First Look into Microsoft Nokia Smartphones in 2012 and 2013. Expect climb-back to barely 8% markets share by Q4 of... 2013 - best case scenario

Modelling the Upscale Potential for Nokia-Microsoft Smartphones in 2012 and 2013 - Best Case Scenario

EXECUTIVE SUMMARY

This is a longer blog, with some mathematical modeling and showing the logic involved. Some of my readers will want to see how I came to the conclusions. But others may only want the top-line numbers, as this is a series of blogs studying the biggest destruction of market value of any corporation in the history of technology companies. So here is the overall projection. Please read the full blog to see how I came to this projection. And please note, these are based on real world smartphone performance numbers and an absolute best-case, ie using Google Android and Apple iPhone as the benchmark - even the most optimistic Nokia smartphone execs will not claim they can match Google Android or Apple iPhone with the Microsoft Windows Phone performance. But this is what the Noki-Soft Micro-Kia smartphone performance looks like from end of 2011 to end of 2013 (see previous blog for year 2011 performance how we get to 11 million in Q4 of this year): (and note, from Q3 2011 all numbers are projections by my consultancy, TomiAhonen Consulting)

Q4 2009 - 28 M total Nokia Symbian smartphones (actual this was 29% market share before Microsoft announced)

Q1 2011 - 24 M total Nokia Symbian smartphones (actual)
Q2 2011 - 17 M total Nokia Symbian smartphones (actual this is 15% market share today)
Q3 2011 - 13 M total Nokia Symbian smartphones
Q4 2011 - 11 M total Nokia smartphones - 1 M WP7 + 10 M Symbian (Nokia market share hits 7% by time Microsoft phones arrive)

Q1 2012 - 11 M total Nokia smartphones - 4 M WP7 + 7 M Symbian
Q2 2012 - 11 M total Nokia smartphones - 7 M WP7 + 4 M Symbian
Q3 2012 - 11 M total Nokia smartphones - 10 M WP7 + 1 M Symbian (Nokia market share bottoms out at 6% before starting painful and slow climb back)
Q4 2012 - 12.4 M total Nokia Microsoft WP7 smartphones

Q1 2013 - 14.0 M total Nokia Microsoft WP7 smartphones
Q2 2013 - 15.9 M total Nokia Microsoft WP7 smartphones
Q3 2013 - 17.9 M total Nokia Microsoft WP7 smartphones
Q4 2013 - 20.3 M total Nokia Microsoft WP7 smartphones (this will be 8% market share)

I will be returning with more analysis of those numbers, adding the value calculations, average sales prices, total revenues, profits etc - and calculating the true cost that Stephen Elop's mad strategy is now costing Nokia. I hope to have that for you tomorrow on this blog. But yes, this is the best case scenario, and Nokia in Q4 of 2010 saw increasing smartphone sales (that is true!) with increasing average sales prices and increasing profits (that is true! it means Nokia's Symbian was not failing in the market, it was actually a hit product that was then killed by CEO Stephen Elop in February). And Nokia trades the world's biggest smartphone OS platform, with 29% market share and growing sales, growing average prices and growing profits, for 8% market share with diminishing average sales prices and vanishing profits. But please read the full blog to understand how I get to these numbers and why this is indeed the best case scenario for Nokia.

HE DID NOT ANTICIPATE THE OSBORNE EFFECT?

We now have the first full quarterly data on what the self-inflicted damage of the 'Osborne Effect' as caused by Nokia CEO Stephen Elop is causing to Nokia's current line of smartphones. We also know that the reseller market has put Nokia smartphones on a sales boycott (Nokia acknowledges as much, with Stephen Elop saying there were "unexpected sales and inventory patterns" and Nokia explaining in the Q2 results "distributors and operators purchased fewer of our devices across our portfolio as they reduced inventories of Nokia devices." Thats trying to paint a nice picture over the cruel reality of a reseller boycott, as has been reported in the press since March of this year.)

 

As regular readers know, I was one of the first analysts to make a projection of what the February 11 announcement of the Nokia-Microsoft alliance would do to year 2011 Nokia smartphone sales, on this blog, on February 15. That blog was widely referenced and many commented that while my general direction was correct, I was being too harsh on Nokia, that the damage would not be so bad as I projected. At the time I said it was my best case. Unfortunately that turned out to be true. All of the individual elements I projected - declining market share, declining unit sales, declining average sales prices, declining total revenues and declining (vanishing) profits - turned out to be true. But as I warned, that was the 'rosy' scenario. The reality was much worse. Most of the projections I had anticipated for Q4 have already happened now by Q2 or are happening as we speak in Q3.

But that projection was made with the best available knowledge, and without knowing really how badly Nokia sales would decline (only knowing they would). Now we have one full quarter of data and can give a much more accurate forecast. And now we can clearly see that Nokia's market share in smartphones will continue to collapse through Q3 and Q4, as Nokia desperately attempts to push ever more undesirable Symbian based smartphones to the market - another 10 new models will still be released this year, says Nokia. They will fare increasingly worse in the market. By the end of Q4, Nokia's market share will be about 7% and its sales of smartphones will have fallen to about 11 million. To compare, in Q4 of 2010, Nokia's market share was 29% and it sold over 28 million smartphones.

WORLD RECORD DESTRUCTION OF A BRAND

 

I have made the point before, but need to re-iterate. Nokia's Symbian based smartphones had been suffering in the market recently, as late as the summer of 2010. But by the Autumn, for Q4, when the new Symbian operating system version, called S^3 had shipped on for example the N8 smartphone, Nokia's Symbian based smartphone platform was in strong rebound mode.

