The Downfall Of Nokia

Published in Company Comment on 1 June 2011

The former leader of the mobile phone market is on the ropes.

Just over a decade ago, the Finnish mobile phone maker Nokia was the darling of the technology sector, and no share portfolio was complete without a chunk. In fact, if you bought some in the late nineties you could have made yourself a tidy packet -- provided you sold at around the time of the tech boom, before they started to slide.

Although the was some respite with a bit of a surge in 2007, the shares have fallen from their $56 peak of early 2000 to $7 today -- while over the same period, shares in iPhone maker Apple have risen around 10-fold, and shares in Google, the makers of the Android platform, are up about 5-fold since flotation.

Profit warning

And on Tuesday this week, the news for Nokia shareholders got worse, as the company issued a pretty severe profit warning.

Sales for the second quarter of 2011 are now going to be substantially lower than the forecast range of £5.3bn to £5.7bn, and the company's operating margin will be substantially below the previously estimated 6-9%.

Perhaps even more worryingly, the company has withdrawn all guidance for the full year -- further details of the current situation are expected towards the end of next month.

All of this comes on the back of last month's news of the loss of 7,000 worldwide jobs, as the company refocuses its strategy on smartphones -- a change that few will disagree is perhaps just a wee bit late.

Nokia is still hoping that its new smartphones, based on Microsoft software after it dropped its own Symbian system, will be released in the final quarter of this year -- more than four years after the first iPhone was launched.

What went wrong?

Nokia is still the world's largest seller of mobile phones (I have two, and they're both Nokia), but it's the plain old "just for talking to people" segment that it dominates, and there's less and less profit to be had there -- my last Nokia phone cost me £4.95, and even allowing for its subsidised price, there's no margin for anyone in that.

Nokia was successful in pioneering mobile phone development because those old phones were what Nokia was best at. It was a telecommunications company, and it knew all about electronics, radio reception, signal processing, power management, etc. 

Software was somewhat secondary -- get the communications protocols right, and provide a relatively simple user interface.

But today's phones aren't phones -- they're versatile computers which just happen to have telecommunications as one trick in the bag. And that's not what old style telecoms companies do best -- it takes smart software companies. Symbian's development was too slow, it was too late to the smartphone arena, and it was quickly outclassed by Apple's iOS and Google's Android.

Looking to buy and sell shares online?

If you're looking to trade shares online -- then look no further than The Motley Fool's
very own Share Dealing Service. Our execution only service lets you trade
UK shares for just £10, or international shares for just £17.50.

Free transfer from your current broker* -- No annual fees -- Free investor support tools

Click here to find out more or to open an account

The value of your investments and the income from them can go down as well as up. You may not get back the full amount you have invested. Foreign currency conversions are required to facilitate the settlement of international transactions and include a spread, which can vary from time to time, applied to the available exchange rate. *Your current broker may charge you for leaving their service. Please contact them directly for details of any exit fees.

Poor choice

Dropping Symbian was a good move for Nokia, but what came next could, in my opinion, turn out to be a disaster. Instead of adopting the obvious Android platform, Nokia plumped for Microsoft.

One has-been jumping into bed with another has-been is rarely a sound technological plan, and though Microsoft may have many years of profitable business ahead of it from its very large legacy PC market, when it comes to new stuff like phones and MP3 players, it's a disappointing also-ran.

Windows Phone 7 is still in its very early days, and whether it will make it into new Nokia phones by the end of the year, as planned, is a far from certain. Android, on the other hand, has been out there in many devices from a whole range of manufacturers for several years, has had a lot more real-world testing, and is popular. Would a jump to Android have impressive Nokia smartphones ready and bug-free a lot sooner?

Why did Nokia head for Microsoft's bed? Well, the answer to that seems simple -- the company's new CEO, Stephen Elop (the first non-Finn to head the company, having taken over the reins from Olli-Pekka Kallasvuo in September 2010), was previously head of Microsoft's business division. I do hope Nokia shareholders will not come to rue his appointment.

And the competition…

Meanwhile, in a week's time, Apple will be hosting its 2011 Worldwide Developers Conference, with Steve Jobs delivering the keynote -- details of iOS 5 are expected, together with iCloud, the company's upcoming cloud services development. Eyes will not be focused on Finland.

Reckon my fears of the death of Nokia greatly exaggerated? Let us know, below.

