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Was Nokia’s quarter really that bad?

by Scott Bicheno on 21 July 2011, 17:10

Tags: Nokia (NYSE:NOK)

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Try to stay calm

As soon as Nokia belatedly announced its Q2 earnings today the wailing, gnashing of teeth and shaking of fists at the sky commenced. It was carnage, disastrous, a horrific train crash.

Twitter was even worse, with former Nokia exec Tomi Ahonen deriving apparent glee from every new bit of bad news he could extract from the results, and retweeting messages of congratulations to him for predicting Nokia's demise. Other traditional Nokia antagonists weren't far behind, and Ahonen also managed to turn around a lengthy blog post within half an hour of the results, on which more later.

Now don't get me wrong, these were ugly figures. Nokia made a big loss, which would have been closer to a billion euros were it not for a one-off royalty payment of €430 million, presumed to be the majority of Apple's settlement with Nokia. Not only did smartphone sales plummet, even feature-phones saw declines of 20 percent in both volume and revenue.

But this was all more or less expected. Nokia had told us to expect device revenue to fall short of the previous guidance in a special sales warning, which it duly did. But given those lowered expectations, Nokia's total revenues and EPS actually beat analyst expectations, and as a consequence its share price has actually been up around three percent since the announcement.

ZDNet asked Why is anyone surprised by Nokia's poor 2nd quarter performance?, and observed: "Of course their results are poor, they are completely changing the operating system strategy on their smartphone platform so they will have poor results for the next couple of quarters as well. It would be major news if they actually showed positive results."

I agree with ZDNet on that one, but I must also confess that I rejected quite a few histrionic headlines myself before opting for a more measured one. It's the tabloid journalist in me fighting to get out, I suppose, and I almost certainly lost out on traffic to my story by doing so. But I don't regret it, because I'm not a tabloid journalist, and I do let the facts get in the way of a good story.

The focus of Ahonen's ire seems to be CEO Stephen Elop, and his decision, not just to abandon Nokia's in-house smartphone platform plans in favour of Microsoft's WP7, but to announce it a year before any such products will be available to buy.

I have some sympathy with the latter point. Quarters such as this one became inevitable once Nokia publicly rejected Symbian, on which its current smartphones run. Why would anyone now buy a phone based on technology that even its owner has acknowledged is obsolete? With that in mind, persuading 16.7 million people to buy one regardless was s pretty good effort.

But how much better would sales be if Elop had kept his cards closer to his chest, and pretended the Nokia N9 was the first of many MeeGo phones? Almost certainly a bit better, but the news would probably have leaked by now, and the uncertainty may well have weighed just as heavily on Nokia's share price, which is ultimately the most important metric for a public company.

Elop seems to have been determined from day one to change the internal culture at Nokia, and that meant he had to do something about the denial that anything was fundamentally wrong. Funnily enough Ahonen has been identified by Apple-insider Jon Gruber as typifying such denial, blogging that he summarises everything that's wrong with Nokia.

That blog post was written at the time of the WP7 announcement, when Elop's ‘burning platform' memo was conveniently leaked. In explaining why he thought the memo was a forgery, Ahonen questioned the statement that Nokia had missed big trends by listing all the things Nokia did before everyone else. While there's no doubt that Nokia has been a great innovator, Apple has done many of these things better and has owned Nokia accordingly.

I completely disagree with the Ahonen's apoplectic assertion that things would be better at Nokia if it had stuck with Symbian and MeeGo. The reason Elop was taken on in the first place was because it was clear that Nokia was on the ropes thanks to its uncompetitive software ecosystem. He talks about Symbian being irretrievably damaged by Elop, but it was already reviled before he got the job.

As for MeeGo, Elop concluded soon after he joined that Nokia would probably only launch one MeeGo phone per year before 2014. While it could be argued that Apple does just fine on one phone launch per year, a bigger problem would have been the ecosystem.

The market can realistically only support four mobile ecosystems. Apple, Android and BlackBerry are here to stay, so MeeGo would have had to supplant WP7, and Elop clearly couldn't see that happening. So it came down to Android or WP7, and Elop went with the latter - reasoning it would be easier to differentiate Nokia handsets using a less ubiquitous platform. His relationship with his old boss Steve Ballmer presumably contributed too.

Q2 was the first full quarter following Elop's WP7 announcement; we should therefore not be surprised that smartphone sales went down the toilet. Perhaps more worrying was the fall in feature-phone sales, with Nokia currently experiencing a perfect storm of competitive pressure at both ends of the market.

The next three quarters will almost certainly be ugly too, but as Nokia's share price today has shown, investors have already priced this in by almost halving the value of the company this year. Expect more blogger melodrama in three month's time, but for a more sober assessment of Nokia's progress it might be advisable to just watch the share price.


HEXUS Forums :: 7 Comments

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There is light at the end of the tunnel for Nokia. With all the recent positive publicity on Windows mobile 7 and revenue it may produce, Nokia will be the fore running to supply the hardware for making such revenue.

We all know Nokia can make the phones. We all know Microsoft can sell snow to Polar bears - I think this time next year we may all be looking at Nokia/Microsoft phone

Anyone bored of iphones ?
Anyone bored of all the crap on Android now ?
Maybe its time for a fresh start.
the fresh start has already started, the transitioning period will begin in september with mango update.

it just takes sometime for peoples brains to be rebooted and be fully comptible with windows phone 7.
Nokia should concentrate on Meego!
Nokia should concentrate on Meego!
Well isn't that just a well thought out justified view!

The problem was Nokia couldn't do softare, they know this.
I love Nokia phones, but i hate nokia software. Android is definitely wearing thin and WP7 looks the part - Mango is adding the features to back that up. I certainly haven't been in contact with a nokiasoft prototype phone, but if i had, I'd think that there were going to be good times ahead… :rolleyes:

With that in mind, persuading 16.7 million people to buy one regardless was pretty good effort.

Elop seems to have been determined from day one to change the internal culture at Nokia, and that meant he had to something about the denial that anything was fundamentally wrong.

was a pretty good effort
he had to do something