Compared to the same quarter last year, Nokia overall revenue is down 29%, to $9.7B. And the company is now losing money, $1.8B, 18.5% of revenue. [Nokia’s official numbers are stated in euros, I convert them at today’s rate of $1.32 for 1€.]
One year after Nokia’s decision to jump of its “burning platform”, this yet another bad quarter and leaves one to wonder about the company’s future. Many, like Forbes’ Erik Savitz, think The Worst Is Still To Come.
I see three life-threatening problems for the deposed king of mobile phones.
First and potentially most lethal: Nokia is burning cash. As the chart above documents, Nokia’s Net Cash went down 24% in one year. From page 5 of the Earnings Release: “Year-on-year, net cash and other liquid assets decreased by $2B…. Sequentially [emphasis added], net cash and other liquid assets decreased by $.9B”. Here, the word sequentially means compared to the immediately preceding quarter, as opposed to the same quarter last year.
Elsewhere in the document, on page 6, we learn Microsoft provided $250M in “platform support payments”. If you back this amount out, you see Nokia’s operations have in fact consumed $1.15B, a significant fraction of the company’s $6.4B Net Cash. This cannot continue for very long and leads Henry Blodget to worry Nokia could go bankrupt in two years or less.
Henry’s view might be a bit extreme; Nokia has assets they could convert to cash, thus giving itself more runway for its recovery efforts. But, as we’ll see below, the company’s prospects in both phone categories don’t look stellar. And bad things happen to cash when the market loses confidence in a company’s future: vendors want to be paid more quickly, customers become more hesitant, all precipitating a crisis.
Second, the dumbphone (a.k.a. “Mobile Phones”) business, still Nokia’s largest, is now in a race to the bottom:
Volume is huge, 70.8M units; it dipped 16%, not a good sign. Worse, the ASP (Average Selling Price) went down 18% to $44 (33€). Mostly in developing countries, Nokia is now losing ground to the likes of Huawei and ZTE selling feature phones and smartphones, both very inexpensive. Unsurprisingly, Nokia claims they’ll counterattack with their Asha family of mobile phones. Few, outside of Nokia, or even inside, believe they can win a brutal price cutting fight against those adversaries.
Last, Nokia’s last hope: Their new Windows Phone “Smart Devices”.
As the chart above shows, Nokia’s smartphone business keeps sinking: -51% in volume compared to the same quarter last year. And, with a $189 (143€) ASP, it can’t make any significant money as $189 is about what it costs to build one.
As for the latest Lumia smartphones, the reviews have been mixed. So are sales, according to Stephen Elop, Nokia’s CEO. Going to the earnings release, I searched for the word “Lumia” in the document. It appears 29 times. — without any number attached to it, just words like “encouraging awards and popular acclaim”. Which can only mean one thing: Actual numbers better left unsaid.
Things don’t get better when, according to Reuters, mobile carriers in Europe pronounced themselves ‘‘unconvinced”, finding the new Lumia smartphones “not good enough”. It is worth noting things could be better in the US where AT&T appears to make a real effort selling Lumias, and where Verizon recently stated its interest in fostering a third ecosystem with Windows Phone devices.
Unfortunately, we also hear a puzzling rumor: Existing Lumia phones wouldn’t be upgradable to the next OS version, Windows Phone 8, code-named Apollo. Both Mary Jo Foley, a recognized authority on things Microsoft, and The Verge, an aggressive and often well-sourced blog, support that theory.
So far, in spite of the potential damage to their business, neither Microsoft nor Nokia have seen fit to comment. Should it be true, should current Lumia buyers find themselves unable to upgrade their software, Microsoft would be about to commit a massive blunder.
But why would they do this? Apparently, the current Windows Phone OS is built on the venerable Windows CE kernel. Setting veneration aside, Microsoft would have decided to use a more modern foundation for Windows Phone 8. And said modern foundation would not run on today’s hardware. For Nokia’s sake, I hope this is incorrect. The company already convinced its customer Symbian-based phones had no future. Sales plunged as a result. Doing the same thing for today’s Lumia devices would be even more dangerous.
A little over a year ago, in February 2011, Nokia’s brand-new CEO, Stephen Elop issued his ‘‘memorable” Burning Platform memo. In it, the ex-Microsoft executive made an excellent point: Having no doubt observed the rise of Google’s Android and of Apple’s iOS, he concluded Nokia was no longer in a fight of devices but in a war of ecosystems. Elop next drew an analogy between Nokia’s jumbled smartphone product line and a burning North Sea oil-drilling rig. To him, the company had no choice: instead of staying on the platform and dying in the blaze, he suggested plunging in freezing waters — with a chance of staying alive. Which, as he soon revealed, meant jumping off Nokia’s Symbian and Meego software platforms and joining the Microsoft Windows Phone ecosystem.
Today, Nokia bleeds cash, its dumbphone business in a race to the bottom, and its plunge into the Microsoft ecosystem isn’t off to a good start. What’s next for the company? Can it turn itself around, and how?
With hindsight, it appears the premature announcement of the jump to Windows Phone osborned Nokia’s existing smartphones. Their sales dropped while the market waited for the new devices running Windows Phone. Some, like Tomi Ahonen, an unusually vocal — and voluminous — blogger, think Elop should be fired, and Symbian and Meego restored to their just place in Nokia’s product line. This isn’t very realistic.
Closer to reality is Microsoft’s determination to get back in the smartphone race, almost at any cost. (For reference look at the billions the company keeps losing in its online business. $449M this past quarter.)
At some point in time, if Lumia sales still barely move the needle, Microsoft would have to either drop Nokia and look for another vehicle for Windows Phone. Or it will have to assume full control of Nokia, pare down what it doesn’t need, and do what it does for the Xbox, that is be in charge of everything: hardware, software, applications.