As bad as it seems now, Nokias future looks worse

After revising earnings estimates downwardin May, Nokia today shared abysmal results for the second quarter. The one-time clear leader of the first smartphone era has tumbled down to what looks like the third spot for smartphone sales; definitely behind Apple and likely behind Samsung as well. With a new CEO in Stephen Elop, Nokia is surely in a transition, but a transition to what?

My first reaction to todays results was two-fold: One of sympathy and one of optimism. I thought to myself that one of Elops major actions so far, choosing Microsofts Windows Phone 7 platform for the future, was akin to quickly yanking a band-aid from a wound: Sometimes its best to just get the pain over with. But after digesting the news a little more and thinking about the path Nokia traveled to get to its current low point, I dont see how the bleeding is going to stop this year, now that the band-aid is off.

Feature phones cant save the day. Each time Ive pointed out Nokias challenges, the companys faithful have railed at me and rallied on the general platform of but Nokia sells more feature phones than most others combined! While thats always been a valid point, its less relevant as the world transitions to smartphones. Nokias own sales numbers reflect this point: Total mobile phone handset sales revenue declined 20 percent from the year ago period and 25 percent from the prior quarter. Combine the sales drop with a 3 percent decline in the ASP of Nokias mobi! le phone s, now 36 Euros (US $51.20) and you can see that Nokias bread-and-butter contributed to its $692 million quarterly loss.
Existing smartphones arent helping. So as feature phone sales are in decline, one would hope that high profit margin smartphones can help make up the difference. Thats not happening, given that the company didntcapitalizeon the smartphone market like Apple and Samsung, for example. Apple just reported 20.34 million iPhone sales for the quarter, a 142 percent boost from a year ago, while Samsung is estimated to have sold around 20 million smartphones in the same time period. This happened while Nokias smartphone sales declined 34 percent from a year ago with 16.7 million smartphones sold. The ASP did rise 2 percent, but thats not enough to offset the salesdrop-off.
A smartphone answer doesnt exist yet. Nokia is still at least one, if not two quarters away from even beginning a sales transition to Microsoft Windows Phone 7 devices. Elop today confirmed that Nokia would launch a Microsoft-powered device by the end of the year.That means sales and revenues in the high-end are likely to continue declining throughout 2011 the year. And theres stilluncertaintyabout the the first WP7 handsets from Nokia: what will make them different from those offered by LG, Samsung and HTC, for example? Again, the Nokia faithful will chant that Nokia makes hardware second to none. Id be the first to agree with that, but theres two problems with the mantra. Nokia always made good hardware and yet that alone hasnt saved the company. Second: No! kia may not be manufacturing its first Microsoft phones. Instead, it reportedly outsourced the production to Compal inTaiwan. In other words: Nokias smartphone transition is still fraught with risksfor many reasons and its going to take time for Nokia to hone its skills on a new platform.
Android squeezes at the top and bottom. Clearly, Nokia isnt competing well in smartphones, given the growth rates shown by devices running iOS and Android. Its the latter of the two that may have hurt Nokia the most. Why? Google is activating 550,000 Android devices per day both handsets and tablets, but the vast majority are phones and that number is comprised of devices at both the top and bottom. High-end smartphones are selling well in regions that can afford them. At the same time, cheap Android smartphones are popping up in areas where feature phones once reigned. Think of India and the next 500 million mobile users. Look to China where Nokia moved 52 percent fewer phones this quarter as compared to the last one. In these areas, inexpensive, low- to mid-tier Android phones are arriving and offering much more functionality for just a little more money over feature phones. Were even seeing these in the U.S.: $149 no-contract Androids this year with expectations of prices dipping below $100 by the end of this year.
How much destruct! ion can one brand take?Among the many negativetangibleresults for Nokia today, theres a massiveintangibleone as well: a tarnished brand. Tomi Ahonen illustrates the global branding Nokia has on his blog today, saying [M]ore people use a Nokia phone than drink a Coca Cola, than wear Leviss jeans, than tell time on a Timex watch,than wear Nike running shoes, than smoke Marlboro cigarettes,or write with a Bic pen. As Nokia devices sales continue to stumble, the brand itself loses value in terms of consumer and investor confidence. With smartphones, the brand is tied not just to hardware, but software and services too: Consumers are purchasing brand platforms and ecosystems when they buy a handset. Think of it this way: when consumer purchases an iPhone, they equate the full package with Apple, a company that arguably sets a high bar for the entire user experience. What will customers think of when they see a Nokia smartphone after the companys fall from grace?

I still have the same sympathy for Nokia that I had over my first cup of morning java. Its never good to see a global leader heading towards has been status, especially with all of the innovation Nokia has brought to so many people around the globe. But the optimism I had dissolved faster than the sugar in my coffee; faster maybe than Nokias overall profits and sales.

Image courtesy of Flickr user ecastro

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