 

That may sound strange to many readers, but I do not deal with fanatasies and myths on this blog - I deal with the real world numbers and facts. We now have not only the sales performance numbers, we have Nokia's re-organization-based accounting - we can see the actual performance of the smartphone unit! So going from Q3 of 2010, when Nokia did not have Symbian S^3 based smartphones, Nokia sold 26.5 million smartphones, at an average sales price (ASP) of 136 Euros (177 US dollars). The general trend of the ASP for Nokia had been falling by about 10 Euros (about 7%) per QUARTER. The total revenues of the smartphone unit was 3.6 Billion Euros (about 4.7 Billion USD) and the profitability of the smartphone unit was at 9.3%. The total amount of profit ("Contribution") by the smartphone unit was 335 million Euros (435 million USD).

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.

In Q4 of 2010, Nokia grew smartphone sales to 28.3 million units (7% growth). You cannot claim that Nokia's Symbian sales were "declining" or in any way "suffering." Nokia Symbian based smartphone sales were growing. That is a fact. And in size, Nokia at Q4 of last year was quite literally as big as all smartphones made by Apple and Samsung added together (these would both individually pass Nokia by Q2). That is a fact. Nokia ASP grew to 155 Euros (200 US dollars) which reflected a jump of 14% from just one quarter before. That is a fact. If we add in the trend line, that the ASP had been in continuous decline of about 7%, the actual jump in Nokia ASP was a breathtaking 21% !!!! Don't tell me Nokia was not back. The phones were jumping off the shelves. And how did this impact Nokia revenues? In Q4 Nokia smartphone unit geneated 4.4 Billion Euros of revenues (5.7 Billion USD). That was a growth of 22% - in just one quarter! That is a fact. And what of profits. Nokia's profit margin jumped ------  34% !!!!!! ---- to 12.5%. That is a fact. And total profits of the smartphone unit powered by the new Symbian S^3 phones rocketed up by ------- 64% ----- !!!!! ------- Sixty Four Percent ------ in one quarter ! ------ to 548 million Euros (712 million USD). That is a fact. See Nokia official Quarterly Results Q3, and Q4 to verify all those numbers, as well as the new official Nokia accounting reports for profitability of Nokia units in the 4 quarters of 2010.

If you can grow unit sales, and grow average sales prices, and grow profitability of your product line - there is absolutely no way that product line is suffering in the market. It is a hit product (line). Symbian S^3 was a hit! It was on a trajectory to produce close to a Billion dollars of profit per quarter this spring until Stephen Elop jumped on the success and sabotaged it with his idiotically-timed Microsoft announcement. Note, I am not saying he was an idiot to select Microsoft (that remains to be seen). But all tech experts agree, it was his moronic timing that caused Nokia smartphone sales to collapse.

How badly? We cannot look at Q1 because the announcement came in the middle of that quarter. But when we look at Q2 results - compare to the above - Nokia unit sales are down to 16.7 milion (down 59% of where they were before he started). That is a fact. Nokia ASP has fallen to 142 Euros (down 9%). That is a fact. Nokia revenues are down to almost half at 2.4 Billion Euros.That is a fact.  The positive profitability of the smartphone unit is now generating a loss with 'negative profitability' of (-)6.2%. That is a fact. And obviously the smartphone unit generated a loss of 147 million Euros, a reversal of 695 million Euros of profit destroyed (904 million US dollars). That is a fact.

It is absolutely concretely true, that Nokia's Symbian S^3 based smartphone sales were growing, with an unprecedented jump in average sales price, matched with a 68% leap in profits generated by the smartphone unit. This is not failure. But it is also absolutely concretely true, that by Q2 of 2011, all those trends had been terminated and reversed so Nokia smartphone sales were declining at not just Nokia's biggest record-setting rate, the worst loss in sales of any mobile phone maker in any quarter ever (including Panasonic, Siemens, Sony, Ericsson, Motorola, Palm, etc). And Nokia reversed increase in average sales price to a decline, and turned dramatic profit growth to a devastating crash-dive into loss-making.

The phones did not change. The OS did not change. The Ovi store did not change. In fact, since Q4, the tech press have been positively impressed by newer Nokia phones such as the E7 and X7; by the newest Symbian version called Anna and the continued great growth of the Ovi store. The change between Q4 and Q2 is February 11, when Stephen Elop announced his Microsoft strategy - and ever since, all channels report collapsing Nokia sales from European big markets like UK, France, Germany etc to Asia's giant markets like China, India etc. The only thing that changed, is 'the announcement' of February 11. It is Stephen Elop and only Stephen Elop that killed the Nokia success, smartphone growth, average sales price jump, and massive leap in profits, that the Symbian based Nokia smarpthones had been generating. The CEO killed the success of his hit products - destroyed the cash cow - killed the goose that lays the golden eggs - snatched defeat from the jaws of victory. (But I will return on this blog to count what is the true cost of this wanton destruction of value) 

MAYBE MICROSOFT IS THE RIGHT STRATEGY?

Yes. Maybe the Microsoft strategy turns out to be the right strategy? But to be so, it would have to OUTPERFORM what Symbian S^3 was doing in Q4 of 2010, before Stephen Elop's ill-timed February surprise killed Symbian's come-back. So can the Microsoft strategy generate better unit sales than 28.3 million smartphones per quarter (a market share of 29% so by 2012 would be about 46 million smartphone sales per quarter, and by 2013 produce about 58 million smartphone sales per quarter), with better than 155 Euro/200 US dollar Average Sales Price, to produce better than 4.4 Billion Euros (5.7 Billion US dollars) of revenues (plus the growth rate as per above) - and better than 12.5% profitability, where the smartphone unit would generate more than 548 million Euros (712 million US dollars) of profits per quarter (again, doubling to more than 1 Billion Euros of profits per quarter by 2013).

If the Microsoft strategy can reasonably - reasonably - be seen to generate better performance, then yes, the Microsoft strategy is worth pursuing. If the Microsoft strategy is destined to do far worse, then Nokia CEO Stephen Elop has committed the ultimate crime as a CEO of a major corporation, taking a winning hit product line and destroyed it replacing it with a weaker substitute. If so, he needs to be fired for incompetence - and Nokia must abandon this futile path of self-destruction immediately!

And now we have the first view to how likely is the Microsoft resurgence. We know Nokia will end this year with about 7% market share and about 11 million smartphone sales (generating massive losses) as it launches the first Microsoft based smartphone a little before Christmas.

