This is a longer analysis, with some mathematical modeling and showing the logic involved. Some of my readers will want to see how I came to the conclusions. But others may only want the top-line numbers, as this is a series of articles studying the biggest destruction of market value of any corporation in the history of technology companies.
Here is the overall projection. Please read the full analysis to see how I came to this projection. And please note, these are based on real world smartphone performance numbers and an absolute best-case, i.e. using Google Android and Apple iPhone as the benchmark – even the most optimistic Nokia smartphone execs will not claim they can match Google Android or Apple iPhone with the Microsoft Windows Phone performance. But this is what the Noki-Soft Micro-Kia smartphone performance looks like from end of 2011 to end of 2013.
Note: From Third Quarter 2011 onwards, all numbers are projections by TomiAhonen Consulting.
- 4Q 2010 – 28 M total Nokia Symbian smartphones (this was 29% market share before MSFT tie-up)
- 1Q 2011 – 24 M total Nokia Symbian smartphones
- 2Q 2011 – 17 M total Nokia Symbian smartphones (this is 15% market share today)
- 3Q 2011 – 13 M total Nokia Symbian smartphones
- 4Q 2011 – 11 M total Nokia smartphones – 1 M WP7 + 10 M Symbian (Market share hits 7% by time Microsoft phones arrive)
- 1Q 2012 – 11 M total Nokia smartphones – 4 M WP7 + 7 M Symbian
- 2Q 2012 – 11 M total Nokia smartphones – 7 M WP7 + 4 M Symbian
- 3Q 2012 – 11 M total Nokia smartphones – 10 M WP7 + 1 M Symbian (Nokia market share bottoms out at 6% before starting painful and slow climb back)
- 4Q 2012 – 12.4 M total Nokia Microsoft WP7 smartphones
- 1Q 2013 – 14.0 M total Nokia Microsoft WP7 smartphones
- 2Q 2013 – 15.9 M total Nokia Microsoft WP7 smartphones
- 3Q 2013 – 17.9 M total Nokia Microsoft WP7 smartphones
- 4Q 2013 – 20.3 M total Nokia Microsoft WP7 smartphones (est. 8% market share)
I will be returning with more analysis of those numbers, adding the value calculations, average sales prices, total revenues, profits etc. as well as calculating the true cost that Stephen Elop’s mad strategy is now costing the company.
This is the best case scenario, and Nokia in fourth quarter of 2010 saw increasing smartphone sales (that is true!) with increasing average sales prices and increasing profits (that is true! it means Nokia’s Symbian was not failing in the market, it was actually a hit product that was then killed by CEO Stephen Elop in February). And Nokia trades the world’s biggest smartphone OS platform, with 29% market share and growing sales, growing average prices and growing profits, for 8% market share with diminishing average sales prices and vanishing profits. But please read the full blog to understand how I get to these numbers and why this is indeed the best case scenario for Nokia.
HE DID NOT ANTICIPATE THE OSBORNE EFFECT?
We now have the first full quarterly data on what the self-inflicted damage of the ‘Osborne Effect’ as caused by Nokia CEO Stephen Elop is causing to Nokia’s current line of smartphones. We also know that the reseller market has put Nokia smartphones on a sales boycott (Nokia acknowledges as much, with Stephen Elop saying there were "unexpected sales and inventory patterns" and Nokia explaining in the Q2 results:
"Distributors and operators purchased fewer of our devices across our portfolio as they reduced inventories of Nokia devices."
That’s trying to paint a nice picture over the cruel reality of a reseller boycott, as has been reported in the press since March of this year.)
As regular readers know, I was one of the first analysts to make a projection of what the February 11 announcement of the Nokia-Microsoft alliance would do to year 2011 Nokia smartphone sales, on February 15. That analysis was widely referenced and many commented that while my general direction was correct, I was being too harsh on Nokia, that the damage would not be so bad as I projected. Unfortunately that turned out to be true. All of the individual elements projected here – declining market share, declining unit sales, declining average sales prices, declining total revenues and declining (vanishing) profits – turned out to be true. But as I warned, that was the ‘rosy’ scenario. The reality was much worse. Most of the projections I had anticipated for fourth quarter 2011 have already happened or are happening as we speak in the actual quarter.
