Microsoft Nokia Best Case Scenario: 8% Market Share in 2013

WE ARE WITNESSING THE DESTRUCTION OF A JUGGERNAUT
Before Stephen Elop killed Symbian, Nokia's smartphone market share was 29%. Nokia towered over its rivals and was growing smartphone sales with highly desirable new smartphones. Today just five months after his ridiculously-timed announcement of Microsoft, Nokia's smartphone market share is down to 15% and collapsing. The Microsoft 'strategy' cannot recover Nokia to more than perhaps about half that level at 8% in absolute best case scenario - it would take superhuman effort just to match the models I used - Nokia-Microsoft cannot match Google's Android ramp-up rate, and cannot match Apple's iPhone sales climb.

There is a huge demand for Nokia premium phones by consumers (remember, they were willing to sustain a huge JUMP in average sales prices and MASSIVE jump in profits just before this silly announcement). The Nokia sales decline is not because Nokia phones are bad. It is not because Nokia OS Symbian is bad. It is not because Nokia apps or 'eco system' is bad (Ovi store was world's second-bestselling app store before Elop killed Symbian). Even today, if Nokia abandoned the ruinous Microsoft path, and returned to Symbian - even as crippled as Symbian is now after the massacre by Stephen Elop, if Nokia abandoned Microsoft and restored the migration path to MeeGo - Nokia would DEFINITELY do BETTER than with Microsoft.

LOST SALES, LOST REVENUES, LOST PROFITS!
But even if somehow Nokia and Microsoft were able to produce this miracle, Nokia will have replaced a growing smartphone performance, where Nokia grew unit sales, grew average sales prices, grew total revenues, grew profitability and grew profits - and replaces this with a miniscule level of sales, after the next ten - ten - quarters, two-and-a-half-years - making losses with the Symbian unit, seeing declining average sales prices, declining total revenues, declining profitability (i.e. increased losses) and yes, what was Nokia's cash cow, its goose that laid the golden eggs, the smartphone unit, is now a liability.

That will be replaced by Microsoft Windows Phone 7 based smartphones. Can they be more desirable by the market? Not likely. The latest Windows Phone 7 to Symbian comparison we had, (last quarter for full numbers) had those so-called 'obsolete' Symbian smartphones by several manufacturers including obviously Nokia, outselling all smartphones made by Microsoft partners, by a mere... 15 to 1. What about the ASP for Microsoft? The head of of Microsoft's Windows Phone unit, Andy Lees has told us that Microsoft WP7 based phones will not be premium phones, their average prices will be only half the industry's ASP, i.e. they can be expected to yield between 100 and 150 US dollars next year ! Yes, Microsoft knows its own smartphones are so undesirable, they will see prices HALVED in ONE YEAR. This, while Nokia's last quarter of un-damaged Symbian sales yielded average sales of over 200 dollars and growing by 14% in just one quarter (that's 48% cumulative growth over 4 quarters)! How utterly idiotic is this switch away from the successful Symbian to the colossal failure Microsoft WP7? When their own head tells the world, WP7 phones will see average prices falling to half in only one year! Symbian phones are so good, they increase prices by half (on an annual level) and these are replaced by undesirable Microsoft phones whose prices are cut in half (on an annual level). Duh! Earth calling Pluto? Hello space cadets? Want to return to reality, perhaps?

How incredibly undesirable are those Microsoft phones if this is happening? Even with the reseller boycott of Nokia now, the average prices of Nokia Symbian based smartphones have not fallen more than 9% since February (that's a loss of 20% in one year). And remember, there is a reseller boycott now of Microsoft phones, because the carriers hate Skype. Trust me, they hate Microsoft based phones MORE than they hate Symbian phones. All the evidence also tell us, that switching from Symbian to Microsoft will make Nokia worse off - than staying with Symbian (and where MeeGo was actually a winning strategy).

Profits then? Surely there must be some logic to this. And yes. There is a "logic" to this, but it is a weird kind of "Stephen Elop logic" where anything good for Microsoft and simultaneously bad for Nokia is somehow 'desirable' for the Nokia CEO. Microsoft Windows Phone based phones cannot do all that current Symbian based phones can do, so there will be downgrades in what the consumers can expect. That cannot help their desirability, especially with any loyal Nokia users. (But sadly, the Nokia internally developed MeeGo OS would be compliant with Nokia features). Microsoft Windows Phone based smartphones are typical Microsoft-style 'resource hogs' so they require higher performance CPUs - not to perform faster - just to keep up with what Symbian was able to do with lower-performance CPUs. So Nokia needs to source more expensive Snapdragon CPU's by Qualcomm to achieve the same level of performance using WP7 as it currently gets from Texas Instruments ARM CPUs running Symbian. And yes, Microsoft WP7 requires more memory installed on the phone just to run. Again, this added memory is not to make consumer get any better functions like more pictures or videos to store - it is to enable WP7 to run! So Nokia hardware costs go up - quite dramatically - with WP7 based phones.

And then there is the royalty. With Symbian, Nokia needs to pay no royalties. If Nokia had gone with MeeGo, its home-grown OS, there would be no royalty to pay (and bizarrely, even the Google Android option would have meant no royalties to pay - sans patent fees to Microsoft). Nokia's CEO has taken a totally free Nokia corporation, and enslaved it to Microsoft, and guaranteed Microsoft a massive royalty stream that Nokia never paid before.
Of the major smartphone makers (Apple, Samsung, Nokia, RIM, HTC, Sony Ericsson, LG, ZTE, Motorola and Huawei) - all of the others, for either all or at least the majority of their smartphones, they do not pay any royalty for the OS. Except Nokia.

PROFITABILITY - DON'T THINK APPLE: THINK DELL
So we now see that Nokia will struggle just to manage the decline in smartphone sales. And we see the unit sales go down to 11 million during 2011, will remain at that level with a tiny recover at Q4 of 2012, to about 12.4 million units. And by 2013, Nokia with Microsoft WP7 can slowly recover to selling 8% of all smartphones by Q4 of 2013 - and produce 20.3 million smartphones - under the very best scenario.

In this time, Nokia's smartphone average sales prices will continue to crash. I don't say so. Nokia doesn't say so. So says Microsoft's head of Windows Phone. Smartphone average prices with Windows Phone will be cut in half in only one year. How much worse will it be by 2013, is anyone's guess. And during this time Nokia's costs will increase simply on the side of hardware (CPUs, onboard memory etc) and Nokia has to start to pay a per-smartphone royalty to Microsoft. So if you think Nokia's smartphone profitability is now in a squeeze - it will be far more so during 2013.

If there is a Nokia still existing, that pursued this utter madness Microsoft strategy, they will be a bit-player, with at best 8% market share, producing a trivial profit if any. This destruction of Nokia will make New Coke or Toyota Brakes or BP Oil Spill look like a market triumph! What is far more likely under this scenario is that the repeated quarterly disastrous results will result Nokia share price to plummet so low, that Nokia will be sold for scrap years before we get to end of 2013.

The Microsoft Strategy is dead. This analysis just based on the best possible scenario using the absolute best performance in the industry that Nokia and Microsoft would be silly to even promise to match. And this is before we look at all the other reasons why the Microsoft strategy is already still-born, and needs to be scrapped before the end of this year. I will return with that in a later blog. But next, I will do a calculation of how much is Stephen Elop's costing Nokia now, per quarter and per year. That article will be illuminating.

Stay tuned.