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Nightmare in Helsinki

I wouldn't want to be in {complink 3847|Nokia Corp.} CEO Stephen Elop's shoes right now. Investors are hopping mad, Nokia's corporate bonds have been downgraded — close to junk, in one instance — and suppliers are hurting terribly due to lost sales.

{complink 5703|Texas Instruments Inc.} is one of the victims of Nokia's reorganization. That company has revised its second-quarter revenue forecast downward to a range of $3.36 billion to $3.5 billion from an earlier guidance of $3.41 billion to $3.69 billion. TI lowered its outlook, according to Doug Freedman, an analyst at Gleacher & Co., because of problems at Nokia. Freedman said the following in a report:

    Simply put, while weakness at Nokia has been very apparent in the marketplace, no one anticipated that custom baseband would be down 53 percent in the span of two quarters, especially given expectations that Nokia units would decline 22 percent in the same period.

TI executives were careful to not put all the blame for their weaker-than-expected performance on Nokia, but others haven't been quite as charitable. I wouldn't be either, because it was obvious the company was making a huge and possibly bad gamble with the decision to adopt Microsoft Corp.'s windows operating system and dump its own Symbian and MeeGo systems. (See: Will Nokia Rise Again?)

Following the announcement of that alliance with Microsoft, software developers have departed the Nokia stable in droves. Nokia executives, miffed about the plunge in the company's fortunes and sagging stock value, are reportedly looking for opportunities elsewhere. Chief technology officer Richard Green has taken a leave of absence allegedly because he disagrees with Elop's strategy.

Nokia is being increasingly scrutinized by suppliers, investors, and ratings agencies, and their current conclusions are not very positive. Investors have voiced opposition to its current strategy by dumping the stock; their reaction follows negative reports from Standard & Poor's, which on Wednesday cut its rating on Nokia to BBB+/A-2 from A-/A-1. Here's Standard & poor's justification:

    The downgrade and CreditWatch placement reflect Nokia's announcement that it expects sales of its devices and services segment for second-quarter 2011 to be substantially below the previously expected range of €6.1 billion to €6.6 billion.

    Following this unexpected and significant sales and profit warning, we have made a first downward revision of our base-case sales and margin anticipations for Nokia in 2011. While visibility on the competitiveness of Nokia's existing handset portfolio–even at lower price points–is currently very limited, we now anticipate a 10 percent decline in revenues for the Devices and Services segment and a low single-digit operating margin before restructuring costs.

    We base this forecast on our assumption that Nokia's existing smartphone and mobile phone product portfolio will face significant competitive price pressure in the coming quarters. This pressure on sales and margins will be only partly offset by significant industry smartphone volume growth, increased marketing and cost-cutting efforts, and our expectation of substantial marketing and sales support from Microsoft Corp. (AAA/Stable/–) for Nokia's first smartphone running Windows Phone as an operating system.

A let-up in the avalanche of negative news is unlikely for Nokia this year, because a successful turnaround won't be noticeable for quite a while and winning back lost customers may be difficult.

If Mr. Elop were lucky, that turnaround would be immediate and overwhelming. He would be pronounced a hero, a visionary, and the savior of Nokia. Let me know what you think. Me? I think Mr. Elop may have taken up an impossible task and made it worse. My bet is on him being run out of town.

18 comments on “Nightmare in Helsinki

  1. Jay_Bond
    June 10, 2011

    With all the competition out there, Nokia is in for a rough year or more. They took a large gamble by switching their OS, and so far it has back fired. Nokia is going to have a hard time bringing sales back and looking for new customers. My guess is new CEO by the year's end, and some drastic changes to try and hopefully rebound from what could be a death spiral.

  2. eemom
    June 10, 2011

    Most were very skeptical when Nokia announced to change its OS.  It was a risky move and one that will haunt them for some time to come.  I can't see how Nokia would quickly turnaround its negative projections and make any kind of positive announcement that would raise its value in the industry's eyes.  Companies like TI should have incorporated the gamble in their projections to protect them from similar scrutiny. 

  3. t.alex
    June 10, 2011

    Once upon a time, Symbian used to be a popular OS.. I used to run lots of cool apps on my Nokia as well. However end users and developers are flocking to iOS and Android nowadays.

  4. Ms. Daisy
    June 10, 2011

    Taking a risk after good assessment and stategic planing in order to make a headway is common practice by many organizations. Sometimes you make it and get hailed as a hero or things don't go as planned and you are a villain. Nokkia's gamble at present time seems to be the latter.

    Your comment “My bet is on him being run out of town” is more likely especially with members of Elop's excutive team, i.e. Richard Green already defecting and the spokesperson Paivyt Tallqvist explanation of him taking time off “to attend to a personal matter,” at a time like this sends alarm bells through the ranks and the stakeholders. Soon the stakeholders will be calling for the head of the CEO. Unfortunately that comes with the job.

  5. DataCrunch
    June 10, 2011

    The Win-Nok deal in my opinion was announced way too early.  I am not sure what they wanted to accomplish by announcing this way before any new products leveraging the partnership were ready.  I believe the deal can be a positive deal, but the premature timing of the announcement may have done more damage than planned.  