But that projection was made with the best available knowledge, and without knowing really how badly Nokia sales would decline. Now we have one full quarter of data and can give a much more accurate forecast. And now we can clearly see that Nokia’s market share in smartphones will continue to collapse through the second half of this year, as Nokia desperately attempts to push ever more undesirable Symbian based smartphones to the market – another 10 new models will still be released this year, says Nokia. They will fare increasingly worse in the market. By the end of 4Q, Nokia’s market share will be about 7% and its sales of smartphones will have fallen to about 11 million. To compare, in 4Q of 2010, Nokia’s market share was 29% and it sold over 28 million smartphones.
WORLD RECORD DESTRUCTION OF A BRAND
I have made the point before, but need to re-iterate. Nokia’s Symbian based smartphones had been suffering in the market recently, as late as the summer of 2010. But by the Autumn, when the new Symbian operating system version, called S^3 had shipped on for example the N8 smartphone, Nokia’s Symbian based smartphone platform was in strong rebound mode.
That may sound strange to many readers, but on BSN* we do not deal with fantasies and myths – we deal with the real world numbers and facts. We now have not only the sales performance numbers, we have Nokia’s re-organization-based accounting – we can see the actual performance of the smartphone unit! So going from third quarter of 2010, when Nokia did not have Symbian S^3 based smartphones, Nokia sold 26.5 million smartphones, at an average sales price (ASP) of 136 Euros ($177). The general trend of the ASP for Nokia had been falling by about 10 Euros (about 7%) per QUARTER. The total revenues of the smartphone unit was 3.6 Billion Euros (about $4.7 Billion) and the profitability of the smartphone unit was at 9.3%. The total amount of profit ("Contribution") by the smartphone unit was 335 million Euros ($435 million).
Then came the new Symbian S^3 on several phones, led by the new flagship phone N8 which set a Nokia record for fastest sales in a quarter. All declining trends were turned into growth – this tells us the market loved Nokia’s new smartphones on the new Symbian S^3 operating system and this is absolute proof that Nokia was on a come-back. Whatever you
may have thought of Symbian prior to fourth quarter of 2010, became obsolete. Nokia had indeed on its hands, a true hit series of phones and a hit operating system with the N8 setting internal Nokia records for new phone sales.
Nine months ago, Nokia grew smartphone sales to 28.3 million units (7% growth). You cannot claim that Nokia’s Symbian sales were "declining" or in any way "suffering." Nokia Symbian based smartphone sales were growing. That is a fact.
In size, on December 31, 2010 Nokia was literally as big as all smartphones made by Apple and Samsung added together (these would both individually pass Nokia by this quarter the latest). That is a fact. Nokia ASP grew to 155 Euros (200 US dollars) which reflected a jump of 14% from just one quarter before. That is a fact. If we add in the trend line, that the ASP had been in continuous decline of about 7%, the actual jump in Nokia ASP was a breathtaking 21%!
If you can grow unit sales, and grow average sales prices, and grow profitability of your product line – there is absolutely no way that product line is suffering in the market. It is a hit product (line). Symbian S^3 was a hit! It was on a trajectory to produce close to a Billion dollars of profit per quarter this spring until Stephen Elop jumped on the success and sabotaged it with his ill-timed Microsoft announcement. Note, I am not saying he was an idiot to select Microsoft (that remains to be seen). But all tech experts agree, it was his moronic timing that caused Nokia smartphone sales to collapse.
How badly? We cannot look at 1Q because the announcement came in the middle of that quarter. But when we look at 2Q results – compare to the above – Nokia unit sales are down to 16.7 million (down 59% of where they were before he started). That is a fact. Nokia ASP has fallen to 142 Euros (down 9%). That is a fact. Nokia revenues are down to almost half at 2.4 Billion Euros. That is a fact. The positive profitability of the smartphone unit is now generating a loss with ‘negative profitability’ of (-)6.2%. That is a fact. And obviously the smartphone unit generated a loss of 147 million Euros, a reversal of 695 million Euros of profit destroyed (904 million US dollars). That is a fact.
