Mid-year Update to Nokia Smartphone Forecast to 2011, with View to 2012 and new Microsoft based phones

On February 15 I was one of first analysts to provide a detailed quarterly forecast for Nokia's smartphone sales this year, after the bizarre announcement by CEO Stephen Elop to select a new Microsoft based smartphone operating system while having no phones to sell, or even to show. That caused what is known as the Osborne Effect ie it killed sales of current models. If Elop was competent, he would have seen this coming. He admits now at Q2 results that it took him by surprise. I think its fair to read into that, that Stephen Elop is completely unfit and incompetent to run Nokia in these difficult times. But lets not talk about Elop now. Lets look at the performance of Nokia's smartphone unit.

My February 15 forecast included a lot of very detailed analysis of why I felt those numbers would happen. There are tons of comments too, and many suggested I was being too pessimistic. Here is the actual forecast from February and the Reality of Q1 and Q2 results to see how pessimistic or not, I happened to be:

TOMI ORIGINAL FORECAST FROM FEBRUARY 15:

Quarter . . . Market Share . . . Unit Sales . . . .  ASP . . . . . Total Revenues of Smartphones
Q1 2011 . . 28% . . . . . . . . . .  29 M . . . . . . . . 146 Euro . . 4.3B Euro
Q2 2011 . . 21% . . . . . . . . . .  25 M . . . . . . . . 136 Euro . . 3.3B Euro
Q3 2011 . . 16% . . . . . . . . . .  21 M . . . . . . . . 126 Euro . . 2.6B Euro
Q4 2011. .  12% . . . . . . . . . .  17 M . . . . . . . . 116 Euro . . 2.0B Euro

ACTUAL NOKIA PERFORMANCE

Quarter . . . Market Share . . . Unit Sales . . . .  ASP . . . . . Total Revenues of Smartphones
Q1 2011 . . 24% . . . . . . . . . .  24 M . . . . . . . . 146 Euro . . 3.5B Euro
Q2 2011 . . 15% . . . . . . . . . .  17 M . . . . . . . . 142 Euro . . 2.4B Euro

I was being as honest and accurate and detailed as I could be. But I also wrote on the blog, that this was my best case scenario. Now we have Q2 results, the first full quarter with the Stephen Elop Effect to destroy Nokia Symbian phone sales. And look at the results. I projected 21% market share. Nokia managed 15%. I projected 25M unit sales. Nokia only did 17M. On the ASP Nokia did better but the total revenues are still almost a Billion Euros BELOW what I had projected. Yes. Tomi was indeed - far too optimistic in his initial forecast haha..

TIME TO UPDATE AND CORRECT THE MODEL

So now we have the first full Quarter of the Elop Effect and we can now do a realistic update to the model to the end of this year (and do some prelim analysis towards next year when Microsoft Windows Phone based Nokia smartphones are expected to sell in mass market quantities).

Lets change the formula for the model. I used the only analogy I could find, and I set the level of lost market share at one quarter (25%). Now we have the real number. All things considered, my guess was not bad haha, the real number is 30% loss. I don't mean 30 market share points, I mean losing nearly one third of your existing customer base - per quarter. But then we recalculate the remaining customers at hte end of the quarter, and then take another nearly one third, and remove those, and repeat and repeat..

NEW MARKET SHARE PROJECTION EFFECTIVE 21 JULY

Quarter . . . Market Share
Q1 2011 . . 24% (actual) 
Q2 2011 . . 15% (actual)
Q3 2011 . . 11% (TomiAhonen projection)
Q4 2011. .    7% (TomiAhonen projection)

Yes. Sadly. Nokia will end this year with 7% market share in smartphones, give or take a point. Single digits most certainly. (if Nokia continues on this suicidal path towards Microsoft and with the psycopath Stephen Elop in charge).