  6. t.alex
    June 10, 2011

    Dave, probably if they were not to announce, the situation would be worse. I believe a handsome of people out there believe in the future of this partnership as well.

  7. DataCrunch
    June 11, 2011

    App stores and the availability of “useful” apps is what will dictate device sales.  Nokia will have to pin their hopes on the growth rate of Microsoft and Microsoft partners’ app stores.  This is the same for many of the other device manufacturers, as for the most part, I would expect many of the mobile devices to generally be on par with each other in terms of features and functionality.  Here are some charts that may hold a glimmer of hope for Nokia and the Win-Nok deal:

    In a January 2011 report on App Store growth rate conducted by Distimo, Microsoft achieved the highest growth rate at 30% followed by Android at 18%:

    Source: Distimo

  8. SunitaT
    June 11, 2011

    Not sure why Nokia didn't adopt Android instead of Windows, having said that recent acquisation of Skype by Windows has raised hopes that “Nokia + Windows + Skype” can still compete with Android/iOS.

  9. Nemos
    June 11, 2011

     From your blog is more than Clear that Nokia and Stephen Elop's facing huge problems. I don't believe the move of adopting Microsoft OS instead of symbian is a wrongfully move. Maybe it was better instead of using Microsoft OS to adopt the Android platform but this is another story.

    The time is the best judge, and the future will show us if it was a fateful move for Nokia.

  10. AnalyzeThis
    June 11, 2011

    Those are some interesting charts, Dave, but it's not hard to have that type of growth rate when you're starting from pretty much nothing. And now that many of the “easy” ports from other platforms are out of the way, what does the future hold for MS apps? It's a really tough sell for developers.

    Clearly, if you're an app developer that wants to make money, you need to be on iOS. It's the obvious and most profitable platform by a gigantic margin. Despite Android's growth and install base, it is clearly not as appealing as iOS for many reasons: less potential customers, more devices to worry about being compatible with, etc.

    A counter-argument to this is that if you have a unique app for less-developed-for platform, you may still be able to make money because there's less competition. Perhaps. Still, it's hard to imagine Microsoft placing any better than 3rd in this race, and even that seems way, way, way too ambitious. 4th if they're insanely lucky. 5th-6th-7th more realistic.

  11. DataCrunch
    June 12, 2011

    Hi DennisQ, it’s amazing how these two titans (Microsoft and Nokia) are now considered underdogs in the quest from mobile dominance.  I’ve stated in the past that there is too much too lose for both of these companies and that is why I expect these two companies not to go down without an all out fight.  For Nokia, it is a matter of survival. 

  12. Anna Young
    June 12, 2011

    It's a shame that Nokia's devices and services unit will report a lower than expected sales and margins in the second quarter despite a deal with Microsoft.

    Glaring as it may seem that Nokia is in further troubled waters; however, I don't foresee further weakness than it is already in. I think Nokia could still reap many of the benefits it expects with the Microsoft relationship given time.

     

  13. FLYINGSCOT
    June 13, 2011

    You were on target with your predictions in your article.  Recent news from bbc.co.uk says:

    “Nokia's chief technology officer Rich Green has taken a leave of absence from the mobile phone giant.”

    Nokia is definitely not the dominant force it used to be.  I believe it is more due to product definition/design rather than strategy execution.

  14. Susan Fourtané
    June 13, 2011

    Flyingscot,

    And Rich Green has taken a leave of absence from Nokia because he doesn't agree with Stephen Elop. 

    -Susan 

  15. mfbertozzi
    June 14, 2011

    Susan, in addition to movements at managerial level, it seems there is still much confusion on strategy: once definitely left Symbian and launched WP7 as best OS environment to promote Nokia-Win success, yesterday one step back is done as tool's announcement to support Android apps porting on WP7…or is a step forward?

  16. Ms. Daisy
    June 14, 2011

    Dave:

    I agree that timing is everything in business especially when a strategic move is being considrered. The window of opportunity was not timed right by Nokia in this instance.

  17. stochastic excursion
    June 14, 2011

    Microsoft has enough top-notch engineering talent that it could easily surpass the wow factor brought on by iOS and supported apps.  Just as a casual observer I see a business-heavy approach though to product development at MS.  True their strategic decisions have boxed out their competition.  At the same time, their developers are boxed in.  MS also seems to be shy on marketing too, and more of this kind of effort might have won the public around to a Nokia-Windows platform.

  18. mario8a
    June 23, 2011

     

    I'll like to understand this comment, this means no one anticipated custom baseband will down even when expectations were that Nokia would decline 22 percent in the same period?

    Somehow I'll like to think nobody expected to reach 53% down, but based on Nokia expectations they should be aware custom baseband will be downhill.

      :Simply put, while weakness at Nokia has been very apparent in the marketplace, no one anticipated that custom baseband would be down 53 percent in the span of two quarters, especially given expectations that Nokia units would decline 22 percent in the same period. “

     

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