It is absolutely concretely true, that Nokia’s Symbian S^3 based smartphone sales were growing, with an unprecedented jump in average sales price, matched with a 68% leap in profits generated by the smartphone unit. This is not failure. But it is also absolutely concretely true, that by 2Q of 2011, all those trends had been terminated and reversed so Nokia smartphone sales were declining at not just Nokia’s biggest record-setting rate, the worst loss in sales of any mobile phone maker in any quarter ever (including Panasonic, Siemens, Sony, Ericsson, Motorola, Palm, etc). And Nokia reversed increase in average sales price to a decline, and turned dramatic profit growth to a devastating crash-dive into loss-making.
The phones did not change. The OS did not change. The Ovi store did not change. In fact, since 4Q, the tech press have been positively impressed by newer Nokia phones such as the E7 and X7; by the newest Symbian version called Anna and the continued great growth of the Ovi store. The change between 4Q and 2Q is February 11, when Stephen Elop announced his Microsoft strategy – and ever since, all channels report collapsing Nokia sales from European big markets like UK, France, Germany etc to Asia’s giant markets like China, India etc. The only thing that changed, is ‘the announcement’ of February 11. It is Stephen Elop and only Stephen Elop that killed the Nokia success, smartphone growth, average sales price jump, and massive leap in profits, that the Symbian based Nokia smartphones had been generating. The CEO killed the success of his hit products – destroyed the cash cow – killed the goose that lays the golden eggs – snatched defeat from the jaws of victory.
MICROSOFT IS THE RIGHT STRATEGY?
Maybe the Microsoft strategy turns out to be the right strategy? But to be so, it would have to OUTPERFORM what Symbian S^3 was doing in Q4 of 2010, before Stephen Elop’s ill-timed February surprise killed Symbian’s come-back. So can the Microsoft strategy generate better unit sales than 28.3 million smartphones per quarter (a market share of 29% so by 2012 would be about 46 million smartphone sales per quarter, and by 2013 produce about 58 million smartphone sales per quarter), with better than 155 Euro/200 US dollar Average Sales Price, to produce better than 4.4 Billion Euros (5.7 Billion US dollars) of revenues (plus the growth rate as per above) – and better than 12.5% profitability, where the smartphone unit would generate more than 548 million Euros (712 million US dollars) of profits per quarter (again, doubling to more than 1 Billion Euros of profits per quarter by 2013).
If the Microsoft strategy can reasonably – reasonably – be seen to generate better performance, then yes, the Microsoft strategy is worth pursuing. If the Microsoft strategy is destined to do far worse, then Nokia CEO Stephen Elop has committed the ultimate crime as a CEO of a major corporation, taking a winning hit product line and destroyed it replacing it with a weaker substitute. If so, he needs to be fired for incompetence.
And now we have the first view to how likely is the Microsoft resurgence. We know Nokia will end this year with about 7% market share and about 11 million smartphone sales (generating massive losses) as it launches the first Microsoft based smartphone a little before Christmas.
TRANSITION YEAR 2012
If Q4 of 2011 ends with Nokia selling 11 million smartphones per quarter, how will 2012 go? Well, we have a transition of one smartphone OS to another. There is really no model for us to compare. But let’s be ‘provocative’ and offer a ‘best case’. What is the fastest any – any – smartphone OS has ever gone from zero sales to 11 million units per quarter? That was not Microsoft’s Windows Phone 7. That was not Microsoft’s Windows Mobile. It is not Blackberry, it is not Palm, it is not Samsung’s bada either. And it is not Apple’s iPhone. The fastest OS ever to ramp up from zero to 11 million was… Google’s Android, which did it in four quarters.
Even if these phones sell in millions, their ramp-up cannot beat one achieved by Apple or Google. Or can it?
