19 Apr 2012

Nokia's Q1 Results & Emerging Market Troubles

Nokia Asha Series

With Nokia announcing its Q1 results, it's starting to look like my previous article analyzing the prospects of Windows Phone correctly predicted their fall from grace in emerging markets...

Nokia's Current State of Affairs

As I've already mentioned in my previous article, Nokia's biggest folly is its focus on feature phones, as that the primary factor holding them back from aggressively pricing their Lumia range in emerging markets. My argument was that low cost smartphones from Android manufacturers will soon begin cannibalizing feature phone sales in those markets and Nokia could not afford to wait. 

Now it seems like this has already become a reality. A week before announcing its Q1 results, Nokia lowered its Q1 guidance citing poor sales in emerging markets.

Nokia CEO, Stephen Elop, had the following to say while announcing the results:

We are navigating through a significant company transition in an industry environment that continues to evolve and shift quickly. Over the last year we have made progress on our new strategy, but we have faced greater than expected competitive challenges.  

"Greater than expected competitive challenges"? Whose expectations are we talking about here? Practically everyone in the industry predicted Nokia's struggles.

Mr. Elop had the following comment about the launch of the Lumia range:

We have launched four Lumia devices ahead of schedule to encouraging awards and popular acclaim. The actual sales results have been mixed. We exceeded expectations in markets including the United States, but establishing momentum in certain markets, including the UK, has been more challenging.  

"Popular acclaim"? The Lumia range is still languishing at the bottom of the barrel in terms of market share. Major European telecom operators have already heavily criticized the Lumia range for being non-competitive. One of the telecom operators explicitly agrees with my first article, saying that Lumia range would be "much easier to sell" with Android. In addition to this, even the apparent success of the Lumia 900's US launch seems to be, at least partly, driven by sell-outs due to low inventory.

And last, but not even close to the least, Mr. Elop had the following to say about the state of Nokia in emerging markets:

At the same time, the lower price tiers of our industry are undergoing a structural change, and traditional feature phones are challenged by full touch devices. As a result we are taking deliberate measures to continue to renew our Series 40 platform, and we plan to strengthen our line-up in Q2 2012. We are making investments in our Mobile Phones business unit aimed at addressing the gaps in our offering.  
We have a clear sense of urgency to move our strategy forward even faster. We are pursuing step function changes by having launched the Lumia 610 and Lumia 900 in the first quarter, expanding market coverage, increasing advertising, introducing key customer-requested features and broadening our most successful go-to-market activities. At the same time, we have focused our efforts in the low-end of smartphones and feature phone asset to drive improved business results and conserve cash. 
We are confident in our strategy and are focused on responding urgently in the short term and creating value for our shareholders in the long term.

Why exactly couldn't Nokia see this coming? I certainly did, and most investors and analysts seemed to see this coming as well, judging by Nokia's steady stock price drop.

Regarding Nokia's recovery strategy for emerging markets, here's some advice for Mr. Elop:

You wrote the burning platform memo, because you felt the Symbian (Series 40 platform) was non-competitive as compared to the iPhone and Android. Now that low cost Android handsets are decimating your feature phone portfolio, you somehow believe that same outdated platform can help keep you afloat?

As seen by the stock market's reaction during the launch of the Lumia 610, investors clearly do not believe that it is nearly competitive enough at that price point. So your solution is to complement it with devices based on a platform that you called "non-competitive"?

Statements like these really bring into question the competence of, not only Mr. Elop, but Nokia's entire leadership team.

What can Nokia do to stay alive in Emerging Markets?

As I've previously mentioned, I don't believe there is a way for Nokia to effectively compete in developed markets anymore. Mindshare is heavily in favor of Apple & Android, and breaking that is proving extremely difficult. Nokia's only shot is to rethink their strategy in emerging markets.

In countries like India, Nokia has long focused on low cost feature phones and entered product categories such as dual SIM. This was highlighted in a recent article published in India's leading business newspapers. This article was also one of the most myopic views of business strategy I have ever had the misfortune to read and truly highlights how little Nokia's leadership team & advisers understand about the rapidly shifting technology landscape. 

The article highlights that Nokia was able to grab a bigger slice of the dual SIM pie, because low cost local manufacturers like Micromax made their move into low cost Android smartphones. Unfortunately, what they fail to mention is that low cost smartphones (including dual SIM smartphones) are cannibalizing the feature phone market, as can be seen from Nokia's Q1 results. 

At current price points, there is no way for Nokia to hold a sustainable competitive advantage with its current product line-up. The only option Nokia has at its disposal is to slash prices of the Lumia range & take temporary losses to move more feature phone users to smartphones, before someone else does.  Once Nokia acquires customers for its Lumia range, it is far easier to upgrade them to higher margin models, over time. 

Conclusion - Here's my last bit of advice to Nokia - There are obvious solutions to some of your problems, at least to some degree. It is about time to abandon the denial and face market realities. Time is running out.