TRANSITION YEAR 2012

So, if Q4 of 2011 ends with Nokia selling 11 million smartphones per quarter, how will 2012 go? Well, we have a transition of one smartphone OS to another. There is really no model for us to compare. But lets be 'provocative' and offer a 'best case'. What is the fastest any - any - smartphone OS has ever gone from zero sales to 11 million units per quarter? That was not Microsoft's Windows Phone 7. That was not Microsoft's Windows Mobile. It is not Blackberry, it is not Palm, it is not Samsung's bada either. And it is not Apple's iPhone. The fastest OS ever to ramp up from zero to 11 million was ... Google's Android, which did it in four quarters.

Please recognize this is quite a huge leap of faith, but lets say, Microsoft and Nokia manage to match the fastest ramp-up ever (ignoring all the bad will that Microsoft has now been generating with its under-performing Windows Phone OS, which after all, launched in 2010 and still hasn't reached even 2% market share and lingers in 7th place among smartphone operating systems behind even Samsung's bada and Microsoft's own, older OS, Windows Mobile). So, lets say Nokia-Microsoft based Windows Phone handsets ramp up from zero at start of Q4 of 2011, to 11 million sold by Q3 of 2011. And to keep the math 'easy' lets say the Nokia Symbian ramp-down will exactly mirror that increase, so for every million lost in Symbian sales, Microsoft Windows Phone exactly matches that decline, picking up every lost Symbian sales. So we get this pattern for the first 12 months of Nokia Microsoft Windows Phone + Symbian combined sales:

 

Q4 2011 - 11 million

Q1 2012 - 11 million

Q2 2012 - 11 million

Q3 2012 - 11 million

We can also give a rough model of a linear transition (only as a guide) so if Symbian starts with 10 million to 1 million at Q4 of 2012, and reverses that by Q3 of 2012, we'd get this pattern:

Q4 2011 - 11 million - 1 million WP7 + 10 million Symbian

Q1 2012 - 11 million - 4 million WP7 + 7 million Symbian

Q2 2012 - 11 million - 7 million WP7 + 4 million Symbian

Q3 2012 - 11 million - 10 million WP7 + 1 million Symbian

 

CANNOT BE BETTER

 

Note, this is taking the fastest ramp-up of any OS ever, by Android, when HTC was hot, when Samsung was hot, when Motorola was in full fight-back mode etc. It was a concerted effort by all the major brands in the Android camp - and was further powered by Google's own hype and excitement around the 'Nexus One' smartphone which Google labeled a 'superphone'. While that Nexus One didn't end up being the 'iPhone killer' that Google had hoped, the hype around Nexus One helped HTC, Samsung etc sell many more Android phones.

So. Please do not for one second think Nokia and Microsoft can do better than this. We use the most successful ramp-up ever, and even with that, we find that Microsoft WP7 sales only match up the ramp-down of Nokia Symbian sales (where Nokia's original 150 million commitment from February 2011, suggested a linear decline to exactly that time. Nokia should have ended Symbian production in summer of 2012).

Note on CEO Stephen Elop 'promise' of 150 Million more Symbian phones. this model pushes Symbian one full quarter FURTHER than all analysts concluded by Elop's February 11 announcement. And how many total Symbian smartphones will Nokia end up producing in this best case scenario before switching to Microsoft? 62 Million. Yes. Only 62 million! Nokia CEO Stephen Elop is lying to us and the Symbian developer community by a factor of 59% ! He is going to under-deliver on his promise by 6 out of 10 promised Symbian phones. There will never be 150 Symbian phones with Stephen Elop in charge with his mad Microsoft strategy. 62 million - is the BEST CASE scenario! Any more that he'd now push the utterly undesirable Symbian phones for 2012 and 2013, would only hurt Microsoft WP7 phone sales - AND hurt Nokia profitability as long as there exists a Nokia Microsoft based phone out there, nobody wants Symbian phones, no matter how great Symbian S^3 or its latest Anna version or any update might be. 62 Million is the new 150 Million. Be prepared for that number. Stephen Elop is obviously utterly incompetent.

Note also on MeeGo, while I am on it. As of now, Nokia is saying that it will not release MeeGo into broad distribution and will not expand the sales of MeeGo beyond the one premium phone model. So the model here assumes no significant MeeGo sales (in the several millions) and what perhaps one or two million total MeeGo sales might be, will be included in Symbian sales).

EMPIRE STRIKES BACK: MICROSOFT GROWTH POTENTIAL?

So, now we know that Nokia Microsoft WP7 smartphones are in transition until about the end of Q3 of 2012. And the first quarter of true Micro-Kia/Noki-Soft comeback will not start until Christmas Quarter of 2012. Yes. Please note first, the pain will continue absolutely definitely until not Christmas Quarter of this year 2011 - no, the pain will continue on this strategy until Christmas Quarter of 2012. And then lets see how we can project growth for Nokia using the Microsoft WP7 operating system for its smartphones.

 

Where can we find a good model to project. There are not many smartphone manufacturers who have grown bigger than 11 million and kept growing for several quarters after that. We only have two - Blackberry and Apple. So lets again take the very best out there, Apple's iPhone. After Apple had passed 11 million sales, at that level, how fast has Apple been growing since? This is the world's biggest smartphone maker now, the company that toppled Nokia. It is certainly an 'optimistic' scenario - most would say that under no circumstances can Nokia, with or without Microsoft, manage as good a market reception as Apple's iPhone has in the recent past. But lets use this as the model. This is clearly the topmost optimistic scenario. Apple's iPhone has been growing at a quarterly rate of 13%. And look at what we get:

Q3 2012 - 11.0 million Nokia Microsoft WP7 smartphone sales
Q4 2012 - 12.4 million Nokia Microsoft WP7 smartphone sales
Q1 2013 - 14.0 million Nokia Microsoft WP7 smartphone sales
Q2 2013 - 15.9 million Nokia Microsoft WP7 smartphone sales
Q3 2013 - 17.9 million Nokia Microsoft WP7 smartphone sales
Q4 2013 - 20.3 million Nokia Microsoft WP7 smartphone sales

THAT IS THE BEST CASE 2012 + THE BEST CASE 2013

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%.