Please recognize this is quite a huge leap of faith, but let’s say, Microsoft and Nokia manage to match the fastest ramp-up ever (ignoring all the bad will that Microsoft has now been generating with its under-performing Windows Phone OS, which after all, launched in 2010 and still hasn’t reached even 2% market share and lingers in 7th place among smartphone operating systems behind even Samsung’s bada and Microsoft’s own, older OS, Windows Mobile 6.5). Let’s say Nokia-Microsoft based Windows Phone handsets ramp up from zero at start of Q4 of 2011,
to 11 million sold by Q3 of 2011. And to keep the math ‘easy’ let’s say the Nokia Symbian ramp-down will exactly mirror that increase, so for every million lost in Symbian sales, Microsoft Windows Phone exactly matches that decline, picking up every lost Symbian sales. Thus, we get the following pattern for the first 12 months of Nokia Microsoft Windows Phone + Symbian combined sales:
- 4Q 2011 – 11 million
- 1Q 2012 – 11 million
- 2Q 2012 – 11 million
- 3Q 2012 – 11 million
We can also give a rough model of a linear transition (only as a guide) so if Symbian starts with 10 million to 1 million at Q4 of 2012, and reverses that by Q3 of 2012, we’d get this pattern:
- Q4 2011 – 11 million – 1 million WP7 + 10 million Symbian
- Q1 2012 – 11 million – 4 million WP7 + 7 million Symbian
- Q2 2012 – 11 million – 7 million WP7 + 4 million Symbian
- Q3 2012 – 11 million – 10 million WP7 + 1 million Symbian
CANNOT BE BETTER
Note, this is taking the fastest ramp-up of any OS ever, by Android, when HTC was hot, when Samsung was hot, when Motorola was in full fight-back mode etc. It was a concerted effort by all the major brands in the Android camp – and was further powered by Google’s own hype and excitement around the ‘Nexus One’ smartphone which Google labeled a ‘superphone’. While that Nexus One didn’t end up being the ‘iPhone killer’ that Google had hoped, the hype around Nexus One helped HTC, Samsung etc sell many more Android phones.
Please do not for one second think Nokia and Microsoft can do better than this. We use the most successful ramp-up ever, and even with that, we find that Microsoft WP7 sales only match up the ramp-down of Nokia Symbian sales (where Nokia’s original 150 million commitment from February 2011, suggested a linear decline to exactly that time. Nokia should have ended Symbian production in summer of 2012).
Note on CEO Stephen Elop ‘promise’ of 150 Million more Symbian phones. This model pushes Symbian one full quarter FURTHER than all analysts concluded by Elop’s February 11 announcement. And how many total Symbian smartphones will Nokia end up producing in this best case scenario before switching to Microsoft? 62 Million. Yes. Only 62 million! Nokia CEO Stephen Elop is lying to us and the Symbian developer community by a factor of 59% ! He is going to under-deliver on his promise by 6 out of 10 promised Symbian phones. There will never be 150 million Symbian phones with Stephen Elop in charge with his mad Microsoft strategy.
62 million – is the BEST CASE scenario! Any more that he’d now push the utterly undesirable Symbian phones for 2012 and 2013, would only hurt Microsoft WP7 phone sales – AND hurt Nokia profitability as long as there exists a Nokia Microsoft based phone out there, nobody wants Symbian phones, no matter how good Symbian S^3 or its latest Anna version or any update might be. 62 Million is the new 150 Million. Be prepared for that number. Stephen Elop is obviously creating his own reality distortion field – the negative one.
Note also on MeeGo, while I am on it. As of now, Nokia is saying that it will not release MeeGo into broad distribution and will not expand the sales of MeeGo beyond the one premium phone model. So the model here assumes no significant MeeGo sales (in the several millions) and what perhaps one or two million total MeeGo sales might be, will be included in Symbian sales).
EMPIRE STRIKES BACK: MICROSOFT GROWTH POTENTIAL?
So, now we know that Nokia Microsoft WP7 smartphones are in transition until about the end of Q3 of 2012. And the first quarter of true Micro-Kia/Noki-Soft comeback will not start until Christmas Quarter of 2012. Yes. Please note first, the pain will continue absolutely definitely until not Christmas Quarter of this year 2011 – no, the pain will continue on this strategy until Christmas Quarter of 2012. And then let’s see how we can project growth for Nokia using the Microsoft WP7 operating system for its smartphones.
