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Stick a Fork in Nokia?



June 21, 2012 – Comments (0) | RELATED TICKERS: NOK , MSFT , AAPL

Board: Nokia Corp.

Author: TMFinept

The past couple of weeks have been perhaps amongst the worst in Nokia history and, in my opinion, the company is officially in dire straits. Up poop creek without a paddle is the way I'd say it.

We had the Q2 warning recently, which in my opinion provides some very damning insight into the state of Nokia's business at the moment and is suggestive of the likelihood that:
- Lumia 900's sales haven't been very strong and likely the whole Lumia lineup's sales have also been lackluster.
- The Symbian base is eroding even more rapidly than before and the acceleration of erosion is greater than expected.
- Feature and dumbphone sales have dropped off another cliff due to unsatisfactory product offerings and very stiff competition.

In the same announcement, Nokia stealthily indicated that is has terminated the substance of its internal research and development projects. MeeGo/Maemo is now unofficially officially dead. Nokia has left itself zero options in the smartphone space that don't depend on third party software. Nokia is totally backed into a corner now with regards to smartphones and wholly dependent on Microsoft and the success of Windows Phone.

Perhaps more alarming is that Meltemi, Nokia's next-gen low-end phone platform, is cancelled. Nokia will ostensibly carry on developing S40 and will attempt to push Windows Phone into the low end. I don't know that they have any other options here either. Every other avenue is now seemingly closed.

As if to put a close to this chapter, Nokia is dispensing with all of the R&D infrastructure it had in place to support these endeavors - there's no going back. It's a decision that cannot be reversed.

I find it rather ironic that Mary McDowell was the "it" girl just a month ago and that the "Next Billion" was a huge strategy going forward for Nokia. All of a sudden, it's not.

Nokia also took a multi-whammy in the tablet space recently. At Computex, Chinese and Taiwanese manufacturers unveiled a plethora of new Windows 8 computers, tablets, hybrid devices, etc. Just this Monday, Microsoft announced that it will produce its own tablet and that it's not at all afraid of entering the hardware side of the business on its own - that bodes poorly for Nokia with regards to smartphones, IMO. Clearly the industry understands that an ecosystem of device offerings to interact with an ecosystem of content and services is the future.

Where is Nokia's tablet offering? Well, we don't know that one exists and by the time we do, Nokia will already be behind the competition. China is ready to go right now and Nokia is not. I think a lot of Nokia loyalists were hoping that Microsoft's announcement on Monday would feature a device created in partnership with Nokia, but it wasn't meant to be.

What we do know is that Nokia is facing stiff competition in every one of its businesses, including in businesses where it might be expected to but does not currently participate, and that it is slower and perhaps less capable of competing than the rest of the industry. We also know that if you have any illusions as to the special relationship between Nokia and Microsoft, you should probably dispense with them now. Nokia is likely to be very late to the tablet space, if they even attempt it at all. They're certainly not getting any special treatment or support from Microsoft. Aside from the offsetting of Windows licensing fees, it's a free for all out there.

Finally, Microsoft just delivered a sneak peek at the long-awaited Apollo version of Windows Phone. It looks like fine OS that brings Microsoft approximately up to par with modern smartphone competition. Buried in the announcement, though, was some disastrous news for Nokia. Current WP devices will not be getting WP8. WP7 hardware is being phased out through limited upgrades.

This probably shouldn't come as a surprise to tech savvy consumers who understood that Nokia was selling obsolete, 2 year old technology as current in its Lumia lineup. It will be yet another slap in the face to most customers, though, who will be getting a fragmented partial upgrade. Nokia has grown particularly proficient at delivering unsatisfactory products that leave customers deeply displeased.

We know that Apple employs relatively similar upgrade stratagems to phase out older products through selective, planned obsolescence. The problem here is that the Lumia 900, which is but 3 months old, is now officially being end-of-lifed and phased out. A new device is obsolete. I don't know what customer would walk into an AT&T store today and say, "Yes, I would like to purchase this phone in spite of the fact that it will not receive Windows Phone 8." That's a gap too far to bridge even with the Lumia's low pricing.

Moreover, when Apple announces that it's phasing out older products with partial upgrades, it does so with new products on hand to sell immediately. Nokia has none. Once again, Nokia is left selling old wares (and likely slashing prices just to move them) while new ones are supposedly just over the horizon. How long has this been the case now with Nokia's product lineup? 1.5 fruitless years for the Microsoft deal, 1.5 years prior to that since Symbian^3 was launched in its incomplete, embarrassing state, another year or so since the iPhone took off. Nokia has been in a waiting and transition phase now for four or five years and it expects to spend billions of dollars to carry on like this through 2013.

The fact is that the Q2 warning might as well have been an FY12 warning. I'd expect the remainder of the year to be a nightmare for Nokia. Annus horribilis defined. I also don't think that 2013 will be an annus mirabilis, or that we could ever expect one going forward. This planned obsolescence of WP7.5 devices comes at a very inopportune time for Microsoft as well and it will damage the adoption of the platform.

The platform is already flagging and consumers now have even less incentive to buy any WP device at all, forget about a Nokia one. I wouldn't expect the platform to gain a great deal of traction, if any, until Apollo comes out for Christmas. Meanwhile, Android and iOS keep growing. Android in particular is gobbling up the low end while Nokia flounders.

In my opinion, the writing is finally on the wall with Nokia. As bad as things are now, I suspect that they will get worse still. I'm not even sure that a buyout is in the cards at this time.

Personally, I had a 2014 synthetic long on Nokia and I covered my written puts last week. If the call side of transaction was still worth anything I'd close it too because I think it's not like to pay out. There was previously some hope of a recovery and I figured it was worth a risk but from here it looks like it's all downhill. In retrospect, I think I was crazy to have opened that position.

Just my opinion, but you can put a fork in this company.


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