Nokia Folds: 15 Years After Inventing Smartphone, The King is Toppled

Nokia results are out. 15 years after inventing the smartphone in 1996 with the iconic but outrageously expensive Nokia 9000 Communicator, and selling more smartphones than any rival every single quarter since then, we have now seen a moment in history: The king has been toppled. And that was done by who else, Apple and the iconic iPhone.

Imagine going back in time, and witnessing the success of the first mass-produced automobile, the Ford Model T. Ford did not invent the car, that was Daimler-Benz (i.e. Mercedes-Benz). But while Daimler-Benz started with the world lead, it was the Ford Model T which made the car affordable for mass markets. Or take Apple the PC maker. It was once the world's biggest computer maker by volume of desktop computers. Then along came Charlie Chaplin in an IBM advertisement for the IBM PC, which ran away with the PC market (and propelled Microsoft to become the biggest software company). Those are iconic moments in industrial and technology history, are studied in MBA classes worldwide.

Now we are witnessing that kind of historical moment in technology, and this transition will be studied in MBA case studies in business schools for this whole century. Mobile phones are the most widely spread technology on the planet (3x bigger than TVs, 4x bigger than PCs, 5x bigger than cars, etc). And Nokia is the biggest phone brand, and all phone makers and major analysts agree, that the future of mobile phones is smartphones. So remember this July of 2011. This is truly a big moment and we are witnessing history.

SECOND QUARTER RESULTS CATASTROPHIC FOR NOKIA
We have the second quarter results from Nokia. As so many expected, the results are brutal. Nokia's new CEO bizarre timing of his (misguided) Microsoft strategy have devastated Nokia smartphone sales. As Nokia faces global reseller boycott of what now are perceived as obsolete Symbian phones, the sales of Nokia Symbian smartphones have collapsed. With it so have revenues, average sales prices and profits also all crashed in world-record-setting style. What a way to go, Stephen Elop! You will be famous - or should we say more accurately, infamous.

Nokia just reported their total sales of smartphones for 2Q 2011 was 16.7 Million smartphones. That gives Nokia a preliminary market share in smartphones of 15% (was 24% in 1Q only three months ago!). The unit sales of smartphones are down 31% from just 3 months ago in 1Q when Nokia still sold 24.2 Million smartphones - one third loss in a quarter!

DESTRUCTION OF PROFITS
The smartphone unit which made over 500 million Euros (over 700 million dollars) of profits per quarter as recently as six months ago, has now crashed and reports an operating loss! And please understand, this is not the bottom. The situation is going to be far worse in Q3, Q4 and Q1. Nokia has already in early July responded to the global market collapse by cutting prices across the board, as much as 15% from its top phones. If your smartphone division is making a loss - and you then cut your prices by 15% - you are ADDING to your losses MASSIVELY. While this analysis is not a financial analysis, we should point out that this new Microsoft strategy and Nokia's catastrophic performance has been so strongly punished by Wall Street, that Nokia's share price earlier this week hit a 14 year low. Mind you, this is not the end.

WE ARE WITNESSING WORLD RECORD DESTRUCTION OF A BRAND
The real comparison of Nokia's crazy shift in smartphone strategy cannot be done to the previous Quarter, i.e. 1Q of 2011, because the market collapse started in the middle of that quarter. The comparison of Nokia's current malaise has to be compared to the last full healthy quarter before that fateful announcement of February 11, so we have to go to fourth quarter of 2010 for comparisons. What was life like before Stephen Elop started to destroy the brand most widely spread on the planet (more people use a Nokia phone than drink a Coca-Cola, wear Levi's jeans, tell time on a Timex watch, wear Nike running shoes, smoke Marlboro cigarettes, or write with a Bic pen).

In 4Q of 2010, Nokia sold 28.3 million smartphones and had 29% market share. The average sales price of Nokia smartphones was 156 Euros or about 210 US dollars. We have since learned with Nokia's new financial reporting also about the smartphone division profitability, so in 4Q Nokia smartphones made a profit of 548 million Euros (715 million US dollars) which gave a profitability of 12.5% for its smartphones unit. Obviously this is nothing like as spectacular profitability as Apple does with the iPhone, but Apple is not Nokia's primary competitor, and of Nokia's main competitors (who sell globally both smartphones and simpler 'dumbphones') - LG, Sony Ericsson and Motorola have all been struggling to do any kind of profits. Only Samsung of Nokia's main rivals is consistently profitable in its handsets unit. And up to now, never has Nokia reported a loss in its handset unit.

Understand how enormous Nokia was just six months ago. As a smartphone maker when measured by units sold, Nokia was bigger than Apple and Samsung added together (it's also likely Samsung has also passed Nokia in size, as Nomura has already calculated.). Nokia was the run-away market leader smartphone maker in all continents but one (North America). In China (world's biggest mobile phone market) Nokia was reported to have 72% market share in smartphones in 2010; in India (world's 2nd biggest market) over 60%. Now we learn that Nokia's market in smartphones in China has collapsed to 22% and similar in India. European major markets have seen Nokia smartphone sales collapse anywhere from around half lost to as much as three quarters lost in just a matter of five months.

So now, with 2Q results, compared to the time before Stephen Elop's ill-timed announcement of its Microsoft alliance i.e. 4Q results, we know how bad the damage has been. And because the announcement was on 11 February, we know that the crash in market share, average prices, revenues and profits has happened in under five months. With Stephen Elop at the helm, we have seen Nokia destroy half of its total market in smartphones.

This is not like the carnage that caused the death of Motorola (and the company to be split) or the destruction of Palm (that caused it to be sold to HP) or similar disasters in mobile telecoms. This is truly the world record for market share capitulation not just in mobile or tech; it is brand destruction world record - in any industry, ever. Toyota's damage with the brakes in its cars, BP's oil spill, British Airways worst quarters fighting with labor disputes; etc have not slashed market share by half in only five months. Nokia and CEO Stephen Elop will go down in history as the notorious and misguided names that destroyed the best-known brand on the planet. This is management stupidity in the scale of Coca-Cola's 1985 launch of New Coke.