Mallinson: Nokia needs to stay the course with Windows Phone

Keith Mallinson

While Nokia is a latecomer in next-generation smartphones, subscriber penetration is already beginning to saturate in developed nations. However, with rather short replacement cycles for these rapidly-advancing products and massive untapped potential in developing regions there is still a lot up for grabs by aspirants including Nokia. On the back of assuring sales growth with some handy innovations, Nokia's Lumia smartphones with Microsoft's Windows Phone platform still have a sporting chance of seizing a substantial position among the top three manufacturers behind Samsung with Android and Apple iOS. Nokia cannot afford to lose its nerve now despite calls for a Plan B from some irate shareholders. It needs to keep its focus and not undermine its best efforts.

We can be heroes

Smartphones have been around since around 2003 with Symbian and BlackBerry devices; but these were limited precursors to the next-generation devices that have appeared since Apple substantially elevated the norms and expectations in performance, usability and developer ecosystem support with the introduction of the original iPhone and iPhone 3G in 2007 and 2008 respectively. Google's Android, in conjunction with Samsung and others, have provided, at least, significant "me-too" competition, and arguably highly-innovative alternatives--depending upon one's perspectives and judgments. Meanwhile, Nokia, BlackBerry and others have undeniably floundered over the last four years.

Now, at last, Nokia and Windows Phone are well positioned for the substantial growth needed to achieve the "critical mass" with the large scales of everything required for survival and success in smartphones. Scale factors loom large internally with high development costs, and externally with the overriding need to motivate and build a large applications developer community, as well as achieve widespread operator adoption. Most recently, Nokia and Microsoft have made significant progress and impact with the introduction of the Lumia 928 at Verizon Wireless in the United States and the Lumia 925 to follow with many operators around the world, starting next month. Having "hero" or flagship handsets on sale with full marketing support (including vital handset subsidies) from most of the major mobile operators is essential for success in handset operating systems and devices including smartphones, phablets and tablets. These two Nokia devices will be at the top of portfolios along with other Lumia smartphones at three of the four largest operators in the crucially-important U.S. market. Similar positions have been established in other developed nations.

These new devices bring superlative photo, video and audio performance among other capabilities such as maps and navigation. The innovative "capture" and editing capabilities, in conjunction with use on social networks and sharing sites, have the potential to seize market leadership among those who want to create and publish the very best multimedia materials. Such capabilities will likely become increasingly mainstream in smartphone adoption and usage in the same way that Hi-Fi moved from a niche to mainstream in the 1970s. Apple advertising indicates that iPhones are used most commonly to take pictures. Nokia should promote the notion that its imaging capabilities are superior. This will differentiate Nokia from other smartphones and disrupt Canon and others in the conventional camera marketplace. By analogy, Apple was able to survive and eventually flourish in competition with Microsoft-based PCs prior to the mid-2000s by leading in the publishing and education market segments.

Overall, strategic potential is probably best for Nokia in low-cost smartphones. Developing markets are still largely untapped for smartphones and in many cases the 3G and LTE infrastructure does not yet exist to support mass markets for these devices. Nokia's brand, distribution and manufacturing leadership was proven in its creation and leadership of the ultra-low cost handset market segment, since the mid-2000s, in India, for example. While competitive challenges from Asian manufacturers such as Huawei are substantial, there is no low-cost iPhone--only ex-flagship iPhone models sold at reduced prices. Nokia's Asha line is a good placeholder, but Lumia also needs to be driven to much lower price points as Samsung and others drive unsubsidized prices for market-leading handset OS Android devices including LTE models down to $100.

Shareholder dissent

However, Nokia's shareholders are getting fractious and some are unhappy with the company's chosen course. Nokia's stock price peaked at around €60 in its pre-millennial heyday. Then, after languishing in the teens, the price rose to nearly €28 in late 2007 before everyone realized quite how damaging to Nokia the market entry of next-generation smartphones would be with iPhones and Android devices rapidly taking the lead. Since then, the shares have plunged to around just a few euros over the last few months.  With major operating losses, it is burning through cash like there's no tomorrow--and stockholders are understandably concerned there might not be one.

According to Reuters, "[o]ver the past five quarters, the onetime darling of mobile telecoms has eroded its cash pile by €2.1 billion euros ($2.7 billion)--a rate that would wipe out its entire €4.9 billion reserves in a couple years." Earlier this month Nokia shareholders vented their frustrations about the Windows Phone strategy to Stephen Elop at the company's annual shareholder meeting. "You're a nice guy...and the leadership team is doing its best, but clearly, it's not enough," one shareholder, Hannu Virtanen, told Elop. "Are you aware that results are what matter? The road to hell is paved with good intentions. Please switch to another road," he said.

Staying the course

This is no time to get distracted or dilute strategic resolve. Nokia and Microsoft have a lot more to achieve before the future is secure for Lumia and Windows Phone; but, reassuringly, there is significant progress. According to research firm IDC, quarterly sales for Windows Phone devices have surged from 3 million in the first quarter of 2012 to 7 million in first quarter of 2013. This puts Windows Phone ahead of Blackberry and into third place in the smartphone market with 3.2 percent  market share. IDC also states that Nokia accounts for around 79 per cent of Windows Phone sales. The sales growth trajectory is good and operators clearly want a significant alternative to Apple and Android. However, volumes and market shares still need to be increased several-fold over the next couple of years, and adequate profit margins must be achieved, before Nokia can rest easily.

It is unclear whether Nokia shareholders are willing to hang on long enough for a major reversal in fortunes while cash reserves are depleting so rapidly; but the alternative of switching to or adding Android would surely accelerate the cash burn and increase rather than reduce commercial risks. Such a move would significantly lessen the chances that Windows Phone device sales will every grow enough to achieve critical mass in the market because the platform is overwhelmingly dependent upon Nokia's Lumia. Undermining commitment and diverting resources from the fledglings would therefore be very damaging. For Nokia to become a new market entrant in Android devices with Samsung in such strong position and so many other players would also be a very difficult road to travel.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor publishes an Extended Mobile Broadband Forecast. This includes network equipment, devices and carrier services to 2025. Further details are available at: Find WiseHarbor on Twitter @WiseHarbor.