And for those who say 'but other Microsoft manufacturers' yes - how excited do you think they will be to see Microsoft prioritizing Nokia ahead of them? That Microsoft actually paid 'billions' to Nokia to bring it to the WP7 family? We already now see WP7 manufacturers diminishing WP7 production and prioritizing other operating systems (Samsung does its own bada OS, HTC reducing WP7 phones in favor of Android, same for LG etc). Maybe Microsoft can get 2% of phones made by other manufacturers, so it might see a total MS market share in smartphones of 8% by Q4 of 2012 and as 'high' as 10% by Q4 of 2013.

Note that Microsoft has earlier had 12% market share in smartphones as recently as 2006 (before the iPhone obviously) so even after all that, Microsoft would be a bit-player at best - smaller than Android, smaller than the iPhone, smaller than Samsung's bada, and likely also smaller than Blackberry. Its possible even at 10% that Microsoft would be smaller than MeeGo even without Nokia's support of MeeGo, as there are several big smarpthone makers - and China Mobile the world's biggest carrier/mobile operator - committed to MeeGo. So any hopes of 'the third ecosystem' using Microsoft is a fantasy. Under the absolute best-case scenario, Microsoft might just break 10% two-and-a-half years from now. Best case. And trust me, that won't happen. It will be worse than that. Microsoft will linger in the single digits as a has-been in smarthphones, once the second biggest smartphone platform, whose manufacturers and suppliers all soured on Microsoft as the Evil Empire and one after another, abandoned Microsoft to its own devices. How long will Nokia punish itself on this path to ruin? I trust Nokia management is smart enough to jump off the Microsoft bandwagon as soon as they can.

Also remember, there were several analyst houses who promised that Microsoft based smartphones could propel Nokia back to about 20% market share (or even better than that) and achieve a 'third ecosystem' level of market share. Those projections were made before these Q2 results were known. Those analyst houses will look supremely silly if they dare repeat those projections now. It is totally inconceivable that Microsoft-Nokia would somehow achieve 20% in 2012 - or even by 2013. They would have to do literally TWICE as well as Android at its best, and then twice as well as Apple iPhone at its best. With Microsoft? Microsoft? Listen to yourself! Microsoft the Empire still known as Evil? With Steve 'I love to scr*w any partner' Ballmer in charge? With one reseller boycott already hurting Nokia and another even bigger reseller boycott hitting Microsoft. What planet would the analyst live on, to think now after these Q2 results, that Microsoft and Nokia can recover to 20% market share. When Nokia already destroyed 31% of its market share now, in just 3 months! No. The 20% vision is a sheer fantasy and the analyst houses who talked of such rates will quietly downgrade their projections to be closer to where I project Nokia-Microsoft now. It will be embarrassing to them, so they will do it in small stages, but expect each of them to issue updates that show lower forecasts for this alliance, every time.. 

WE ARE WITNESSING THE DESTRUCTION OF A JUGGERNAUT

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. The Microsoft 'strategy' cannot recover Nokia to more than perhaps about half that level at 8% in absolute best case scenario - it would take superhuman effort just to match the models I used - I promise you Nokia-Microsoft cannot match Google's Android ramp-up rate, and cannot match Apple's iPhone sales climb.

There is a huge demand for Nokia premium phones by consumers (remember, they were willing to sustain a huge JUMP in average sales prices and MASSIVE jump in profits just before this silly announcement). The Nokia sales decline is not because Nokia phones are bad. It is not because Nokia OS Symbian is bad. It is not because Nokia apps or 'eco system' is bad (Ovi store was world's second-bestselling app store before Elop killed Symbian). Even today, if Nokia abandoned the ruinous Microsoft path, and returned to Symbian - even as crippled as Symbian is now after the massacre by Stephen Elop, if Nokia abandoned Microsoft and restored the migration path to MeeGo - Nokia would DEFINITELY do BETTER than with Microsoft. The Microsoft path is certain ruin of Nokia.

LOST SALES, LOST REVENUES, LOST PROFITS !!!!

But even if somehow Nokia and Microsoft were able to produce this miracle, Nokia will have replaced a growing smartphone performance, where Nokia grew unit sales, grew average sales prices, grew total revenues, grew profitability and grew profits - and replaces this with a miniscule level of sales, after the next ten - ten - quarters, two-and-a-half-years - making losses with the Symbian unit, seeing declining average sales prices, declining total revenues, declining profitability (ie increased losses) and yes, what was Nokia's cash cow, its goose that layed the golden eggs, the smartphone unit, is now a liability.

 

That will be replaced by Microsoft Windows Phone 7 based smartphones. Can they be more desirable by the market? Not likely. The latest Windows Phone 7 to Symbian comparison we had, (last quarter for full numbers) had those so-called 'obsolete' Symbian smartphones by several manufacturers including obviously Nokia, outselling all smartphones made by Microsoft partners, by a mere... 15 to 1. What about the ASP for Microsoft? The head of of Microsoft's Windows Phone unit, Andy Lees has told us that Microsoft WP7 based phones will not be premium phones, their average prices will be only half the industry's ASP, ie they can be expected to yield between 100 and 150 US dollars (and declining) next year ! Yes, Microsoft knows its own smartphones are so undesirable, they will see prices HALVED in ONE YEAR. This, while Nokia's last quarter of un-damaged Symbian sales yielded average sales of over 200 dollars and growing by 14% in just one quarter (thats 48% cumulative growth over 4 quarters)! How utterly idiotic is this switch away from the successful Symbian to the colossal failure Microsoft WP7? When their own head tells the world, WP7 phones will see average prices falling to half in only one year! Symbian phones are so good, they increase prices by half (on an annual level) and these are replaced by undesirable Microsoft phones whose prices are cut in half (on an annual level). Duh! Earth calling Pluto? Hello space cadets? Want to return to reality, perhaps? 

