This is a longer analysis, 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 articles studying the biggest destruction of market value of any corporation in the history of technology companies. EXECUTIVE SUMMARY
Here is the overall projection. Please read the full analysis 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, i.e. 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.
Note: From Third Quarter 2011 onwards, all numbers are projections by TomiAhonen Consulting
- 4Q 2010 - 28 M total Nokia Symbian smartphones (this was 29% market share before MSFT tie-up)
- 1Q 2011 - 24 M total Nokia Symbian smartphones
- 2Q 2011 - 17 M total Nokia Symbian smartphones (this is 15% market share today)
- 3Q 2011 - 13 M total Nokia Symbian smartphones
- 4Q 2011 - 11 M total Nokia smartphones - 1 M WP7 + 10 M Symbian (Market share hits 7% by time Microsoft phones arrive)
- 1Q 2012 - 11 M total Nokia smartphones - 4 M WP7 + 7 M Symbian
- 2Q 2012 - 11 M total Nokia smartphones - 7 M WP7 + 4 M Symbian
- 3Q 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)
- 4Q 2012 - 12.4 M total Nokia Microsoft WP7 smartphones
- 1Q 2013 - 14.0 M total Nokia Microsoft WP7 smartphones
- 2Q 2013 - 15.9 M total Nokia Microsoft WP7 smartphones
- 3Q 2013 - 17.9 M total Nokia Microsoft WP7 smartphones
- 4Q 2013 - 20.3 M total Nokia Microsoft WP7 smartphones (est. 8% market share)
I will be returning with more analysis of those numbers, adding the value calculations, average sales prices, total revenues, profits etc. as well as calculating the true cost that Stephen Elop's mad strategy is now costing the company.
This is the best case scenario, and Nokia in fourth quarter 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."
That's 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 February 15. That analysis 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. Unfortunately that turned out to be true. All of the individual elements projected here - 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 fourth quarter 2011 have already happened or are happening as we speak in the actual quarter.
But that projection was made with the best available knowledge, and without knowing really how badly Nokia sales would decline. 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 the second half of this year, 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 4Q, Nokia's market share will be about 7% and its sales of smartphones will have fallen to about 11 million. To compare, in 4Q 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, 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 on BSN* we do not deal with fantasies and myths - we 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 third quarter 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). 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) 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).
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 fourth quarter 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.
Nine months ago, 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.
In size, on December 31, 2010 Nokia was literally as big as all smartphones made by Apple and Samsung added together (these would both individually pass Nokia by this quarter the latest). 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%!
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 ill-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 1Q because the announcement came in the middle of that quarter. But when we look at 2Q results - compare to the above - Nokia unit sales are down to 16.7 million (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 2Q 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 4Q, 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 4Q and 2Q 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 smartphones 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.
MICROSOFT IS THE RIGHT STRATEGY?
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 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.
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