Published: 1 June, 2011
Nobody thought this was going to be an easy year for Nokia, with a long transition to a wholly new platform just aggravating its problems in the smartphone sector, for now at least. But even in a market that must have built considerable pessimism into the Finnish giant’s share price, its latest profit warning came as a shock, sending its stock down by up to 18%. Not only did Nokia say second quarter device revenues would be “substantially below” previous guidance, but it gave very few concrete signs of the promised turnaround. Indeed, the visibility is so low for its full year that it tore up its previous forecasts, saying they were “no longer valid”, and refused to issue new ones.
This was all to be expected in a hiatus year, even if the performance will be even worse than anticipated because of rising competition and an ageing product line. But it raises more worrying question marks over the longer term – notably, whether the WP7 strategy will reap the impressive results that will be needed to come back from this deep dip, or whether, by the time Nokia comes to town, others will have stolen the WP7 space anyway. Particularly concerning for the market leader must be the Chinese big two, both of which are expected to adopt WP7 in time for next year. These will go after just the midrange markets where Nokia traditionally thrives, and where it could hope to build up quick acceptance of its new devices while it works – more slowly, unless it really can come up with a WP7 flagship of iPhone-level impact – to infiltrate the high end territories commanded by Apple, Samsung, HTC and RIM.
ZTE said last week it would support the newly announced Mango upgrade to WP7 and Huawei is considering a similar move, though its plans are less definite. Both would run Windows as a second string to Android. Nonetheless, this is serious stuff, because of the firms’ rising influence in emerging economies and among carriers looking for affordable smartphones for prepaid or youth tariffs. These are also Nokia’s heartlands, and increasingly its main sources of unit growth – it may have invented the smartphone, but since losing its way in the touch-enabled apps race, it has become firmly midmarket, and with its famous brand retaining its allure only in the low cost territories like India, where Nokia has invested so heavily in mobile services and where Apple and co hardly venture.
For these reasons, Nokia had real reasons to hope that the march of Android – and especially of iOS and BlackBerry – would have been sufficiently gradual, compared to the developed countries, that it would have breathing space to keep Symbian robust and then attack that base with WP7. In the advanced mobile markets, it will have the more difficult task of coming up with a leapfrog device that will actually steal share from a dominant Android and Apple. But in territories like India and Indonesia, it could hope to keep its bases loyal and address them with a dual-pronged strategy of Symbian and WP7. Serious moves by Huawei and ZTE could wreck this strategy, not just by putting greater resources into low cost Android models, but by introducing WP7 to the mass market ahead of Nokia.
And though the early WP7 models are resolutely high end, markets like China are vital to it. Microsoft has three standard chassis designs for the platform, only one of them currently in broad use, but another targets the more affordable smartphone. Despite its wish to keep a rein on the number of WP7 OEMs in order to safeguard the user experience (see separate item), Microsoft will certainly not exclude a firm that could get it a major presence in China or India. One motive behind its alliance with Nokia is that the Finn could deliver it a mass market for WP7 without involving deals with hundreds of small vendors – but at the rate they are going, Huawei and ZTE could do the same, and will be assiduously cultivated by Microsoft to lure them away from Android. After all, not all the problems noted in the profit warning were about high end segments – Elop picked out China, as well as Europe, as the main problem zones, citing “quite frankly mismanagement” of channel inventory in the former. And he said there had been huge competitive pressure on the mass market phones, noting: “Even though a lot of the news has been about Symbian and so forth, we have faced very specific competitive pressures on the featurephone side as well, and faced some of the same portfolio challenges.”
None of this will delight Microsoft, which already has significant activity geared to building emerging market share, including its Chinese deals with MediaTek and Marvell. Nokia will lose some power in the relationship if it does not perform well in these key territories. It likes to present WP7 as a more carrier friendly alternative to the disruptive Google, and this message will often go down better in Asian countries than in the west. Large carriers in these economies, such as China Mobile, are more insistent than their western peers on having a second platform alongside Android, to keep Google’s power in check – and Huawei and ZTE could help to deliver that.
In many ways, ZTE and Huawei are more comprehensible rivals to Nokia than Apple or Google, drawing on some of the same strengths, such as manufacturing scale and a strongly controlled ecosystem. They lack the hardware design excellence, at least at this point, but many of their other weaknesses are Nokia’s too, notably an unsophisticated approach to user interfaces and apps (again, so far). Both have handset growth that Nokia can only dream of these days, and ambitious targets.
For Huawei, supporting a second smartphone OS would be part of those ambitions for the handset space. It told Taiwanese newspaper DigiTimes last week that it aimed to double its cellphone sales this year, and to shift 60m units. This target includes 12m smartphones, which would represent a 400% increase in its 2010 figure. Huawei plans to launch eight to 10 new smartphones this year, 80% of them entry or midtier models. Its broader ambition is to enter the handset top five in 2013, following ZTE, which in certain quarters has already achieved that position, at the expense of Motorola and Sony Ericssson.