Where can we find a good model to project. There are not many smartphone manufacturers who have grown bigger than 11 million and kept growing for several quarters after that. We only have two – Blackberry and Apple. So let’s again take the very best out there, Apple’s iPhone. After Apple had passed 11 million sales, at that level, how fast has Apple been growing since? This is the world’s biggest smartphone maker now, the company that toppled Nokia. It is certainly an ‘optimistic’ scenario – most would say that under no circumstances can Nokia, with or without Microsoft, manage as good a market reception as Apple’s iPhone has in the recent past. But let’s use this as the model. This is clearly the topmost optimistic scenario. Apple’s iPhone has been growing at a quarterly rate of 13%. And look at what we get:
- 3Q 2012 – 11.0 million Nokia Microsoft WP7 smartphone sales
- 4Q 2012 – 12.4 million Nokia Microsoft WP7 smartphone sales
- 1Q 2013 – 14.0 million Nokia Microsoft WP7 smartphone sales
- 2Q 2013 – 15.9 million Nokia Microsoft WP7 smartphone sales
- 3Q 2013 – 17.9 million Nokia Microsoft WP7 smartphone sales
- 4Q 2013 – 20.3 million Nokia Microsoft WP7 smartphone sales
We’re looking at maximum of 44.4 million in 2012 and 68.1 million WP7 smartphones. That is less smartphones than Nokia shipped five years ago.
THAT IS THE BEST CASE 2012 + THE BEST CASE 2013
So taking the very best case of 2012, using the best ramp-up ever, and then using the best case of growth in mass market scale, we get Nokia’s Microsoft Windows Phone 7 based smartphones – the very best case scenario – to hit 20.3 million smartphones not at the end of 2011, not at the end of 2012, but the end of 2013. By that time, Nokia’s smartphone market share will be at… 8%.
And for those who say ‘but other Microsoft manufacturers’ yes – how excited do you think they will be to see Microsoft prioritizing Nokia ahead of them? That Microsoft actually paid ‘billions’ to Nokia to bring it to the WP7 family? We already now see WP7 manufacturers diminishing WP7 production and prioritizing other operating systems (Samsung does its own bada OS, HTC reducing WP7 phones in favor of Android, same for LG etc). Maybe Microsoft can get 2% of phones made by other manufacturers, so it might see a total MS market share in smartphones of 8% by Q4 of 2012 and as ‘high’ as 10% by Q4 of 2013.
Note that Microsoft has earlier had 12% market share in smartphones as recently as 2006 (before the iPhone obviously) so even after all that, Microsoft would be a bit-player at best – smaller than Android, smaller than the iPhone, smaller than Samsung’s bada, and likely also smaller than Blackberry. It’s only bigger than HP/Palm and their webOS. It’s possible even at 10% that Microsoft would be smaller than MeeGo even without Nokia’s support of MeeGo, as there are several big smartphone makers – and China Mobile the world’s biggest carrier/mobile operator – committed to MeeGo. So any hopes of ‘the third ecosystem’ using Microsoft is a fantasy. Under the absolute best-case scenario, Microsoft might just break 10% two-and-a-half years from now. Best case. And trust me, that won’t happen. It will be worse than that. Microsoft will linger in the single digits as a has-been in smartphones, once the second biggest smartphone platform, whose manufacturers and suppliers all soured on Microsoft as the Evil Empire and one after another, abandoned Microsoft to its own devices. How long will Nokia punish itself on this path to ruin? I trust Nokia management is smart enough to jump off the Microsoft bandwagon as soon as they can.
Also remember, there were several analyst houses who promised that Microsoft based smartphones could propel Nokia back to about 20% market share (or even better than that) and achieve a ‘third ecosystem’ level of market share. Those projec
tions were made before these Q2 results were known. Those analyst houses will look supremely silly if they dare repeat those projections now. It is totally inconceivable that Microsoft-Nokia would somehow achieve 20% in 2012 – or even by 2013. They would have to do literally TWICE as well as Android at its best, and then twice as well as Apple iPhone at its best. With Microsoft? The company that entered the smartphone market by destroying Sendo who carried the brunt of development on the original Windows Mobile? With Steve ‘I love to scr*w any partner’ Ballmer in charge? With one reseller boycott already hurting Nokia and another even bigger reseller boycott hitting Microsoft?