Nokia had 29% market share with growing unit sales, growing average sales prices, growing revenues and growing profits as recently as Q4 of 2010 ! Now Nokia has already destroyed half of its market share. This, during a year when smartphone sales are exploding globally. A year when Apple can't sell enough iPhones with the demand exceeding supply. Where Samsung is doing more than double the sales from a year before. And Nokia is destroying half of its market in a mere 5 months.

Also do undestand what 7% means. RIM, ie Blackberry, has now fallen to 13% market share in Q2 and everybody is calling them a failure, and most who consider future operating systems and 'ecosystems' are counting RIM out now, as having failed. THAT'S TWICE where Nokia will be, in only 6 months. Nokia is completely doomed on this path. By current projections, Nokia is not only falling from biggest to second to third, behind Apple and Samsung. And obviously by Q3 will fall behind RIM and HTC, but by Q4 Nokia will be playing 'Honey I shrunk the kids' falling behind LG and SonyEricsson and racing Motorola for who gets to be 7th biggest smartphone maker. And may even fall behind ZTE. So Nokia could be as little as 9th biggest smartphone maker. From first to 9th in less than 11 months. This is so outrageous, if someone at Hollywood suggested this as a plot for a movie, it would be rejected as unbelievable.

Lets populate the model with the rest of the data. I am modelling smartphone sales this year to hit 475 million units (up from 300 million in 2010). And I will use a linear decline in ASP, dropping it the same 4 Euros per quarter. Then I multiplied it across to get the revenues.

TOMIAHONEN PROJECTION: NOKIA SMARTPHONE SALES BY QUARTER 2011 (REVISED)

Quarter . . . Market Share . . . Unit Sales . . . .  ASP . . . . . Total Revenues of Smartphones
Q1 2011 . . 24% . . . . . . . . . .  24 M . . . . . . . . 146 Euro . . 3.6B Euro
Q2 2011 . . 15% . . . . . . . . . .  17 M . . . . . . . . 142 Euro . . 2.4B Euro
Q3 2011 . . 11% . . . . . . . . . .  13 M . . . . . . . . 138 Euro . . 1.8B Euro
Q4 2011. .    7% . . . . . . . . . .  11 M . . . . . . . . 134 Euro . . 1.5B Euro

Source: Nokia (actuals Q1 & Q2), TomiAhonen Consulting July 21, 2011 (projections Q3 & Q4)

PROFITS

I said in my original Feb 15 forecast that Nokia smartphones would be reporting zero profit by Q2 and losses from Q3 pushing all of Nokia Corp into losses by Q4. I was right about what would happen but again, Nokia's suicide has been far more rapid than even I was able to project. They reported a massive loss not just in smartphones by now, in Q2 but also the whole of Nokia Corp has gone from making profits to making losses, already now in Q2. While the delusional CEO, Stephen Elop promises that Q3 handset sales would be near zero profit or loss (in other words a big improvement from now), that should be taken with a grain of salt. This is the same man who didn't foresee the Osborne Effect and who thought China sales in Q1 willl repeat in Q2 (ie didn't know about China gifts for Chinese New Year, the Chinese culture equivalent of Western Christmas gift-giving) and who had to rush only weeks after Q1 results, with a profit warning for Q2. So he is pretty well clueless as to how Nokia's handset unit might do profits or losses.

Here are the facts. Nokia's Q2 handset profitability (ie about 500 million Euros / 700 million US dollar loss) had a one-time positive profit injection - the IPR payment from Apple covering patent lawsuits and iPhone sales for the past 16 quarters since 2007. That was worth half a billion dollars. So in reality Nokia's handset unit in Q2 is doing so horridly, it is generating one Billion dollars of a loss.

Then what does Nokia do? In early July they annnounced big across-the-board price cuts - price cuts - up to 15% in their most expensive phones. So while they already report a massive loss, and in reality their operational performance hides an even more gargatuan loss, now Nokia cuts its prices - that boosts its LOSS. Nokia handsets will not be reporting a zero profit/zero loss for Q3. Ain't gonna happen. No f*cking way.