More from Alan Oscroft:

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

UncleEbenezer 01 Jun 2011 , 6:04pm

Nokia a couple of years ago: some excellent phones (including E-series smartphones), together with a lot of crud. I'd choose my E71 again over iphones, androids or blackberries I've seen, not for the symbian but for the superb build, the battery life, and the comfort and convenience of using it day-by-day.

February 2010[1]: the developer community (including me) was excited about the new Maemo platform. A full-blown Linux optimised nicely for the small screen, and looking more Free[2] and Open than Android.

A month or two on, they abandon Maemo in favour of MeeGo, the joint project with Intel. Developers on Maemo left high-and-dry. That's the point where the lost the goodwill they needed to build a vibrant ecosystem around a great product.

That's a full year before the Microsoft announcement they effectively dropped out of the smartphone race. Nokia and Intel looked like two ex-growth companies pinning their hopes on each other, with Nokia the more vulnerable to competition in existing markets.

The Windows deal looks good for Microsoft, but as you say it's hard to see how it helps Nokia. To be taking crumbs from the rich man's table, I think we can infer Nokia was already on the ropes after too much drifting.

[1] Specifically FOSDEM, a huge annual conference of about 5000 geeks.
[2] Free as in Free Software - the emphasis being on liberty, not cost.

LastChip 02 Jun 2011 , 12:25am

They may as well signed their own death warrant.

A huge mistake going with Microsoft.

Are these company's run by morons?

That alone tells me they've no idea what they're doing and to stay well clear.

eccyman 02 Jun 2011 , 6:37am

" Instead of adopting the obvious Android platform, Nokia plumped for Microsoft."

Is that a case of hindsight being 20:20?

jaizan 02 Jun 2011 , 6:39am

I follow Peter Lynch's policy of avoiding investments in this sector.

All it needs is someone to build a better product and even Apple could be knocked off their perch relatively quickly.

jackdaww 02 Jun 2011 , 9:07am

a dead end business.

ive put my faith in vodafone which makes networks not gadgets.

digitaria 02 Jun 2011 , 10:52am

"it was too late to the smartphone arena"

Consider the Nokia 9000 Communicator, which arrived in 1996. The first device I can recall which could today be recognised as a "smartphone".

So Nokia wasn't late to the smartphone arena - it was there long before Apple and Google. But it seems to have got the strategy wrong, time and time again. Now, aligning with Microsoft, rather than Android or a Linux variant, seems wrong again. Time will tell...

eccyman 02 Jun 2011 , 11:25am

"All it needs is someone to build a better product and even Apple could be knocked off their perch relatively quickly."

Not many people realise how old Apple is, it was formed and 1976 and launched the first Mac in 1984. However it's ascendancy is quite recent.

Inevitably it's only a question of time before they're knocked off their perch - but I know not and by whom. Probably some kids in a garage in California who're working on a Apple smasher right now

As Jaizan says, technology is a very fickle sector, plus Apple has the issue of Steve Jobs health. I work in the technology sector and have done for years - I know what a fashion conscious industry it is and also how good people are at predicting last years winners...

TMFBoing 02 Jun 2011 , 11:33am

" Instead of adopting the obvious Android platform, Nokia plumped for Microsoft."

Is that a case of hindsight being 20:20?


Don't see how it can be really, seeing as we don't know the outcome yet.

Cheers,
Alan

Gruth 02 Jun 2011 , 1:53pm

Actually, Vodafone don't make networks (or even operate them) - they contract this work to Ericsson, Nokia Siemens Networks and Huawei. Since NSN is a JV between Nokia and Siemens part of these poor results come from networks.

Which brings me to another point - one of the problems with Smart phones etc. is that because they dont use the clever telecoms protocols as effectively as they could (cf old Nokia phones), they place much greater demands on the network than they should do which is expensive for the operators. Ultimately, they need to address this because the network operators are devising new ways to recover the costs of inefficient Smart phones from consumers.

LiberalThug 02 Jun 2011 , 11:57pm

"All it needs is someone to build a better product and even Apple could be knocked off their perch relatively quickly."

I disagree. Apple has created some very impressive moats around its business, and they continue to entrench them with massive year on year R&D and design investments. Most importantly, they set the agenda - look what Apple has done in terms of digital music players, online music sales, software apps, smartphones, tablet computing - they set the agenda and everyone else is playing catch up.

