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Nokia reaps the Dilbert years

Margin on the ridiculous

Analysis Nokia took a long, long time to turn consistent profits into a gigantic quarterly loss, but nobody can be surprised by yesterday's results. With so few (and such lacklustre) products in the pipeline for the past two years, it is remarkable how well it has done for so long, with so little.

Last summer I was window-shopping in two operator stores in what is the UK's third wealthiest borough (Hampstead – and don't imagine for a second that I live there) and was amazed to find one Nokia model in each. Nokia has all but disappeared from Europe over the past 12 months. And it was nowhere in the US or Japan (Nokia has now formally withdrawn from Japan). What kept the giant ticking along was that its brand reputation and low-cost manufacturing setup helped it pump out lots of volume into India and China. But in the past quarter it was destroyed in these markets, as more competitive, faster innovating rivals caught up. Nokia lost 30 per cent share in APAC and 34 per cent in China.

It is less than a year since Anssi Vanjoki greeted Nokia partners in London with the message that "Nokia is back". Vanjoki was showing off three lacklustre smartphones, and the new Qt development strategy. But three was too little too late.

Phones are developed on an 18-month cycle, one that's particularly rigid and bureaucratic at Nokia. With the benefit of hindsight, the period from 2007 to 2008 was crucial: these were the years that Google used to ramp up Android development, closely aping the iPhone, and Palm developed a competitive platform too. In each case, Google and Palm made significant changes to the input model to make them more competitive with the iPhone. Nokia merely grafted touch onto Symbian, and failed to address other critical issues such as the development platform. You'll recall that the two years following 2008 were spent setting up a Foundation to handle software that nobody wanted.

The grafting created a Frankenstein's monster, one arguably harder to use than before. The result, in 2009, was the N97 debacle. The phone was supremely cumbersome, buggy and under-specced. It caused immense harm to the Nokia reputation, particularly since it was accompanied by such self-serving claims as the one that Nokia was "democratising the smartphone".

After the 2009 disaster, Nokia decided it had made too many smartphones, so as a radical strategy, it wouldn't bother making any at all. Brilliant.

Not to re-open gaping wounds, but we can only imagine how things might have turned out if Nokia had been able to deliver something on a par with WebOS or the N9, two years ago. The company's arrogance and earlier missteps would quickly have been forgotten.

In his Burning Platforms memo, Elop shrewdly analysed that two of the three areas in which Nokia is feeling the heat have nothing to do with smartphones. The midrange feature phones made by Samsung and sold into Europe destroyed much of Nokia's midrange. Then there's the emerging tablet battleground.

Elop is (rightly) furious that Nokia didn't catch trends in emerging markets quickly enough – he devoted much time in yesterday's earnings call to promoting Nokia's new dual-SIM models, explaining that Nokia's are superior to home-brand models. For example, they don't need a reboot.

Alas for investors, the worst isn't quite over. Nokia's Windows Phones won't ship in volume until next year – the earliest we can expect to see an uplift on the balance sheet – and analysts are concerned that the market will be even more commoditised by then. Nokia said in February it hoped to ship another 150 million Symbian smartphones in the next two years, but it will be doing well to break 100 million, and remember it is practically giving them away to clear unwanted channel inventory. The most bullish guidance Nokia could give yesterday is that it will be aiming for break even margins in Q3.

That, boiled down, means that Nokia won't any longer be effectively paying people to take phones off its hands.

Things can only get better, can't they? ®

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