In the Q2 results Nokia reported their marketing costs grew dramatically by 6% from Q1, for the smartphones unit (because nobody is willing to buy - or sell - Nokia phones). The quarterly results also offer Nokia's validation of my claims here, that there is a reseller boycott - Nokia admits that the channel, the resellers and the operators - are 'reducing inventories' - ie refusing to stock and sell Nokia. But Samsung, HTC, Apple phones are jumping off the shelves into the pockets of happy new customers. And what of Nokia other costs? Their smartphone sales have been cut by half from their peak at Q4. So Nokia owns all those expensive mobile phone handset factories in 9 countries including China and India, and they now are running at half-capacity. HALF CAPACITY? Imagine the costs of that! This again, while rivals are complaining they can't meet demand. Nokia can't even keep its factories running at normal capacity. Texas Instruments complained that their biggest chip customer (ie Nokia) has seen a huge drop in component shipments.. So the costs for Nokia keep going up, while the prices they charge keep coming down. This is a sure way to make BIGGER losses, not less losses.

PROJECTION FOR MICROSOFT PHONES IN 2012 (COMING SHORTLY)

I will do my update and detailed first projection for Microsoft based Nokia smartphones for 2012. At this moment its late here in Hong Kong and I can't really concentrate to do this properly. But I know there are readers of mine who are waiting for my updated forecast for 2012 sales in Q3 and Q4. So I will post this blog now, I will return shortly to do the Microsoft and 2012 bit (and beyond). But trust me, it won't be rosy. Nokia and Microsoft will not get 20% or better market share in any conceivable scenario now, not after the carnage we see happening in 2011. Microsoft will not even get into the low double digits by end of 2012. But yes, I have to come back to that, at this point I will just post this blog and get some rest.

UPDATE July 25: I have now provided the update for Microsoft based Nokia smartphone sales for years 2012 and 2013. I used best case example of real existing smartphone sales patterns, so this is very real, and it is the best-case scenario.

Comments

[live cricket streaming]

Microsoft was lumbering as well as Microsoft Windows Mobile, until their nemesis, Apple, entered into the device space. And before you decide to could say 'Palm' Microsoft's business is at freefall.. So Microsoft said they'd abandon the Windows Mobile platform, because that's now 10 years old, and to produce completely new operating system truly for smartphones, Windows Phone, which might be completely new, and be optimized for touch-screen phones. Now, since this was 'totally new' it resulted in there were no migration path for developers who had made apps for Windows Mobile.

If you ask me at that time, that seemed truly odd. Microsoft if anyone, needs to have known better. It turned out DOS that built Microsoft. Then came Apple while using the Mac (like now while using the iPhone) and showed a more practical service notebooks than DOS. So Microsoft had to reverse-engineer the Mac OS and continue to make a clone, which we now know as Windows. And from now on DOS is dead. But Microsoft were built with a massive global PC lead in DOS based machines in 1984 once the Mac was announced. Whilst Macintosh PCs were sold, Microsoft based PCs sold more. And Micrsosoft made Windows first just as one add-on over DOS, being a 'GUI' (Graphical User Interface). The very first versions of Windows were horrible, it wasn't until Windows 3.0 that it was at in any manner usable, even so the point was, that all Windows PC's were also using DOS, and any recent DOS machine could be upgraded to own Windows

[elmo]

Is possible that Elop is so incredible incompetent ???

Elop is a CRIMINAL ... he should go to jail !

Why Finland is doing nothing for protect what was their 20% of GDP ????

[jjh]

Come on, Nokia's share of Finland's GDP was never 20%. More like 3-4% and that was years ago.

[Yuri]

This has to be the most Exceptionally Enormous Flop in the history of the tech industry - The Eflop.

I just don't get it. Even if Mr. Eflop is working in the interest of Microsoft, why is MS agreeing and sponsoring his actions? This is very bad for them too. The way things are going, not only are they not going to gain any boost for Win Phone's share from the dying Nokia, but Microsoft is going to take a heavy PR hit. It will be remembered that an ex Microsoft manager adopted a Microsoft OS and killed Nokia in about a year...

