Profiling the slide at Nokia (Part I)

Nokia’s slide in the smartphone segment has been well documented and the latest results from Nokia do not inspire confidence about a quick revival. Nokia’s slide draws a sharp contrast from Apple and its Apps store. Here’s profiling Nokia’s smartphone story.

Nokia’s Decline
Nokia announced a 66 percent yearly drop in Q2 profit while lowering its 2009 market share target for its cellphones. Originally, Nokia had expected market share to rise in 2009, presumably based on a successful launch of the N97 flagship device. However, outside of a core group of S60 diehards, the N97 has been universally panned in both reviews and user forums alike. And with nothing but rumors of an Atom-based Nokia Netbook on the immediate horizon.

Overall YOY sales for Nokia have fallen by 25% to 9.9 billion Euros in Q2. This is 7% higher than Q1, 2009.YOY Nokia shipped 103.2 million devices during Q2, 15% less than an year earlier, but 11% more than Q1,2009. The average selling price was also down from 74 Euros Q2 last year to 62 Euros currently. In Q1 2009, Nokia had recorded less than 100 million shipments for the first time in 2 years. Q2 2009 was slightly better in terms of volumes but the ASPs are southward bound still.

Inspite of aggressive job cuts and other measures such as moving out of non core activities, Nokia is now cutting down its profitability and market share outlook. It is now predicting its mobile phone operating profit margin will match the first half at 11.3% (less than the analysts prediction of 17.4%) and its market share will stay the same as last year (compared to original forecasts of a rise).The stock took a 15% plunge after the results were announced last week.

Analysis
The significant volumes from the lower end have helped maintain the market shares although it is pulling the ASPs down. However it is the smart-phone market where Nokia is taking a big hit in terms of both volumes and numbers. Thus, Nokia is finding harder to stay profitable because of increasing competition in the high end phone segment from the likes of Apple’s iPhone, Palm Pre, Toshiba’s TG01 against Nokia’s N 97 and 5800, which are key support to its margins. Nokia is suffering from low operating margins because it does not have really competitive products at the high end of the portfolio.

Analysts are dubbing this period as Nokia’s Motorola Moment. http://www.forbes.com/2009/07/17/nokia-apple-iphone-markets-equity-mobile.html?feed=rss_technology.

Once a giant of the handset industry, Motorola got stuck with its Razr handset model longer than it should have done, failing to catch on to other innovations that were taking place in handset making, before losing market share in China to Nokia and in the US to Apple.
Nokia seems to now be falling in the same trap. It was late to realizing the popularity of clam shell phones, late to touch screen and now late to the application store as pioneered by Apple’s iPhone, as well as high quality web browsing. The fact that remains is that Nokia has not been innovating and has only been a fast follower.

Services Company
2 years back, when Nokia had suggested a move into services based businesses, the Wall street had welcomed the efforts by a stock price spike. That was the right thing to do. However, Nokia has taken long to do what it set out to do. And its efforts have been largely diffused. Instead of getting one thing right, Nokia tried many and more different things. It launched into Nokia Music Service and Comes with Music, N-Gage Gaming and Ovi Services, Ovi Share (networking platform) and the latest being Symbian horizon (an apps store). Was Nokia doing too many things at the same time? With Nokia’s kind of ability, it could probably carry the gambit as well. The problem perhaps was Nokia trying a plethora of business models, without really doing anything really meaningful. It was a follower and not the original in most of these services. In effect, it was trying to compete, by its sheer size and presence, and not basis its technology leadership.

In many cases, the platforms existed at Nokia, long before competition had stepped in. N-Series phones were regarded as the ultimate edge in technology for a long time. Yet Nokia never regarded applications and software as a differentiating element unless Apple came along with the Apps Store. It was Apple who pioneered the iTunes and Nokia has been playing catch up with its Music store and Comes with Music.

The problem is complicated with Symbain OS. While Symbian is the most robust mobile OS and leads the smart-phone OS market share at 40%, Nokia probably needs to look at a second option to compete with the likes of Web OS (Palm), Android and Apple OS.