘dying’ part of ex-Nokia dumbphone business holds about a 15% market share in dumbphones currently and its main rival globally is.. Samsung. But the BUSINESS performance of this unit had suffered from 2011 onwards (Stephen Elop worst CEO ever) and still suffered from bad carrier relationships by Microsoft up to today. This unit could see a modest ‘revival’ in its last years. The Nokia basic phones are very well made, fit their intended customers very well, with aspects such as basic cameras, in-built FM radios, great battery life, etc. Once the ‘anti Microsoft’ attitude by the carrier community and distribution is removed, this unit should achieve its full potential while the HMD-FIH partnership prepared for the final migration of remaining Nokia brand customers to low-end Android smartphones.
ANDROID NOKIA SMARTPHONES
The eagerly-awaited part of this partnership is the ‘proper’ transition of Nokia from dead OS platform Windows to Android. When I speculated on what a pure Foxconn/Hon Hai purchase of the ex-Nokia business from Microsoft might become, I said I expected Foxconn/Hon Hai to focus on low-end and at best mid-price smartphones on Android to gain sales volume, and mostly ignoring the top end ‘flagship’ class contest. I also thought that Hon Hai/Foxconn would not want the actual factories nor the sales and distribution staff from Microsoft which once belonged to Nokia. Now in this new HMD-FIH partnership, essentially ‘the full Nokia’ handset business, of what is left, is transferred in parts to these two partners. Rather than just pursue a large volume low-end business, this partnership will be well prepared to actually ‘compete’ fully for a total smartphone portfolio play. Expect Nokia brand to rapidly return to flagship class smartphones and then several models all the way far far below where day Apple’s new iPhone 5 SE is priced. Because HMD has acquired Nokia design and intellectual property aspects, this new partnership can pursue ‘typical’ award-winning top-end smartphones. But differing from the past 5 years the new HMD-FIH partnership will not be stuck trying to push a dead Windows OS, but rather can thrive using the Android OS (which powers about 80% of all smartphones in use and sold in 83% of new smartphones last year).
I mentioned that Nokia designed a series of 3 ‘X Series’ Nokia Android smartphones in early 2014 just before the handset business was handed over to Microsoft. Microsoft then immediately ended those phones. They were low end smartphones but they did achieve a nice start in sales. They were ‘typical’ low-end smartphones of modest specs. But they also were priced to sell. When we consider the upcoming portfolio, expect several models as updates to those models (and possibly even launching a few of them still now, at lower prices). The more interesting part was Nokia’s R&D project for handsets (and tablets) for Android. That - which is kind of the father of FIH - has already DESIGNED Android based ‘new’ Nokia smartphones, which this unit (while still at Nokia) was hoping to then find a partner like Hon Hai/Foxconn to start to manufacture and sell. In that way, the transition from dead Windows to Android is not starting ‘from scratch’ like it did when LG went through this same process - they tried to go purely Windows first, before admitting its not viable and ended Windows and went fully to Android where most of LG’s rivals had already gone. So we could see (hopefully will see) the first new Nokia Android smartphones relatively soon. I think a Christmas launch of new Nokia Android smartphones is optimistic (but might happen in small volume) but a Spring 2017 roll-out should be very feasible as this deal is now announced in May of 2016.
We then need to think of Nokia and its potential. Apple did not invent the smartphone (in fact the first iPhone of 2007 was not even a smartphone, it was only a high-end expensive featurephone). Nokia invented the smartphone. Some foolish pundits and mostly US based ‘experts’ have peddled the myth that Nokia was somehow behind on the trends in smartphones. Nothing could be further from the truth. Lets take Apple. All major developments on Apple’s iPhone, as announced by Apple both on the hardware to the iPhone and the iOS operating system - all of them - had already existed on Nokia flagship class smartphones - sold YEARS before that latest model iPhone was annoucned. This was true all the way to last year, 2015. Yes, when Apple introduced phablets - Nokia did them in 2013 - and when Apple introduced a mobile wallet Nokia had done Nokia money back in 2010. Nokia had NFC on its smartphones long before Apple, and better cameras, plus a long slew of features, several that Apple STILL has not implemented (such as microSD card slot). What Nokia was particularly good at, was adding features that are popular in the Emerging World from the in-built FM radio, to dual SIM, to the in-built flashlight/torch function. And on the pricing, Nokia had pursued lower-end smartphones long before Apple decided to go to lower-end smartphones. Finally the world distribution, Nokia was in India, China, Brazil, Nigeria etc for years and years before Apple started to pursue those markets. It is simply ignorance to peddle the myth that Nokia was ‘behind’ Apple. As I said, the last year before Elop (worst CEO ever) destroyed Nokia’s handset business, in year 2010, Nokia grew MORE in smartphone business than Apple did. Apple was not CATCHING up to Nokia. Nokia was more that twice as big in market share as Apple’s iPhone - and Nokia was PULLING AWAY from Apple, while Nokia reported its most profitable smartphone quarter just before Elop (worst CEO ever) suddenly caused the total collapse of the business.