If Nokia did not discontinue MeeGo, Symbian would not have been viewed as a dead-end ecosystem and sales would not have efloped. Nokia would be much stronger and would be able to push WP much better. They could always target the MeeGo devices to the lower end and keep the WP devices in the high end.
In case of failure, Microsoft would not be seen as the problem and not take a PR hit.

And in my personal opinion, there is no chance Win Phone will sell well - its design is suitable for advertisements, not a personal device - its just too cold.

[cycnus]

When this all over.... elop got kicked, sued, beaten by angry bird/mob, i mean angry nokian.

I think that Rumpelstiltskin, I mean Elop would end up just like Rumpelstiltskin in shrek 4 Forever After.... eating from dumpster.

Nokia shareholder must sue elop until his last penny.!!!!!!

[cycnus]

Hi Tomi,

Actually Osborne effect and elop effect were different.

Adam Osborne was pre-announcing a replacement product that were better ahead of time.

elop was pre-announcing a replacement product that the current owner of nokia devices would not want it. and also announcing that all the current good product would be dead. So, basically elop was giving a replacement product that were worse than current product to replace current product that were in high demand.

[Alan]

Hi Tomi, do you have any updated numbers of Samsung for Q2. Very much interested to know if they crossed Nokia or not. Definitely Apple's 20M is out of reach. So is it Apple-Samsung-Nokia or Apple-Nokia-Samsung ? Let us know your latest projection given Nokia's numbers.

[Michael]

With such profound love for Mr. Elop, may I suggest the ultimate solution.

http://hitman.us/main.html

[Alexey Zimarev]

Some pieces of truth but in general this is too emotional. Yes, they should have go slowly descending Symbian and transit to MeeGo as they have planned. Seems that people are more than happy with N9. If Nokia had balls to make their own (patented) tablet on this platform it will sell very well, much better than RIM's device. WP7 wasn't the best choice indeed but I surely don't believe that Nokia would get below 10% of the smartphone market by the end of 2011, this will not happen.

[SymbianDeveloper]

At least Symbian developers will have moved to Accenture before Nokia goes bust. There's still a chance of some severance guys!

[Pallo]

@live cricket streaming

I think Microsoft had 2 objectives for Nokia deal. It´s bit hard to say what was priority.
To kill MeeGo was truly top priority. With Nokias global spread combined with Intels push and multi industry cooperation for interoperable core system for multiple purposes was (and partly stil is) real threat to Microsofts core bussines both pc and mobile softs in few years.
To have worlds largest (smart)phonemaker to bow down to take OS and to burn other bridges was also important.
Meego is/was only platform that is not closed and allows every suplier of hardwares, softwares and services to compete with each other, for good of consumer.

[cycnus]

@Pallo

I 100% agree with you.
I also have wrote this several times on Tomi blog that the big conspiracy theory by me that MS might just want to kill open source.
Meego with Nokia + Intel support is a REAL THREAT for MS.
and QT by Nokia is also a REAL THREAT for MS.
If Meego become mainstream, QT got lots of developer
that's mean. MS platform (.Net, silverlight) will be less important

and windows will fail.

[khim]

@Pallo: Please check you facts before starting typing. MeeGo is more closed then Android. Core is open in both cases, but latest goodies (Honeycomb UI in case of Android and Swipe UI in case of Meego) are closed. And while Google publicly promises to open everything in Ice Cream Sandwich (see http://arstechnica.com/open-source/news/2011/05/google-announces-android-ice-cream-sandwich-will-merge-phone-and-tablet-oses.ars) there are no such promises from Nokia side.

@cycnus: This is plausible explanation for Elop's actions, but he's still the CEO so it's not enough. There were (are?) some additional arguments which convinced the board of directors. WTF are they is anyone's guess.