As well as a smartphone push, Huawei plans to sell more devices under its own brand, rather than focusing mainly on white label products for carriers. It will start promoting its own brand in China and the UK later this year, and then in the US, Japan, India and Indonesia from 2012. There are no firm plans on the WP7 front though. According to ZDnet, Xu said Huawei was “just watching” the operating system, though it has "had some discussions with Microsoft" and will "probably" release a device in 2012.
Nokia will be praying that it comes later in 2012 rather than earlier, to avoid the risk of another dire profit warning like this week’s. This indicated that revenues for the Devices and Services unit in the second quarter will be “substantially below” former guidance of €6.1bn to €6.6bn, while operating margin could be only breakeven.
In its statement, the firm said: “Multiple factors are negatively impacting Nokia’s Devices & Services business to a greater extent than previously expected.” Device volumes and average selling prices will both be lower than originally expected, and it added: “While visibility is very limited, Nokia’s current view is that the second quarter of 2011 Devices & Services non-IFRS operating margin could be around breakeven” (rather than between 6% and 9% as previously targeted).
Nor is this a one-quarter agony, with the rest of the year looking bleak. The firm went on to day that, in light of the “unexpected change in our outlook for the second quarter, Nokia believes it is no longer appropriate to provide annual targets for 2011”. The company reports its Q2 results on July 21.
In an analyst call, CEO Stephen Elop focused on Europe and China as the main areas of weakness, though offered few details. In western Europe, where Nokia ruled supreme until recently, it has been overtaken by Samsung and Elop sees Android in general as the main factor. “We are seeing a large volume of Android devices really coming in to the market. They are largely undifferentiated from one another, which is putting pricing pressure there upon. Which, in turn, affects the overall ranging decisions of the operators,” he said, acknowledging that the huge scale of the multi-supplier Android market could outdo even the legendary economies of Nokia and its fiercely managed supply chain – and its own scale is, of course, being eroded along with its market share.
CEO Stephen Elop sought to reassure investors and customers that action was already being taken to address the issues facing Nokia, particularly the urgent need to launch a convincing WP7 device – indeed, with smartphone share slipping away to Android vendors plus Apple by the day, it needs to be more than convincing. Elop said he had “increased confidence” that Nokia would ship its first WP7 product in time for the holiday season, and commented: “Strategy transitions are difficult. We must accelerate the pace of our transition.”
His aggressive stance on timing was echoed by Jo Harlow, EVP of smart devices, who promised Nokia would push out its Windows handsets “at a fast clip” from year end, to get some scale into this segment. "We should be launching new devices in a rhythm that might be every couple of months, every three months, something like that," Jo Harlow, Nokia's EVP of smart devices, told PC Magazine. Nokia plans to launch its first WP7 device this year, and will begin shipping in volume from early next year. It will support Mango from the start and will use Qualcomm chipsets at first, then expanding its reach to include ST-Ericsson and possibly others.
Elop said Nokia was already laying the groundwork, holding “specific discussions” with carriers, planning marketing campaigns that would prevent the firm being “out-shouted by our competitors”, and keeping the channel “well lubricated”. He also echoed Microsoft’s favorite theme, that it can be a carrier friendly alternative to Google and Apple. “Android is gaining strength, Apple is Apple of course, and there is a clear desire from operators around the world to have some degree of balance in the ecosystem. In other words, they are looking for that third horse, they are looking for that third ecosystem, to create a sense of balance,” Elop concluded.
Harlow enlarged on that, saying Nokia was in talks with all the major US carriers and hopes that WP7 handsets will finally bring a breakthrough at CDMA operators, a market that has been closed to Nokia before – and which was cited as a reason for poor performance in China.
Meanwhile, Elop said Nokia would continue to support Symbian until 2016. The CEO told Nokia Conversations: "We're in a period where the investment in Symbian absolutely continues. Even as we go through a transition towards our primary smartphone platform, Windows Phone, you will see that continued investment. We've now been very clear about that, that software updates to Symbian devices are expected until at least 2016. So there's a long history still to be paved for Symbian in the future."
But all eyes are on WP7, and in the meantime, Nokia only has ageing products to sell, destroying its famous margins and reducing its economies of scale. “They are forced to discount a lot,” Lee Simpson of Jefferies International told Bloomberg News. “No-one wants these handsets. This is the real terrible year for these guys.” Yet Nokia is forced to talk up its legacy platforms until it has something new to offer, and then it must hope that it will not have come to the party too late.