Nokia's opportunity to create a third ecosystem based on Windows Phone is vanishing fast, warn experts.

Dory Carr-Harris, PSFK
  • 14 june 2011

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This article titled “Nokia’s new smartphone strategy fails to impress market watchers” was written by Charles Arthur Technology editor, for The Guardian on Sunday 12th June 2011 15.33 UTC

Nokia’s chief executive Stephen Elop left the stage quickly after his speech last week, when he set out how the Finnish mobile phone company planned to build the “third ecosystem” in the fast-growing smartphone market.

He had been was speaking in London, and said he was confident that in partnership with Microsoft – which from this autumn will supply its Windows Phone software to top-end Nokia handsets – the company would continue its drive to connect the “next billion” people to the mobile network.

Richard Windsor, global technology marketing analyst at broker Nomura, was unimpressed. “Well, I’m still selling the stock,” he said as he watched the Canadian leave the room.

He is not alone: analysts around the world are marking the company’s stock down. They reckon it will make a loss for at least the next two quarters and that its mobile business will shrink by 20% this year and then remain at about the same size for the next two years.

Meanwhile the company’s credit rating has been cut by Fitch and Moody’s rating agencies to just a notch above junk. If Nokia were a European country, you would be thinking of Greece, not Finland.

The company’s market value is now bn (£15bn) having fallen to its lowest level since the first half of 1998. In June 2000 it hit a peak of 5bn.

It is a shaming situation for a company that was once the Goliath of the mobile market. Now it seems to be careening unstoppably downhill as operators and customers shun its internet-enabled smartphones, based on the Symbian system that Elop intends to kill off. At the same time he is struggling both to downsize the company and speed up product development.

“We believe the new guidance [from Nokia] is a strong indication that our worst-case scenario for the company, of accelerating market share and gross margin decline, is crystallising,” said Bernstein analyst Pierre Ferragu. “The Nokia brand is at risk of losing visibility and the opportunity to create a third ecosystem based on Windows Phone is rapidly vanishing.”

The only light in the darkness is that the company has been discussing the sale of part of its share of Nokia Siemens Networks, a joint venture building telecoms infrastructure, which represents about 30% of revenues but is barely profitable. However, if that succeeds it could make the company vulnerable to a destabilising bid.

The reason for Nokia’s latest dose of financial pain is that analysts have caught wind of the fact that it is cutting prices – both on its smartphones, which represent about 25% of its handset sales but generate some 50% of mobile revenue and the cheaper handsets which sell at a rate of about 75m a quarter.

At this low end of the phone market, Nokia has been losing share rapidly to cheaper Asian rivals. In May it warned it would miss sales and profit targets, blaming tough competition.

Nomura’s Windsor thinks the group has little time to turn around because the smartphone sector will see its fastest growth this year and in 2012, and then level off. “After that, all you’re really left with is competition, trying to get market share from rivals.”

The promise that Microsoft’s Windows Phone, a new mobile operating system launched in October 2010, will spark a whole new ecosystem to rival Apple’s iPhone and Google’s Android is viewed with scepticism by many. “Windows Phone offers a nice experience, but nobody has bought it,” said Windsor. “There are nine different devices being offered on 60 operators, and we calculate 1.3m have shipped.” (Microsoft said 2m shipped in the first three months, but has not said how many have been activated.)

Windsor reckons Nokia’s Windows Phone device, expected in the autumn, will therefore be “irrelevant, because it will be an expensive device, and the top-end market is effectively lost to Apple’s iPhone and Android phones such as HTC. The only chance for Nokia is in the mid-tier of smartphones selling at about 0 to 0 – but we won’t see those for at least 12 months.”

During that time, he thinks, cheap Android smartphones made in China will take over the bottom end of the smartphone and “feature phone” market.

Dean Bubley, who runs the research company Disruptive Analysis, said: “I think the ecosystem will happen, but in a different timescale to Nokia’s revenues. Developers are starting projects to write apps for Windows Phone. And there can be more than just Apple and Android in the ecosystem space. There are on the internet – Google, Facebook, Skype – so why not on mobiles? It all depends what they can show off by the first half of next year. If I were Elop I would be concentrating on getting a phone out really quickly.”

• This article was amended on 13 June 2011. The headline on the original suggested that Nokia had recently released a new smartphone. The story text said that Nokia has been discussing “the sale of its share” of Nokia Siemens Networks. This has been corrected. © Guardian News & Media Limited 2010

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