[expalmandse]

Tomi,
I cannot understand your position regarding Nokia reducing prices. Actually, I ma more impressed that it has not happen more aggressively. After Februuary announcement, I expected Nokia phone prices to come down very quickly. In front of a retail boycot and PR disaster, it becomes quite important to defend the market in your power rather than letting it go without a fight. Customers that they loose now will be almost impossible to recover, as you have well said. So Nokia needs to reduce prices AND keep their shops! At least until they find a way to appease the retailers.

[cycnus]

@expalmandse

i agree with you on pricing strategy, but tomi were pointing out that OPK (the CEO before elop) were fired because he's doing a price cut, in which lowering the ASP.

[Pallo]

@khim

I´m sorry for my weak english writing skills.
About MeeGo from Meego.com:
"The MeeGo project provides a Linux-based, open source software platform for the next generation of computing devices. The MeeGo software platform is designed to give developers the broadest range of device segments to target for their applications, including netbooks, handheld computing and communications devices, in-vehicle infotainment devices, smart TVs, tablets and more – all using a uniform set of APIs based on Qt. For consumers, MeeGo will offer innovative application experiences that they can take from device to device.

The MeeGo project is hosted by the linux foundation"

Core comes with different "reference/example" UX, for different purposes, for example, handheld UX, netbook UX...
All of those can run same software, it´s up to developer to optimize UI for different devices. Idea is that vendors (of hw) creates their own (propietary/closed) UI to differentiate themselfs as Nokia did with swipe UI. Even then same soft runs on all devices idependent from hw or ui, if developer havent done optimazion for spesific ui then asability suffers but code itself stil works.

So every on could compete, no monopolistic walled gardens.

Khim look at evolution of mobiles in last half decade, what a leaps. In few years mobiles can run every trivial desktop tasks with ease(spesific use cases need spesific tools) so why restrict usefulnes of devices to single or few monopoles. With "docking station" mobile changes to desktop when needed other UX. If you go to walled gardens "gate keeper" rules what you can and cannot do.
I don´t like idea of future where I have only three real options to choose Apple, Google and Microsoft. And in that world one can choose only one time without major risk to loose ability to easily change platform or device vendor.

[SoVatar]

What I just don't understand is why are Elop and (parts of) the Board still not fired. The numbers speak for themselves, there is just no sugarcoating. About 1 Billion loss in Q2 (if you count out Apple's IP payment), market share in free fall, share price down more than 50% since Feb 2011.

Who are the forces keeping these guys on their jobs and what are the reasons they do it? Are some of the major Nokia share holders net short so that they win if Nokia fails? Do major Nokia share holders think they can make more money letting Nokia fail by betting on the competition (MSFT, Apple, Moto, HYC, etc,)?

Is there still a game where somebody gains buying some Nokia assets cheaply while the rest of the company disappears into history?

As i said, I don't understand.

[peter]

SoVatar, hire a lawyer and sue both Elop and Jorma to Finland Court for the damage they had done to Nokia shareholders. $20B loss should be able to put these two into jail. and Nokia will come back immediately due to short sellers squeeze. Or use class action.

[SoVatar]

@peter:
AFAIK incompetence is not a crime, so the fact that Nokia lost $20B market value per se will not be enough to win a lawsuit. Somebody needs to be able to prove intent, and it is here where I am at a loss.

What is the intent behind Elop's / the Boards actions to make Nokia fail? What is the intent behind major shareholder's apparent willingness to to let Elop / Board make Nokia fail?

I cannot believe that it is incompetence on all three levels: CEO, Board and major shareholders. There must be a game somewhere in the dark why these 3 entities do what they are doing.

Granted, I see that 2 of the 3 levels are incompetent (namely Elop & the Board). But all 3?

[peter]

face it: there is no major investors in Nokia, all small individual shareholders who owns Symbian devices got betrayed by Elop and Jorma.

you have to start the suit to find more fact. just like Murdoch case. more fact will be found each day. Convetion wisdom manifests Elop and Jorma are criminals. They are not Trojan of Microsoft but agents of Wall Street Short sellers.

That's why you have to sue in Finnish court not here in America.