Nokia: Ship's now stable, all we need is passengers

Everything's rosy except Lumia

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Analysis Europe's biggest technology company Nokia caught a few people by surprise with its outlook yesterday. Nokia released far more information than a company typical discloses in a preview - an unusual amount.

Ratings agencies may regard Nokia as "junk", and the fallen industry leader has flogged off and leased back its glittering HQ, but there are many healthy signs at the business. The mobile phones division still brought home almost €4bn of income in the quarter, and although that's €2bn lower than the same quarter two years ago, it claimed to have attained "underlying profitability".

In what has increasingly become an IP business, Nokia bags almost $1bn a year from patents. Microsoft's support payments add another $1bn. The Nokia Siemens Network division brought in €4bn - with much healthier margins, after much bloody cost cutting (see here and here - and looks better than at any time since the two divisions merged. The Navteq mapping business also looks very healthy - with an estimated revenue of around $400m in the quarter and impressively higher margins than before.

The star of the company was undoubtedly the growth of the low-cost, sub-$100 Asha line, selling into India and other Asian markets. In his notorious "Burning Platforms" memo, Elop had warned of several mortal competitive threats - but there's one people always overlooked: the threat of integrated silicon platforms that allowed new, indigenous brands such as Micromax, Spice, Karbonn and Lava to enter the market. These new manufacturers could knock out attractive kit, but without Nokia's overhead. These brands went from zero in 2008 to take almost 40 per cent of the Indian market in just two years, and took a complacent Nokia - which was playing at being an NGO, and more concerned about saving the planet than saving itself - completely by surprise.

Yet in the last quarter Nokia shifted 9.3 million full-touchscreen Asha devices. (Many more Ashas are QWERTY or candybar models). These full-screen Ashas are really feature phones based on a Java-ified Series 40 - here's our review of the 311 for more detail - but Nokia at times refers to them as smartphones. You may quibble, legitimately, that a S40 with Java is a smartphone. But the ability to pick up "smartphone-like" features on a device that delivers four days of battery life, and costs less than 6,000 rupees (£68, $109), has allowed Nokia to stay in the game. Android phones can be found at a similar price on the Indian market, but the low-cost Android experience isn't that great, and a long battery life really matters to a consumer.

What about the Windows Phone sales, then: surely Nokia's fate hinges on its (genuinely) smart devices? Nokia said it had to manage distribution carefully because of component shortages. It could have sold more if it had been able to. As it was, China Mobile only launched its variant of the flagship 920 on 23 December, and the Indian launch was pushed back to this year. Shipments were so constrained that if you went into a store in markets where it had been launched, you would most likely see a shop dummy. So of the 4.6 million Lumia devices Nokia says it shipped, we must infer most were older WP7.5-based models being shifted to budget and pre-pay consumers. However the ASP (Average Selling Price) of smart devices rose, so the balance between newer (more expensive) and older (cheaper) Lumias remains healthy.

Finns need to make Lumia a safe choice

The Lumia 920 has succeeded in getting Nokia talked about again, and it's changed the perception of the company as a leader rather than a straggler. But if the company is to deliver solid growth, it needs sales volume - and here the midrange Lumia 620, the Lumia 820, and the as-yet-unannounced 720 are rather more important to its fortunes than the flagship. To achieve volume, Windows Phone needs to become a trusted as a safe choice.

It took some time for Android to make that breakthrough, and that was during a period (2008 to 2010) when Android was the only really competitive platform to Apple's iPhone, when Apple was still insisting on carrier-exclusives and a whopping price premium - which made it easier for Android manufacturers. It's far tougher now, and ominously, there's still no real sign of consumer demand for Windows Phone. It's good enough to compete, but in as much as it's visible at all, it remains a novelty.

In this quarter, Nokia also faces a rejuvenated RIM, trying to woo its remaining 80 million users to its much-delayed new platform, BlackBerry 10. RIM has sold well into carriers before launch, but like Nokia, RIM needs midrange volume, and we won't hear about that until launch day on 30 January - or later.

Much of the above was acknowledged in Nokia's rather guarded investor statement yesterday, which referred to "competitive industry dynamics continuing to negatively affect the smart devices", stiff competition, and what is traditionally the weakest quarter of the year for sales.

Put bluntly: "Seasonality and competitive environment are expected to have a negative impact on the first quarter 2013 underlying profitability for Devices & Services, compared to the fourth quarter 2012." In other words, don't get your hopes up.

Nokia really needs an exhausted Microsoft WP team, which delivered a solid system to OEMs in time, to give the platform some renewed momentum. As we have pointed out several times in recent weeks, despite being a vastly superior platform underneath, it only offers marginal improvements in userland, and the app store is (if anything) worse than a year ago. Several analysts have pointed out the obvious recently: that if Nokia's differentiation is in its imaging technology, sturdy design, and its maps - if these are the factors that "make a Nokia a Nokia" - then it doesn't really matter what lies underneath. ®

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