Market Insight

Nokia's Windows phone strategy is on the brink of failure


Nokia has announced preliminary Q1 2012 results:

  • Nokia shipped more than two million Lumia Windows Phone devices, out of total smartphone shipments of 12 million.
  • Total handset shipments were 83 million, down from 113.5m in Q4 2011 and 108.5m in Q1 2011.
  • Devices and Services sales were Euro 4.2 bn, of which 1.7bn was generated by smartphones.
  • In CEO's Stephen Elop's words these were 'disappointing' results.
  • Nokia intends to quickly take actions to increase investment into Lumia, take tactical pricing actions over non-smartphones, and also accelerate planned cost reductions and pursue additional structural actions 'if and when necessary'.

Nokia stands on the brink of failing with its smartphone strategy, again.
Just over a year ago, in February 2011, Nokia chose to switch from Symbian to Windows Phone as its primary smartphone software. Symbian was to be wound down over the course of two years as it was failing to compete with Google's Android and Apple's iPhone. In late 2011, Nokia successfully shipped its first Windows Phone smartphones on time branded as Lumia.
Now, Nokia's Lumia range have been on sale for four months, but Nokia is struggling to achieve sales traction. For every Lumia smartphone shipped in Q1, Nokia shipped five smartphones running the legacy Symbian OS that Nokia is winding down.
Nokia's smartphone revenues make for no better reading. Across all of Nokia's smartphones their gross margins were poor at just 16 per cent. For Lumia smartphones, the average selling price (ASP) was just Euro 220. For comparison the two launch Lumia devices that were on sale during this period, had list prices pre tax and pre subsidy of Euro 420 for the Lumia 800 and Euro 270 for the Lumia 710. The difference is due to the relationships Nokia has with carriers that sell most devices to consumers.
The problem for Nokia is that when poor phone shipment results combine with poor revenues at the same time there is little room to manoeuvre. If shipments are struggling but ASP's are good, then a handset maker always has the option of sacrificing a degree of per device revenue to drive adoption. Nokia has a little tactical room, but it will rapidly vanish unless the results improve in Q2 and Q3.
Nokia's poor results with Windows Phone are not due to Nokia's failures. The Lumia devices have attractive and differentiated industrial design, in a smartphone market where every handset maker is struggling to stand out. Nokia shipped the launch devices on time and at attractive prices. Nokia's problem is that Microsoft appears to have stood still. A year and a half after Windows Phone 7's debut, it has changed little. In effect, the gap in features between Windows Phone and Android or the iPhone has widened and not shrunk as Nokia needed it to.
Nokia and Microsoft need Windows Phone to ship in large volumes. Smartphones are a scale business. Without sufficient consumer adoption, Windows Phone will not prove attractive to App developers. Without large numbers of quality apps, a smartphone will struggle to deliver on the promise of smart capabilities.
This current second quarter is the critical time for Nokia and for Microsoft. The Lumia 900, Nokia's first Windows Phone flagship in the US has just gone on sale. The Lumia 900 has to succeed. With large US sales will come a large attractive market of consumers that will encourage the US-headquartered Internet companies to build the quality apps that Windows Phone so desperately needs. With US failure, Nokia will be locked out of the premium part of the US handset market, again, and Windows Phone will need a complete rethink.
When CEO Stephen Elop made the brave move to embrace Windows Phone, he said there was no plan B. Given the results to date, IHS Screen Digest believes that now is the time for Nokia to create a back up strategy to the current Windows Phone endeavor.