Nokia knows what handset customers want. Nokia knows what is a smartphone, Nokia literally invented the smartphone. While the original iPhone of 2007 was a revolution (and I said so back then) after that revolution, Apple’s total iPhone strategy was to add features that Nokia had in its smartphones - but on typically a four-year lag. Who was following whom? Nokia knows how to design great phones and to add features and abilities that consumers want and fall in love with. Like now, Apple is rumored to add an optical zoom (aka ‘real zoom’) to its next iPhone, the iPhone 7. It is expected to be either a 2x or 3x optical zoom. Nokia again, has done all that, but when did Nokia do the world’s first smartphone with optical zoom? Nokia did that LITERALLY ten years ago, in 2006. It was the N93. And it was a 3x optical zoom, while Apple might do a lesser zoom now. Or take Xenon flash (aka ‘real flash’ versus the LED flash on most smartphones). Apple still doesn’t do Xenon flash on iPhones. Nokia had the first Xenon flash in 2007.
And Nokia’s massive image sensor, the Pureview with 41 megapixels. The image density was literally the best on planet earth. Literally the largest camera sensor of any camera on the planet, from any camera brand from Nikon to Canon with pro cameras costing 10,000 dollars without their lenses; or any other pro camera including the Hasselblads and the like. And why do I say ‘on planet earth’ - because the only camera sensor even more advanced than Nokia’s Pureview 41mp sensor, when it was launched in 2012, was in orbit, used on US spy satellites which had 64mp sensors. There is much more to camera quality than who has more megapixels, but in terms of image resolution - the sharpness of detail - then megapixels matter. Nokia has still today (in Microsoft’s Lumia) the largest sensor ever put into any cameraphone. Now this FIH-HMD partnership also reacquires that tech, and we can expect more super-cameras on future Nokia flagships. Oh did I mention, the camera function this year becomes the most used feature of any phone, ahead of messaging (and far ahead of voice calls or internet or apps or Facebook or anything else). Who leads whom? Nokia KNOWS how to do great smartphones. What it had, was a bad OS and the sales boycott against Microsoft by the carrier community.
RETURN OF THE REAL NOKIA
So the Windows project was a disaster yes. Nokia had never stopped making great hardware - Nokia even with Windows was winning best phone awards. But the sales and distribution channel was strangling all Windows makers - and all other giant brands left the Windows family by the end of 2011 (yes at one point, 7 of the Top 10 largest handset makers offered Windows smartphones but Windows never passed 12% total market share. Nokia had 29% market share the year before Elop - worst CEO ever - wrecked that business).
Now the remains of what once was the world’s dominating handset juggernaut, but including parts of its legendary design, its overpowering sales and marketing, and its superbly efficent factories, can be ‘released’ from the restraints and constraints of Windows. Now the question is primarily, on how quickly and with how broad a portfolio will this new FIH-HMD make its comeback. I’d love to see the first Nokia Android smartphones this year but lets say they come back in any meaningful way in terms of handsets and their sales reach only next year. Lets say by the end of 2017 Nokia should have at least 5 Android models, maybe something like 8; and including one clear flagship with Pureview camera, Xenon flash etc. That Nokia brand should be at about 3% market share for Q4 of next year. That is four times better than what the same unit, selling Lumia brand on Windows is doing now, in Q1 of 2016. It will be a massive slap in the face of Windows and Microsoft, when this happens.
Then Nokia should be expanding, mostly further down in the price range, but also across more niche markets (I half expect and fully hope for a return of ‘The Communicator’ a full touch-screen large screen flaship class superphone with slider/folder physical QWERTY keyboard, in the style of the Nokia E7 and the N950). Nokia has its own ‘skunk works’ and owns a vast array of patents in the handset and wearable and portable gadget space, we could see many new ideas coming in near-future flagship class phones. But expect most of the new Nokia to be roughly iPhone-a-clones, slab touch-screen ‘generic’ smartphone designs like nearly all of any other Samsung Galaxy or LG or HTC or Sony or Huawei or Xiaomi smartphone that runs on Android. But a portfolio of at least 10 and could be as many as 20 smartphone models by Q4 of 2018 also means a market share well past 5% and Nokia brand fighting for the 4th ranking just outside the Top 3 of global smartphone brands by market share. The last time Nokia had a smartphone market share higher than 4% was in Q2 of 2012, when still more than half of Nokia smartphones sold, were powered by Symbian or MeeGo. The story will be the incredible come-back of Nokia and the damage is likely to be most felt by Samsung but also several of the other current Top 10 brands like LG. I strong recovery by Nokia can well have Sony quit its phone business and HTC and Blackberry to finally fold.
A recovery spirit with the rump-Nokia and its ‘last survivors’ now with FIH-HMD - will power the unit to more heroic and brave attempts and a continuing growth where for 2019 I think Nokia will be challenging Huawei for the Top 3 position. Nokia might be at around 7% to 8% market share which in 2019 will mean something around 135 to 150 million smartphones sold globally. Microsoft sold 21 million Lumia/Windows smartphones in the past 12 months. Nokia’s best year was 2010 when it sold 103.6 million smartphones. But as this recovery-Nokia returns to its ‘natural’ market position as a highly beloved, features-packed, premium phone brand but selling in all markets and at all price points, the fight will get tougher. From 2019 the ‘bounce back’ will be completed and I think its very likely that Samsung will still the biggest smartphone maker and Apple number 2, but the race will be on for number 3 and Nokia as FIH-HMD will be perceived as one of the strongest competitors in that market heading into the next decade. It is great news for all fans of mobile phones and smartphones. It is also great news for Finland and for fans of Nokia. This is pretty close to a ‘best case’ scenario of how Nokia could come back, and yes, we will finally get a full portfolio of ‘real’ Nokia smartphones running full Android. Tervetuloa takaisin Nokia!! Welcome back Nokia !!