HKres 03 Jun 2011 , 5:07am

I've owned several Nokia phones as well as an Ericcson and a Motorola and I always thought they were the best. I still keep a 6510 for use with a local SIM when I'm abroad. I also owned 2 Psion PDAs and the operating system on that was superb. So when I decided to buy a smartphone, I plumped for an N97 mini. What a mistake! It's the most frustrating phone I have ever used. It's not at all intuitive; it seems to have been designed by a "team" who didn't speak to each other. It frequently hangs and the WiFi connection refuses to connect through a selected connection most of the time. The GPS won't work in standalone mode and the operating system can't be updated through the WiFi, only through the service provider or via a PC (and I have an iMac!). As soon as I can sell it, I'll be buying an Andoid phone.

UncleEbenezer 03 Jun 2011 , 10:38am

HKres, see my first line:

Nokia a couple of years ago: some excellent phones (including E-series smartphones), together with a lot of crud.

From what I've seen, most of the N-series is the cruddiest of the crud. Your sort of experience is based on historical blunders they're now painfully aware of. It's just a shame they threw away the baby before the bathwater (and look like replacing the latter)!

eccyman 03 Jun 2011 , 1:58pm

If Nokia called in management consultants they'd give the same advice they give to most of their clients - Concentrate on their core competencies, which in Nokia's case is...making paper.

Tridhos 06 Jun 2011 , 3:43pm

I had Windows on my Samsung Omnia, I was constantly having to reboot just like you did with the PC versions of Windows. Now I wouldn't touch a phone with Windows installed. Must admit I have been very impressed with Apple very easy to use and I am in my late sixties.

WhiteHatBobby 07 Jun 2011 , 1:15am

In the US market, the major problem is Nokia is having a hard time negotiating with the major players (AT&T (NYSE.T), Sprint (NYSE.S), Cellco Partners (Verizon and Vodafone).

jasonjarvisgbr 07 Jun 2011 , 5:39pm

Who knew so many industry experts were lurking around the Fool ?

They've made some tactical errors, I agree, but if you can name a company or individual who could have defended a dominant position from direct and persistant attacks from LG, SONY, SAMSUNG, APPLE, GOOGLE, MOTOROLA et al ?

Not many, if any.

Secondly, choosing Microsoft as a partner is a very reasonable decision, given the options available. You can't partner with Android, it's not a company - it's lines and lines of program code.

They could adopt Android as a platform - but then so could I, and so you could you, and then we'd all be just like the next Grey Gadget company in Shenzhen. The point is, anyone can take Android and do anything they want with it. Anything that is, except assert ownership of it for competitive advantage - anything you do with Android, pretty much everytone else is entitled to do too.

So what's left on table ? Who's got the ability to add real value to your expertise in making handsets ? A company with infinite resources and, infinite talent and corkin' record of turning a profit out of software and services ? Who's got a massive user base, a loyal following, the clout to signup key partners and oh, a burning desire to give Apple a kick in the bollocks ?

Why, it's the Redmond Rancheros themselves, Microsoft.

Time will tell if its a winning decision, but it's certainly not dumb. Will it return them to dominance ? I doubt it very much....but I do think we'll look back and say, that was the deal that saved the company.

MarkWakefield 08 Jun 2011 , 12:37am

“”Symbian's development was too slow, it was too late to the smartphone arena, and it was quickly outclassed by Apple's iOS and Google's Android.””
Actually it was the first to market and was the market leader for some years. Under the skin it's still way ahead of iOS as it is a real MT OS unlike iOS. It's a real shame that Symbian sold out to Nokia but to say it was quickly outclassed is simply wrong.
Having said that there were issues with the platform in that it was difficult to develop on and trying to work with 4 big manufactures was a big problem.
MS desperately wanted to be part of Symbian in the past but were excluded from the Motorola/Nokia/Ericsson/Samsung/Panasonic/Etc partnership despite much wrangling.
Now, given the dominance of Apple and Google I think that a tie up with Nokia and the enemy MS could be very good. Nokia have the Hardware and a huge amount of SW experience. MS have the whole windows platform to exploit throughout the Windows world.
I for one will welcome some new competition.
Interesting times ahead me thinks.


TMFBoing 08 Jun 2011 , 1:56pm

It's a real shame that Symbian sold out to Nokia but to say it was quickly outclassed is simply wrong

I think it was outclassed in terms of usability and associated services - like app stores hosting thousands of bits of admitted tat, but the kind of tat that kids like and which sells the underlying platform.

Interesting times ahead me thinks

I do agree with that, yes.

Cheers,
Alan

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.