How incredibly undesirable are those Microsoft phones if this is happening? Even with the reseller boycott of Nokia now, the average prices of Nokia Symbian based smartphones have not fallen more than 9% since February (thats a loss of 20% in one year). And remember, there is a reseller boycott now of Microsoft phones, because the carriers hate Skype. Trust me, they hate Microsoft based phones MORE than they hate Symbian phones. All the evidence also tell us, that switching from Symbian to Microsoft will make Nokia worse off - worse off - than staying with Symbian (and where MeeGo was actually a winning strategy)

So profits then? Surely there must be some logic to this. And yes. There is a "logic" to this, but it is a weird kind of "Stephen Elop logic" where anything good for Microsoft and simultaneously bad for Nokia is somehow 'desirable' for the Nokia CEO. Microsoft Windows Phone based phones cannot do all that current Symbian based phones can do, so there will be downgrades in what the consumers can expect. That cannot help their desirability, especially with any loyal Nokia users. (But sadly, the Nokia internally developed MeeGo OS would be compliant with Nokia features). Microsoft Windows Phone based smartphones are typical Microsoft-style 'resource hogs' so they require higher performance CPUs - not to perform faster - just to keep up with what Symbian was able to do with lower-performance CPUs. So Nokia needs to source more expensive Snapdragon CPU's by Qualcomm to achieve the same level of performance using WP7 as it currently gets from Texas Instruments ARM CPUs running Symbian. And yes, Microsoft WP7 requires more memory installed on the phone just to run. Again, this added memory is not to make consumer get any better functions like more pictures or videos to store - it is to enable WP7 to run! So Nokia hardware costs go up - quite dramatically - with WP7 based phones.

And then there is the royalty. With Symbian, Nokia needs to pay no royalties. If Nokia had gone with MeeGo, its home-grown OS, there would be no royalty to pay (and bizarrely, even the Google Android option would have meant no royalties to pay). But only the Microsoft Windows Phone smartphone OS option has a royalty that Nokia has to pay. Forever. For every smartphone ever made using that OS. Nokia's CEO has taken a totally free Nokia corporation, and enslaved it to Microsoft, and guaranteed Microsoft a massive royalty stream that Nokia never paid before (and Microsoft was spectacularly failing to get from any kind of mass market success before).

Of the major smartphone makers (Apple, Samsung, Nokia, RIM, HTC, SonyEricsson, LG, ZTE, Motorola and Huawei) - all of the others, for either all or at least the majority fo their smartphones, they do not pay any royalty for the OS. Except Nokia.

PROFITABILITY - DON'T THINK APPLE: THINK DELL

So we now see that Nokia will struggle just to manage the decline in smartphone sales. And we see the unit sales go down to 11 million during 2011, will remain at that level with a tiny recover at Q4 of 2012, to about 12.4 million units. And by 2013, Nokia with Microsoft WP7 can slowly recover to selling 8% of all smartphones by Q4 of 2013 - and produce 20.3 million smartphones - under the very best scenario.

 

In this time, Nokia's smartphone average sales prices will continue to crash. I don't say so. Nokia doesn't say so. So says Microsoft's head of Windows Phone. Smartphone average prices with Windows Phone will be cut in half in only one year. How much worse will it be by 2013, is anyone's guess. And during this time Nokia's costs will increase simply on the side of hardware (CPUs, onboard memory etc) and Nokia has to start to pay a per-smartphone royalty to Microsoft. So if you think Nokia's smartphone profitability is now in a squeeze - it will be far more so during 2013.

If there is a Nokia still existing, that pursued this utter madness Microsoft strategy, they will be a bit-player, with at best 8% market share, producing a trivial profit if any. This destruction of Nokia will make New Coke or Toyota Brakes or BP Oil Spill look like a market triumph! What is far more likely under this scenario is that the repeated quarterly disasterous results will result Nokia share price to plummet so low, that Nokia will be sold for scrap years before we get to Q4 of 2013.

The Microsoft Strategy is dead. This analysis just based on the best possible scenario using the absolute best performance in the industry that Nokia and Microsoft would be silly to even promise to match. And this is before we look at all the other reasons why the Microsoft strategy is already still-born, and needs to be scrapped before the end of this year. I will return with that in a later blog. But next, I will do a calculation of how much is Stephen Elop's obstinance now costing Nokia, per quarter and per year. I think that will be illuminating. I hope to do that tomorrow on this blog. How expensive is the Microsoft Muppet. Stay tuned.

UPDATE 26 July - I have now finished the blog with the costs of what Stephen Elop costs Nokia every day simply by showing up at the office. He is the most costly, most damaging CEO of history, his mere presense costs Nokia abandoned profits - profits not revenues - of 10 million dollars every day (actually increasing to 14 million dollars by 2013). Read the blog with all the math.

Comments

[jo]

now tomi u are not alone on this..

many other analyst are predicting the same microsoft +nokia project its going to turn into a big failure.

microsoft have no marketshare and their phone are given away with a free 360. or free on contract.

nokia it's bleeding marketshare and they have uphill battle in a stronger apple and google.

if microsoft wanted nokia to carry wp7 on brand name by the time it's released its going to be dead brand.