What planet would the any self-respecting analyst live on, to think now after these Q2 results, that Microsoft and Nokia can recover to 20% market share. Nokia already destroyed 31% of its market share now, in just 3 months! The 20% vision is a sheer fantasy and the analyst houses who talked of such rates will quietly downgrade their projections to be closer to where I project Nokia-Microsoft now. It will be embarrassing to them, so they will do it in small stages, but expect each of them to issue updates that show lower forecasts for this alliance, every time…
WE ARE WITNESSING THE DESTRUCTION OF A JUGGERNAUT
Before Stephen Elop killed Symbian, Nokia’s smartphone market share was 29%. Nokia towered over its rivals and was growing smartphone sales with highly desirable new smartphones. Today just five months after his ridiculously-timed announcement of Microsoft, Nokia’s smartphone market share is down to 15% and collapsing. The Microsoft ‘strategy’ cannot recover Nokia to more than perhaps about half that level at 8% in absolute best case scenario – it would take superhuman effort just to match the models I used – Nokia-Microsoft cannot match Google’s Android ramp-up rate, and cannot match Apple’s iPhone sales climb.
There is a huge demand for Nokia premium phones by consumers (remember, they were willing to sustain a huge JUMP in average sales prices and MASSIVE jump in profits just before this silly announcement). The Nokia sales decline is not because Nokia phones are bad. It is not because Nokia OS Symbian is bad. It is not because Nokia apps or ‘eco system’ is bad (Ovi store was world’s second-bestselling app store before Elop killed Symbian). Even today, if Nokia abandoned the ruinous Microsoft path, and returned to Symbian – even as crippled as Symbian is now after the massacre by Stephen Elop, if Nokia abandoned Microsoft and restored the migration path to MeeGo – Nokia would DEFINITELY do BETTER than with Microsoft.
LOST SALES, LOST REVENUES, LOST PROFITS!
But even if somehow Nokia and Microsoft were able to produce this miracle, Nokia will have replaced a growing smartphone performance, where Nokia grew unit sales, grew average sales prices, grew total revenues, grew profitability and grew profits – and replaces this with a miniscule level of sales, after the next ten – ten – quarters, two-and-a-half-years – making losses with the Symbian unit, seeing declining average sales prices, declining total revenues, declining profitability (i.e. increased losses) and yes, what was Nokia’s cash cow, its goose that laid the golden eggs, the smartphone unit, is now a liability.
That will be replaced by Microsoft Windows Phone 7 based smartphones. Can they be more desirable by the market? Not likely. The latest Windows Phone 7 to Symbian comparison we had, (last quarter for full numbers) had those so-called ‘obsolete’ Symbian smartphones by several manufacturers including obviously Nokia, outselling all smartphones made by Microsoft partners, by a mere… 15 to 1. What about the ASP for Microsoft? The head of of Microsoft’s Windows Phone unit, Andy Lees has told us that Microsoft WP7 based phones will not be premium phones, their average prices will be only half the industry’s ASP, i.e. they can be expected to yield between 100 and 150 US dollars next year ! Yes, Microsoft knows its own smartphones are so undesirable, they will see prices HALVED in ONE YEAR. This, while Nokia’s last quarter of un-damaged Symbian sales yielded average sales of over 200 dollars and growing by 14% in just one quarter (that’s 48% cumulative growth over 4 quarters)! How utterly idiotic is this switch away from the successful Symbian to the colossal failure Microsoft WP7? When their own head tells the world, WP7 phones will see average prices falling to half in only one year! Symbian phones are so good, they increase prices by half (on an annual level) and these are replaced by undesirable Microsoft phones whose prices are cut in half (on an annual level). Duh! Earth calling Pluto? Hello space cadets? Want to return to reality, perhaps?
