2011 is a Make-or-Break Year for Nokia

by Tony D'Altorio

2011 is a Make-or-Break Year for Nokia

by Tony D'Altorio, Investment U Research

Friday, February 4, 2011

The small country of Finland is focused on Nokia ADR (NYSE: NOK), the world's largest mobile phone maker.

Its CEO, Stephen Elop, accepted the position last September. But he already faces a huge challenge in developing a plan for the company's much-needed turnaround.

Nokia's shares fell nearly 9% on January 27 after publishing its fourth quarter results. That's because its smartphone market share tumbled to 31% compared to 40% a year ago.

The company also predicted a disappointing start for this year too. Nokia expects operating profit margins at its mobile phone unit to sink to 7-10% this quarter, down from 11.33% last quarter.

Nokia Is Still Tops but Symbian Stinks

Nokia still sells nearly 67% more phones than Samsung Electronics, its nearest rival.

Yet it can't seem to produce devices that compete with the Apple (Nasdaq: AAPL) iPhone or the Android operating system from Google (Nasdaq: GOOG). This segment is key, as it is the highest growth, highest margin segment of the mobile phone market.

Most critics point to its Symbian operating system as the main problem. Though it has long been the world's most popular model, Android and Apple's iOS offer a more user-friendly experience.

Consumers increasingly choose phones based on software and web applications, such as email, video and maps. So this puts Nokia at a competitive disadvantage.

The last quarter highlighted that issue, as Symbian phones no longer sold best worldwide. Instead, research firm Canalys labels Android-based phones as holding that honor.

Canalys says that 33.3 million Android-based phones shipped last quarter. That compares to 4.7 million the same time in 2009.

Meanwhile, only 31 million Symbian-based phones and 16.2 million iPhones shipped.

Nokia's Choices: Act Now or Risk Obscurity

If the company doesn't do something soon, Nokia risks obscurity in the smartphone market. Even its CEO admits, "the industry changed, and now it's time for Nokia to change faster."

Mr. Elop will reveal the company's strategy soon, probably at its annual capital markets day on February 11. Most analysts expect him to stick with Nokia's existing Symbian and fledgling MeeGo smartphone operating systems in most of its markets.

Later this year, it should launch the first devices to use the MeeGo, which was jointly developed with Intel (Nasdaq: INTC). That system is likely Nokia's effort to compete with the Apple and Google smartphone platforms.

If so, the company is likely aiming at gradually building traction in the market by improving its software offering. The strategy has the advantage of not throwing away years of effort and millions of dollars spent on mobile operating systems.

On the other hand, it could abandon its software development and just embrace Android. Operating margins would then rise by about 4%, phone sales would climb and Nokia would save $1.37 billion a year.

Unfortunately, it would also then become a mere low-margin, commoditized hardware maker, much like Dell (Nasdaq: DELL) in the PC market. And while Nokia's gross profit margin has slipped, it currently sits well above Dell's.

To avoid that fate, the company could strike a deal with Microsoft (Nasdaq: MSFT) - Elop's former employer - and adopt the Windows Phone 7, a decent operating system.

Considering its mere 3% claim on the market, Microsoft would likely be open to the idea. Though joining forces could simply join two weak partners together for no real change.

Nokia's Decision Is.....

Investors will have to stay tuned for a couple of weeks until Nokia makes its decision.

More than likely, the company will stick with its software overall. But it may very well adopt either Google's or Microsoft's operating system in North America, where it is all but invisible in the smartphone market.

One way or the other, investors shouldn't write it off just yet. After all, it did reinvent itself from a stodgy conglomerate into Europe's most successful consumer technology brand.

But Nokia has to rediscover the knack of delivering winning products. If not, its shares could drop even further than the two thirds they've fallen in the past three years.

Good investing,

Tony D'Altorio

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