[Stanil]

As always excelent analysis!
Couple points:
NOKIA will ship(not sell) 1,5M WP7 devices in Q4. Effectively stuffing the channel. Maybe two models one around 150-200Eur, and another 300Eur(Sea Ray).
Symbian will continue to crash even faster, just look at the portfolios of major european operators, it's non existent.
Operators will not allow Nokia to rise to pre Elop days, it's exciting to have several OEMs with comparable market share.
In Q3 HTC will pass Nokia in smartphones.
In Q4 Nokia will have the same martketshare in smartphones as Motorola, SE and LG.
In Q4 Samsung may pass Nokia overall, some say even in Q3 :) , we'll see the trend in couple days.
Operators are hating, realy realy hating, the two SIM phones, Elop is so eager to promote.
In 2012 there will be another OS transition of Microsoft, will Win8 be a smartfone OS, or only PC and tablet OS, or will WP7 continue to be developped? No body knows for sure.
Funny thing is that N9(MeeGo) may outsell N9(WP7) initialy despite the price premium that Nokia is demanding for N9(MeeGo), if ever Elop allows N9(MeeGo) to market :)
Operators are demanding BIG marketing budget for Nokia phones, the ASP will continue to fall, as will the earnings.
In weeks, maybe days, depending of the earnings of Samsung, Nokia will release info of it's tablet, just to garner attention, they may not ship it ever :)

[cycnus]

Wow Tomi,

You under promise over deliver.
this is a really awesome article.

[AF1]

Tomi, I like Ur view on mobile market, I like Ur topics and sense of humor. Keep up this way!
One and only thing that bothers me - man, U're typing waaaaaay too much text... I mean, all the thoughts that are under th topic can be shortened easily in half.
Readers are readers, U know. Not everyone will sit still for half an hour reading one topic from all over the net ;)

Peace!
A.

[Adrian Bunk]

"With Symbian, Nokia needs to pay no royalties. If Nokia had gone with MeeGo, its home-grown OS, there would be no royalty to pay (and bizarrely, even the Google Android option would have meant no royalties to pay). But only the Microsoft Windows Phone smartphone OS option has a royalty that Nokia has to pay. Forever."

Tomi,

while many of the other things you are writing are true, this Symbian/MeeGo to WP comparison is not fair (but the Android one is a point):

Nokia will have to pay royalties forever, but it will also save money in development costs forever.

[vvaz]

Tomi, you are mistaken in one point. Some (not all - yet?) Android manufacturers are paying royalties on OS to... Microsoft. Supposedly HTC pays 10$ per handset - similar amount to what Apple pays to Nokia in patent royalties.

MS wants 15$ per handset from Samsung and Samsung would agree to 10$. In foreseeable future MS will earn more in Android royalties than on its own OS...

[Boris]

MSFT profits more from Android than from WP7 now, not in the future ;-).

And even more, I agree with some poster from several days ago when he stated that main MSFT task was to kill Symbian sales, and to sunk MeeGo, as that would prop up Android sales, as they already earn more money on Android than WP7.

Remember, MSFT earned nothing from Symbian sales.

So:
1. Kill Sybian and MeeGo =>
2. Larger Android market share.
3. Profit from royalties from Android manufacturers.

1 billion $ they gave to Nokia is nothing compared to rolayties from Android OEMs.

I am sorry if somebody thinks it sounds like conspiracy theory but this is how real world function (welcome to corporativism).

And I guess the only reason why HTC and Samsung manufacture WP7 phones is because of MSFT patents. To explain, if they refused to manufacture them, they could ban via court their Android phones from USA because of patents. Simple as that.

[Youssef Mrabet]

I think that there's almost no way Nokia will drawback from its Microsoft strategy today. The only realistic scenario that I can see for Nokia in order to succeed is maintaining a Meego lineup at the high-end in parallel with its Windows Phones strategy. Starting with the N9, and updating it quickly with another similar phone that would sport better hardware specifications, Nokia can show its commitment to this lineup and attract a lot of buyers.

I don't believe in the strategy of marketing several variations of the same product (C7, N8, E7, X7...), cause it proved not being adapted anymore. It's hard to maintain, needs specific and separate marketing effort for each phone, and dilutes the brand image and effort. Moreover it increases the costs without necessarily producing better gross margin.

To efficiently counter-fight the iPhone, Nokia needs a highly visible product that would be almost perfect and efficiently marketed as so. Such a product can really be the N9. Its unique and very simple UI/UX is a real advantage for non geek users, I see it democratizing the multitasking, enabling a larger user base to see its benefits and use it. All it needs is a quick tutorial at the phone's first setup. The N9 also have all it takes to convince the geek and hardcore users, with its open and highly tweak-able linux based OS. Even fashionistas would be convinced by the device's seamless and unibody design.

Nokia needs to hit Apple with its own weapons, simple and practical ads emphasizing the UI/UX and phone capabilities, perfect design, high value... The Nokia brand is falling quickly, but still didn't vanish or become irrelevant, it is still time to do something!

[Earendil Star]

Just a thought on the hypothesis of Nokia having to pay royalties -on Android- to MS.

This would not have happened. Normally, these royalties are paid if the company has little IP to counter the suitor's (MS in this case) claims.
For Nokia, this means forgetting that it even managed to get royalties from Apple!
Nokia is the INVENTOR of smartphones in the first place, and has such an IP warchest in this field that it is inconceivable to think that they would need to pay anything to MS.

On the contrary! NOKIA COULD PROBABLY HAVE SUED MS AND GOT ROYALTIES ON WP rather than the other way round.

This is the terrible irony: Nokia will now pay MS for royalties on WP, instead of what would probably have happened if they had kept their independence!
Because Elop made no real negotiation with MS. He simply offered Nokia as a gift to MS, as he was supposed to do!

It's a total disgrace, but it must be deriving from a calculated albeit hidden plan.
Hopefully, one day, we will discover what happened behind the scenes in 2010, when Nokia's board chose TH Elop as CEO.
Only then will we understand exactly why Nokia died.

Now, the most likely outcome, is simply that MS will buyout Nokia. It will keep its interesting leftovers (IP, software & hardware technology, know how, carrier relations network, etc.) and sell the rest. This will be much more valuable to MS than having an independent Nokia selling its own WP phones. And the lower Nokia stock falls, the cheaper it will be.

[harry in singapore]

iPhone/iPad is very successful as of now. Android also.

The world of mobile phones esp on the business users part will get very exciting with more apps and esp Office365.