How incredibly undesirable are those Microsoft phones if this is happening? Even with the reseller boycott of Nokia now, the average prices of Nokia Symbian based smartphones have not fallen more than 9% since February (that’s a loss of 20% in one year). And remember, there is a reseller boycott now of Microsoft phones, because the carriers hate Skype. Trust me, they hate Microsoft based phones MORE than they hate Symbian phones. All the evidence also tell us, that switching from Symbian to Microsoft will make Nokia worse off – than staying with Symbian (and where MeeGo was actually a winning strategy).
Profits then? Surely there must be some logic to this. And yes. There is a "logic" to this, but it is a weird kind of "Stephen Elop logic" where anything good for Microsoft and simultaneously bad for Nokia is somehow ‘desirable’ for the Nokia CEO. Microsoft Windows Phone based phones cannot do all that current Symbian based phones can do, so there will be downgrades in what the consumers can expect. That cannot help their desirability, especially with any loyal Nokia users. (But sadly, the Nokia internally developed MeeGo OS would be compliant with Nokia features). Microsoft Windows Phone based smartphones are typical Microsoft-style ‘resource hogs’ so they require higher performance CPUs – not to perform faster – just to keep up with what Symbian was able to do with lower-performance CPUs. So Nokia needs to source more expensive Snapdragon CPU’s by Qualcomm to achieve the same level of performance using WP7 as it currently gets from Texas Instruments ARM CPUs running Symbian. And yes, Microsoft WP7 requires more memory installed on the phone just to run. Again, this added memory is not to make consumer get any better functions like more pictures or videos to store – it is to enable WP7 to run! So Nokia hardware costs go up – quite dramatically – with WP7 based phones.
And then there is the royalty. With Symbian, Nokia needs to pay no royalties. If Nokia had gone with MeeGo, its home-grown OS, there would be no royalty to pay (and bizarrely, even the Google Android option would have meant no royalties to pay – sans patent fees to Microsoft). Nokia’s CEO has taken a totally free Nokia corporation, and enslaved it to Microsoft, and guaranteed Microsoft a massive royalty stream that Nokia never paid before.
Of the major smartphone makers (Apple, Samsung, Nokia, RIM, HTC, Sony Ericsson, LG, ZTE, Motorola and Huawei) – all of the others, for either all or at least the majority of their smartphones, they do not pay any royalty for the OS. Except Nokia.
PROFITABILITY – DON’T THINK APPLE: THINK DELL
So we now see that Nokia will struggle just to manage the decline in smartphone sales. And we see the unit sales go down to 11 million during 2011, will remain at that level with a tiny recover at Q4 of 2012, to about 12.4 million units. And by 2013, Nokia with Microsoft WP7 can slowly recover to selling 8% of all smartphones by Q4 of 2013 – and produce 20.3 million smartphones – under the very best scenario.
In this time, Nokia’s smartphone average sales prices will continue to c
rash. I don’t say so. Nokia doesn’t say so. So says Microsoft’s head of Windows Phone. Smartphone average prices with Windows Phone will be cut in half in only one year. How much worse will it be by 2013, is anyone’s guess. And during this time Nokia’s costs will increase simply on the side of hardware (CPUs, onboard memory etc) and Nokia has to start to pay a per-smartphone royalty to Microsoft. So if you think Nokia’s smartphone profitability is now in a squeeze – it will be far more so during 2013.
If there is a Nokia still existing, that pursued this utter madness Microsoft strategy, they will be a bit-player, with at best 8% market share, producing a trivial profit if any. This destruction of Nokia will make New Coke or Toyota Brakes or BP Oil Spill look like a market triumph! What is far more likely under this scenario is that the repeated quarterly disastrous results will result Nokia share price to plummet so low, that Nokia will be sold for scrap years before we get to end of 2013.
The Microsoft Strategy is dead. This analysis just based on the best possible scenario using the absolute best performance in the industry that Nokia and Microsoft would be silly to even promise to match. And this is before we look at all the other reasons why the Microsoft strategy is already still-born, and needs to be scrapped before the end of this year. I will return with that in a later blog. But next, I will do a calculation of how much is Stephen Elop’s costing Nokia now, per quarter and per year. That article will be illuminating.