Death by a Thousand Cuts
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The latest news from the Finnish smartphone maker Nokia (NYSE: NOK) is that they will be laying off 10,000 workers, closing plants and selling their luxury phone line, Vertu. This is roughly a 20% reduction in their workforce following 14,000 layoffs in the last few years. On this news and the significant cash burn that Nokia is experiencing, Moody’s cut Nokia’s debt rating to junk status. It is safe to say that the billion dollar multi-year deal that Nokia struck with Microsoft (NASDAQ: MSFT) to use Windows Phone for its smartphones has yet to pay off. These layoffs are designed to save Nokia 2 billion dollars by the end of next year and involve plants closing in multiple countries. However the layoffs would not cut its research and development team, at least this round of layoffs. Nokia CEO, and former Microsoft executive stated that these redundancies were "a difficult consequence of the intended actions we believe we must take to ensure Nokia's long-term competitive strength."
In the first quarter of 2012 Nokia was passed by Samsung for the first time in over a decade as the largest maker of mobile phones. After only roughly a year since Microsoft and Nokia inked their deal it is a little premature to call it a failure. However with Windows Phone struggling to hit 3% global market share and these layoffs coming down the pipe, something needs to change to make Nokia competitive. The largest single change that is coming this year with the potential to reverse the negative news from Nokia is the upcoming release of Windows Phone 8.
Windows Phone 8 was previewed and detailed at this month’s Microsoft Phone Summit. It has several new features that will make it and phones that run it far more competitive including support for Multi-core processors, deeper Skype integration and more of a platform with the upcoming Windows 8 operating system and Xbox through Smartglass. It also shares a common core with Windows 8 meaning development for both platforms is very simple. These should give Windows Phone 8 the added features it needs to bring it up to par with its competitors. This will be especially good for Nokia, whose Lumia line of Windows Phone smartphones have seen decent sales here in the US but have not caught on like Nokia hoped.
Nokia’s smartphone future depends on the success of Windows Phone 8, codenamed Apollo; they cannot recover from another generation of Windows Phone that does not catch on. Microsoft will also be pushing Windows Phone 8 alongside their Windows 8 operating system. The Microsoft push for Windows Phone will help Nokia as the most widely available line of Windows Phones is the Lumia line built by Nokia. Nokia has also recently brought its lower end Lumia phones to China Telecom which will give them a boost in one of the largest and fastest growing mobile markets. A Microsoft executive recently stated that Windows Phone had 7% of the Chinese smartphone market after only two months on sale there. It could be that China will serve as a base for Windows Phone and Nokia. Windows Phone 8 will also feature deeper Nokia integration with the operating system as Nokia maps and navigation are featured in Windows Phone 8.
Should Windows Phone take off it will save Nokia’s potentially lucrative smartphone business and come at the expense of Androids continued growth. It may also come at the expense of Research In Motion (NASDAQ: BBRY) BlackBerry should the upcoming release of the BlackBerry operating system, BlackBerry 10, not take off. However with less than ten percent of the smartphone market, it remains to be seen how much Windows Phone could benefit from taking market share from BlackBerry.
The largest draw back to Windows Phone 8 from Nokia’s perspective is that there is no backwards compatibility. This means that none of the Windows Phones that Nokia currently makes can be upgraded to Windows Phone 8. Though they will get an upgrade that will give them the new live tiles feature, they will not get Windows Phone 8. This will depress Nokia phone sales from now until Windows Phone 8 launches and could be very rough in the short term for Nokia.
Apple (NASDAQ: AAPL) has very good support for their older devices, over 80% of all iOS devices run iOS 5 and the newly announced iOS 6 will work on devices going back to the iPhone 3GS. Apple made it a point at their developer conference that they had a quick update cycle and compatibility with their older devices. A jab that at the time was directed at the fragmentation in the Android ecosystem. It seems that this critique now also applies to Windows Phone.
Nokia is also working on improving their feature phone line; they recently launched the PureView 808 which is rocking a 41 megapixel camera. However Nokia cannot survive on feature phones alone and they are taking their own steps to try to ensure smartphone success. They are aggressively pricing their lower end Lumia devices, specifically the 610, in an to attempt to compete with lower-end Android devices. Chief marketing officer Jerri DeVard is stepping down to be replaced with a long time Nokia employee. This comes after the marketing strategy for the launch of the Lumia devices was not as successful as it could have been.
Combine the new features in Windows Phone 8 with increased marketing as well as further price reductions and Nokia’s Lumia line will take off globally for the first time since its launch. Windows Phone should have no problem surpassing BlackBerry in global market share in the coming year. The sticking point for Nokia is the time period from now until they launch a new line of Windows Phone 8 smartphones. The announced layoffs should save them enough money to bridge this gap but there are still rumors that Microsoft will purchase Nokia.
Nokia will also gain ground in the corporate and government markets where Microsoft’s ability to sell a complete IT package will boost their appeal. With greater hardware support, like multi-core processors in Windows Phone 8. Nokia will be able to design phones to compete with the most cutting edge Android hardware, and Windows Phone 8 will give Nokia smartphones the refinement of Apple’s iPhone.
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