2 major developments will make business use of mobile phones more pervasive and accepted. One is the corporate acceptance of Cloud Computing and adoption by smaller companies. Second is the increasing user friendliness of the apps. Lots of older businesspeople are really lazy to learn too many things and will appreciate the ease of use. The new kids coming into the workforce, expects the use of SmartPhones and Tablets or something similar. They are not necessarily enamoured or dependent on PC.

These business apps are usually not free and lots of $ can be made, when volume is achieved. $10 monthly for 50 million phones is $500m monthly!!!

With Nokia maps and great stuff from Nokia, the eco from MS could mean a lot of $ for Nokia.

I am looking forward to Nokia Windows Phone; primarily for business use. I will subscribe to the useful business apps and my friends who are not that savvy would gladly have a phone that can help in getting their business and daily process more productive. Music & games and videos for entertainment are nice to have BUT not compelling.

[Peter]

@tomi, solid prediction, well done.

After years huge investment on R&D, after the lauching of symbian ^3, ovi store, comes with music, free gps for ever, nokia existing and prospectives consumers love them.

nokia management knows it, nokia board knows it, but why hiring the criminal stephen elop to destroy nokia right when it is turning back with symbiam ^3 and leaps forward with Meego ?

My conclusion is the board planned and stephen elop is the man who executed well.

It is not for the interests of nokia shareholders, employees, distributors, and most importantly nokia precious consumers.

with the sabotaging on the back of nokia precious consumers, they won't go back to nokia any more. they are gone forever.

More blogs/predictions do not make any sense any more for nokia when it is full of crime from the board and the management.

now it requires action to sue them in a Finish Court to bring justice back. it is time put Jorma Ollila and Steven Elop into jail. cancel the enslavement of nokia from ms partner agreement.

with new board and new management, nokia can propel itself with Meego and its own mature ecosystem for sure.

Get away, janathan, you are a garbage, no mre post,please.

[Tomi T Ahonen]

Hi Everybody - thanks for the comments. I will respond to each of you individually as per usual. The only thing is, I will of course not keep any comments by people who did not read the article, so I have removed some who did not read the blog which clearly stated - for example - that the evidence says Nokia Symbian had turned into growth...

Now to the actual comments. I will do these in smaller groups

Hi jo, Stanil, Cygnus, AF1, Adrian, vvaz and Boris

jo - thanks. Yes, its getting worse every day. Also pls monitor my blog, I will shortly blog my calculation of how much Elop is actually costing Nokia every day

Stanil - Thanks. Good views. On the 1.5M shipment number for Q4, I am actually doubtful of that, as Nokia will be ramping up the production, it will come from Taiwan and only sold in limited countries, so I think it would be optimistic to get 1M Nokia branded WP7 phones shipped by Q4. But yeah, 1.5M is still plausibile. I think its quite unlikely they can manage two actual devices to ship prior to Christmas.

About the dual-SIM phones, I hear the same. They are mostly only sold in markets where the handsets are sold primarily through third party resellers - who like them (consumers also obviously like dual SIM) but even in those markets, the carriers/operators hate Nokia and Elop for launching the dual SIM phones and are now punishing Nokia. The problem gets far worse for Nokia as most significant national operators are part of major carrier groups so they can retaliate against Nokia in their full footprint of markets. Again this is something Elop has seriously miscalculated.

As to N9-MeeGo vs N9-WP7 - I totally agree. If Elop were to allow N9-MeeGo to be released in all major Nokia markets, it would certainly outsell the Microsoft version, because the carriers would love to sell a highly desirable non-Symbian Nokia phone but don't want to sell Microsoft. So both they would suppress the WP7 version N9 sales and would promote the MeeGo version. I am sure Elop knows this, has heard this, and still he obstinately refuses to release MeeGo to the main markets. He is simply a coward, he fears if MeeGo is a success, Elop is seen as a failure and incompetent.

Also good point about operators punishing Nokia with marketing budgets. We saw Nokia smartphone marketing shot up 6% in just one quarter and they've slashed after that, their prices by 15% - I am sure when Q3 results come out, the marketing costs of the smartphone unit have again shot up considerably more. Good stuff Stanil, thanks!

cygnus - thanks! Wait until the next installment. I am building a really robust model 'beyond any reasonable doubt' of what is the real cost that Elop is now inflicting on Nokia as permanent irreversable damage... I hope to post tomorrow

AF1 - I hear you. I wish I had the time to edit these down for shorter articles, but please note, AF1 - there are no ads on this blog, you are not charged to read it, and you are not asked to register. I ONLY do this blog out of a hobby and an interest in sharing. I have a day job, I cannot spend days editing the long analysis pieces down into shorter articles like a professional journalist could - honestly, I don't have that kind of time. So please accept, this is the best I can do - and I challenge you to find any other blog with more data, facts, stats and analysis of our industry for free, than mine haha. The 'cost' for you is, sometimes the blog articles may be long. I also warn readers when it is a long article..

Adrian - first, it is factually true that Nokia did not need to pay royalties for Symbian and MeeGo but does now have to pay WP7. But if you argue that there are cost savings, fine, that is a fair point - but I would counter that it is now beyond Nokia's control - they will often have to make changes - or suffer the consequences - of Microsoft making changes - and the R&D of Nokia handsets is certainly more expensive in the short run due to radically different hardware component requirements than before. Maybe over time some savings can be generated, I would argue that would also have happened with MeeGo with the exception, that Nokia would have been in charge and could have directed that evolution to provide Nokia-oriented gains, rather than for example Microsoft own (own staff) or Nokia-rival ie Samsung, LG, HTC etc gains.

vvaz - royalties for patents are a different issue from royalties to use the OS. Nokia has the deepest patent portfolio in smarpthones -look at Apple, it is suing the others, but it settled with Nokia and pays Nokia. Nokia typically negotiates reciprical deals - so it would definitely not be paying anyone - until this ridiculous Stephen Elop-negotiated deal to pay Microsoft into perpetuity. That alone is reason to break the alliance and get rid of Microsoft now, that it has become obvious that Microsoft can never restore Nokia to reasonably strong sales.

