Nokia has been hit where it hurts

02 Jun 2011

It seems all Nokia’s nightmares are coming true, and it’s now under attack in the low- and mid-tier device sectors that have kept it at the top of the tree despite it’s well-publicized problems in the smartphone market.

The firm’s admission that it won’t hit 2Q targets and decision to drop all guidance for the rest of 2011 is a serious blow indeed – particularly for recently installed CEO Stephen Elop. There’s a separate question about how much time shareholders give Elop to turn the business around that we hope to answer early next week, but in the meantime the new boss is staring at the stark statistic from Bloomberg that the firm’s share price has tumbled 37% since he took over in September.

David McQueen, principal handset analyst for Informa Telecoms & Media, told Telecoms the vendor’s current problems stem from growing competition from local vendors in India and China. “Nokia is now starting to feel the heat a little at the very low end,” he noted, adding that the local vendors “are competing well on price and features.”

The situation has left the door open for Android devices, he said. “If you add in the low-cost Android smartphones from ZTE and Huawei, there seems nowhere else for Nokia’s sales to go but down.”

Elop conceded that Chinese vendors, in particular, are now more competitive at Nokia’s AGM in early May. He said the firms are beating Nokia with dual-SIM handsets and that the firm will have its first rival device ready in a matter of months.

When I read through the text of Elop’s presentation to shareholders, I got the impression he was completely unaware of the existence of dual-SIM devices. These have been around for anything up to a decade in Japan and South Korea, and yet Elop stated the Chinese vendors “are delivering new types of innovation to the market.”

If my impression is right, it certainly heaps pressure on the new CEO, who went to great lengths to explain how his home nation – Canada – is very similar to Finland in terms of geography (they’re both right on the Arctic circle). This apparent bid to win favor seems to be an attempt to assure the Finns that he’s not so much of an outsider as it might first appear. Is that a sign he recognizes the need to build confidence in him?

Perhaps, but McQueen offers a valid argument regarding Nokia’s smartphone partnership with Microsoft. Aside from the need to launch devices quickly – Elop yesterday said it is on track to do so in the fourth quarter – McQueen notes that vendors including Motorola and Sony Ericsson have managed to turn around their ailing handset businesses in recent years.

He also predicts Microsoft will be a powerful ally, and that the partnership could result in a “whole new smartphone landscape in two years time.” It’s not an unreasonable forecast, given the typical 24-month upgrade cycle of consumers.

Crucially, though, McQueen notes that Microsoft has already come from behind in the games console market, and so could do the same in smartphones. “Look what MS did in the games platform market with the XBox, having been way behind Sony PlayStation.”

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