Nokia Folds: 15 Years After Inventing Smartphone, The King is Toppled
7/21/2011 by: Tomi Ahonen
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.
THIS IS ONLY BEGINNING OF THE NIGHTMARE
We can now update the first projections to how badly Nokia will bleed market share to the end of 2011 when the first Microsoft Windows Phone 7 based Nokia smartphones will start to ship. That level is definite to hit single digits but I will return shortly with that full analysis. It is FAR WORSE than anyone had projected so far, and Nokia cannot recover to its pre-February 2011 levels, not even half-way with Microsoft, because of the severe problems with the Microsoft partnership. So please understand what I am saying - some analysts have bravely and optimistically projected Microsoft and Nokia to get something like 20% market share in 2012. That is utterly impossible now. That is a fantasy. The facts now show that Nokia will never recover its smartphones using Microsoft OS, to that kind of levels.
I was one of first analysts to project that the Microsoft announcement would cause a collapse of Nokia sales, and that Nokia smartphone sales this year would hit a level of 17 million sales per quarter, and the average sales prices of smartphones to 116 Euros. The analysis was called by many colleagues as "too pessimistic". Now we have the first meaningful facts i.e. 2Q results. And Nokia is nearing those numbers already. I felt that level would be seen by 4Q of this year, not 4Q. Thus I was being too optimistic! The situation is far worse than even I could have guessed. But now we can make a revision and more accurate projection for the rest of the year and into next year. I will do that on the blog soon, please stay tuned.
WHAT COULD SAVE NOKIA? MEEGO
If Nokia fires its incompetent CEO Stephen Elop and hires some smart CEO from the carrier/mobile operator community, that would be a good start. Then if Nokia abandons the delusional Microsoft strategy, that would be a strong signal. Symbian has now been damaged so badly by Elop that it cannot recover but Nokia has a real chance, if it goes full speed with MeeGo, its home-grown OS. The MeeGo based Nokia N9 smartphone is shortly starting to sell. It is the best-received Nokia smartphone ever, utterly loved by the early reviewers. But idiot Stephen Elop refuses to let the N9 be sold in most markets where Nokia is now bleeding - like the UK, Germany, France, Spain etc - and major international markets like, can you believe it, Elop refuses to release the N9 in India for example!
Nokia N9 - The GodPhone Stephen Elop's Ego never allowed it to be
And what is even worse, there is a SECOND already fully designed Nokia premium smartphone running the amazing MeeGo OS, called N950. And Elop refuses to release that phone to any markets, and it is only given to some developers. How mad is that? The reviewers who hate Nokia and love Apple, are now comparing the N9 and MeeGo to Apple's iPhone, commonly called the JesusPhone based on my article from 2007, and now those analysts are calling the N9 and MeeGo as the GodPhone.
Unlike Microsoft Windows Phone, the MeeGo OS was designed to take advantage of Nokia's competences and components and designs. Thus a MeeGo smartphone by Nokia can take advantage fully of Nokia's competences rather than be crippled like early phones with Microsoft. The MeeGo OS is fully supportive of Nokia's current 400,000 strong app developer community via Nokia's development tools Qt, something Microsoft is not. MeeGo phones are capable of high-end devices at high prices (something Microsoft says WP7 is not capable of). MeeGo production costs would be less for Nokia, and made in Nokia's own factories (The first Microsoft phones will be made in Taiwan by subcontractors! Imagine the lunacy of that CEO decision, when Nokia's own factories are running at half-capacity, he goes and hires an outside factory to make the Microsoft phones. What will that do to Nokia brand value when we hear of suicides at sweat shops, while Nokia's own smartphone factories are idle). And on and on and on.
If the early reviewers are even partly correct, Nokia is sitting on the biggest hit they have ever had. The N9 and MeeGo (and N950) could be to Nokia what the iPhone was to Apple or what the Razr was to Motorola. IF there ever was a time when the N9 was needed - it is now as Nokia profits have vanished. And what a HUGE profit engine would the N9 and N950 be to a market starved for competitive Nokia premium phones! The first Microsoft phone won't ship until the end of the year! But the N9 and the N950 could ship now! Yes now. In 3Q. Both of them! And Nokia has smartphone factories on idle. But the clueless Nokia CEO, Stephen Elop (aka the Microsoft Muppet) - refuses to release the N9 in most of Nokia's biggest and strongest markets, and only offer the N9 in very limited release in 29 countries, many of which are small countries like New Zealand, Singapore and Norway. And he is not even allowing the N950 to be sold. And get this - this from the CEO of Nokia - he told Finland's biggest newspaper, Helsingin Sanomat - that even if the N9 with MeeGo was a huge hit, Nokia will not make more phones on MeeGo. Who is he working for? This from the Nokia CEO?
If the CEO of a company has a hit product and restricts its sales - he is actively destroying shareholder value - it is not only 'cause' to fire him without compensation, it is breach of duty and the shareholders should sue Stephen Elop. Any Nokia Board Members who don't voice a call of no confidence for the CEO are suspect to collusion with the traitor and must also be fired and sued.
ALL HAIL APPLE
So, Nokia invented the smartphone. It had held the global lead in smartphone sales for 15 years. That has been a nice long run. It didn't have to end this rapidly - and certainly Stephen Elop will go down in history as the notorious saboteur CEO who destroyed his own brand and market - but there is a particular poetic justice in who is the new boss.
Apple was once the biggest PC maker. Then came IBM who took it. Apple saw its market erode was on the brink of bankruptcy making losses in the middle of the 1990s. By that time a Finnish phone maker decided to merge the pocket computer and cellphone and invented the smartphone. Then during the 2000s decade the PC makers all agreed that modern smartphones were indeed computers. With Steve Jobs at the helm, Apple joined the smartphone races very late in 2007 with the radical, iconic and all-altering iPhone and its iOS, app store and ecosystem; and in only four short years Apple displaced Nokia as the bigger smartphone maker (we cannot say for certainty if Apple is only bigger than Nokia, or if Apple is biggest smartphone maker - because Samsung might report bigger results as well). Nonetheless, it must be a good feeling over at Apple that their smartphone strategy succeeded in only 4 years to topple the global giant smartphone maker, Nokia.
And now when we add together Apple's Mac shipments, and iPad shipments, and iPhone and iPod Touch shipments - Apple actually sells more 'computers' than any other computer maker including HP, Lenovo, Dell, Acer, Toshiba. So the king is dead, long live the king! Congratulations Apple. The Jesusphone did truly change everything in mobile. Only four years to topple the giant. Wow. We were witness to history.
A TALE OF TWO STEVES
I want to mention also the two Steve's. When Apple was making losses, they brought back Steve Jobs, who rescued the company, turned into a powerhouse which now makes astronomical profits. Then we have Stephen Elop, who came to Nokia when it was making the biggest profits among the traditional handset makers (excluding those who are pure smartphone-makers like Apple, RIM and HTC). So Elop took profit-making juggernaut Nokia - and he destroyed it so it now makes massive losses, while slashing prices to make even more losses (and refuses to release profit-making MeeGo phones). So yes, Steve Jobs is the hero of all technologists. Stephen Elop is the evil opposite of Jobs. Where Jobs turns loss-makers into profit-powerhouses, Elop takes profitable giants and guts them. Hey. Am I the only one who is stunned that while Stephen Elop's Microsoft strategy clearly killed Symbian sales, why are dumbphone sales so badly down? Simple answer if you know anything about brands. When the CEO torpedos his own premium brand Nokia smartphones - that hurts ALL Nokia branded phone sales.
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