Boris - good points. Microsoft knows all about royalties, they get all those royalties from Microsoft Windows sales and Office sales etc. Why is it that essentially all major manufacturers have gotten frustrated and broken their relationships with MS, from HP and Apple on down. Its their ruthless war on the royalties front. I totally agree with your comment, yes MS knows what it is doing. (But Nokia doesn't. They are the lamb being led to the slaughter-house)

Thank you all for the comments, keep them coming, I will return with more responses

Tomi Ahonen :-)

[Asko]

@Jonathan In many companies the CEO will prepare and present his proposal as strategy to the board and then the board will decide if they adopt the strategy or if they require some changes to it.

So it is very likely that Nokia's strategy has been written by Elop and he has managed to sell it to the board by being an excellent used car salesman.

[Giovanni]

Hi Tomi,
we all know Elop previous employer, but what about the BOD members? Ultimately it's their duty to monitor the CEO behaviour so if they don't act then they approve. But why they approve those catastrophic situtation? Who are those BOD members? Their relationships with MS and/or american corporations?
At the end what we're seeing is a (purposefully driven?) shift from european leadership (symbian) to american one (iOS, android and tentative to add WP). Initially it was only stated (even if untruth) but now it is real.

Day by day the conspiracy theory become more and more the only one able to explain the current situation. But can't be Elop alone, there must be the BOD involvement. I think that bloggers like you should press not only Elop but also the individual BOD members

[Brendan]

"Symbian will continue to crash even faster, just look at the portfolios of major european operators, it's non existent."

That's a ludicrous statement. It's all Nokia have at the moment. The problem is, as Tomi mentions there seems to be some kind of operator boycott of NOKIA in effect. The don't want to promote Nokia phones because they see it as a waste of their time.

[jabra]

Please Tomi, it's nice to read you but is it possible to improve your layout webpage? It's hard to browse between your articles: all the text are black, it's impossible to distinguish one article from an other.
Thanks.
(sorry, i'm not english native speaker)

[Stanil]

@Tomy Again thanks for the excellent and thorough analysis and response.
You’re too kind on NOKIA, the byproduct of food digestion (Elop) has hit with terminal velocity the air pushing device :)
NOKIA circa 2012(IF there’s an independent NOKIA by then) will be a very different beast compared to NOKIA 2010-2011.
History will decide what was the worst: hiring Elop or ousting Ansi :(

[Crowbar]

Tomi, you're making the mistake that a same-ol'-same-ol' strategy for Nokia would have worked out in the long run. Fact is that Nokia was losing marked share in the smartphone space constantly. Sure, we had good times the the N95, but once the iPhone and especially Android hit, it was game over:

http://www.asymco.com/2011/05/22/other-vendors-sell-10-of-smartphones-but-30-of-voice-oriented-phones/

Claiming that Symbian^3 could be competitive with iOS or Android is delusional. Even if it were, there are so severe execution problems in Nokia to deliver any update for Symbian it doesn't matter in the end. Resellers boycott Symbian devices because they don't sell, period. The X7 was cancelled by AT&T because customers in market studies have simply ignored it.

And again on your Meego argument, you still fail to realize that the N9 with Harmattan was turned into a zombie already 2010 when Meego was introduced. The N9 has had since then no future on the roadmap, since it is not a Meego device (despite all the marketing speak).

If you're looking for a comparison, Apple around 1996 is apt, as would be Netscape at the beginning of the browser wars. The mobile industry was disrupted by Apple and Google, and there was no turning back the clock.

As a Finn, you also must have read this series of articles from 2010, which reveals the real depth of the problems at Nokia:

http://www.hs.fi/english/article/Knock+Knock+Nokias+Heavy+Fall/1135260596609

[John Phamlore]

Tomi and Crowbar,
According to this article:

http://www.theregister.co.uk/2011/02/16/nokia_had_choices_but_couldnt_take_them/page2.html

in 2002, around the time when Nokia's true troubles of warring divisions began, Linus Torvalds had consulted with the company and convinced it to create a competing division within Nokia that would by necessity create a civil war within the company over the OS of the future.

It is astonishing to me that no one has connected the dots (not even TheRegister) that the creation of a Linux "skunkworks" by necessity would force the company to change its corporate culture from one of cooperation to one of competition between divisions.

The destruction of a great company because of a religious war in OS design over the use of microkernels is going to go down as one of the most pathetic moments in modern Western history.

[John Phamlore]

Tomi,

You may be the only one who can answer an alternate hypothesis I have about Nokia's problems, so please bear with me in this argument.

Not too long ago I would have argued that Nokia's existential competitor, the competitor who would have loved to have destroyed the company, was not Microsoft but was instead Qualcomm. I believe in 2008 Nokia and Qualcomm settled patent litigation. That to me was the point of no return, because Qualcomm was able to purchase from struggling AMD its mobile graphics unit and create a complete ARM SoC. Is it a coincidence that the first phones for Windows Phone 7 ran on Qualcomm ARM SoC's?

If we combine the strategies of Nokia's more successful competitors today, early in the 2000s Nokia should have been planning to create its own complete ARM SoC solution including graphics, one that could be extended eventually to tablets. As Nokia would have had its own hardware solution it would have not needed to have considered Linux because portability to other platforms would have been completely irrelevant. Instead Nokia should have simply extended Symbian, perhaps employing former BSD developers like Apple did not Linux zealots from Qt.

I can't help but wonder if TI is once again involved in the demise of a great tech company, now Nokia, then Sun. I believe once upon a time Sun was known for being the server manufacturer who did not own its own fabs but contracted out the work to TI. The problem to me is that TI concentrates only business lines that it can completely dominate. If TI doesn't think it can win going head-to-head vs. say Intel in fabs, it won't, which in my opinion killed Sun because Sun simply couldn't bring out fast enough the servers that would have exploited Java's multithread features. With all of the other ARM SoC contenders for phones and tablets, does TI really intend to devote much more energy in what in the end will only be a stalemate at worse, or will they instead try to dominate businesses such as analog technology?