The meek, indeed, shall inherit the earth. Hot telecommunications rumor mongering and chatter relates to felled giant Nokia (NOK) and Research in Motion (RIMM), rather than scuttlebutt tracking the now stale Apple (AAPL) iOS and Google (GOOG) Android duopoly. As a sign of the times, Nokia and Research in Motion shares have clocked 66% and 136% gains, respectively, over the course of the past 90-day period. Alternatively, Apple shares remain in the thralls of a maddening collapse, which began immediately after establishing a 52-week high on September 21, 2012. On January 24, Apple shares dropped by $63, or 12%, to close out the session at $450, upon additional reports detailing slackening production. The grudge match between Nokia and Research in Motion, of course, is symptomatic of a larger paradigm. The smart phone market is reordering itself towards the product maturity stage and commoditization.
The Smart Phone Market
The smart phone is the focal point of an integrated consumer electronics ecosystem that includes telecommunications, music, computing, and video recording. To date, the Apple corporation has operated as the 800-pound financial gorilla dominating the Web 2.0 Industrial Complex. For its latest 2012 fiscal year ended September 29, 2012, Apple reported $41 billion in profits, on $156 billion in total net sales. These results largely radiate from the iPhone platform, from which Apple sold 125 million units for $80 billion in revenue. All financial success, of course, attracts competition. The Google Android - Samsung (SSNLF.PK) alliance emerged as the primary challenge to Apple, as evidenced by intense legal wrangling this past summer over intellectual property. Technology is a "winners take all" game, where fortunes are literally made and destroyed overnight.
On January 3, research firm comScore released its November 2012 report for U.S. mobile subscriber market share. This report presents averages for data collected during the September - November quarter. According to comScore, Google Android and Apple iOS operating systems now power respective 54% and 35% shares of the smart phone market. On the handset side of the ledger, Samsung and Apple are listed as one and two - with a combined 45% share of the original equipment maker market. Last quarter, the smart phone duopoly actually gained strength, as Apple, Google, and Samsung each increased share by more than 1% during the period.
At the bottom of the heap, Nokia and Research in Motion effectively battle over table scraps and the remaining 11% share of the smart phone market. Nokia has abandoned Symbian and hitched its wagon to historical Apple foil Microsoft (MSFT) and its Windows program, while Research in Motion executives opt to build out their in-house BlackBerry platform. Heightened competition will drive down profit margins for all parties involved.
Nokia Lumia Versus BlackBerry 10
On October 26, 2012, Microsoft released its Windows 8 operating system alongside the Surface tablet. Despite the initial marketing hype, technology enthusiasts now dismiss the Windows 8 release as a literal non-event. Personal computer sales continue to stagnate, while demand for the Surface tablet is nearly non-existent. In light of such a disastrous Windows 8 release, Nokia is forced to pitch the merits of its Lumia phone as a standalone entity, rather than as part of a larger ecosystem.
Nokia manufactures its Lumia phone in five separate colors, and claims that this handset is "designed to wow." Rapper Nicki Minaj has been hired as a prominent spokesperson for the Lumia, which further indicates that Nokia is hell bent upon challenging Apple's appeal to the young, counter-culture set. Beyond this marketing campaign, the Nokia Lumia is notable for the picture clarity of its 8.7-megapixel camera alongside the functionality of its mapping applications. AT&T (T) offers the Nokia Lumia 920 for $99, when consumers agree to accept the terms and conditions of a two-year contract with the carrier. In exchange for this ongoing revenue, AT&T effectively grants one $350 subsidy, up-front. Alternatively, AT&T retails the iPhone 5 for $199 ($450 up-front subsidy) with a contractual agreement, while offering unlocked iPhone 5 handsets for $649. AT&T will therefore save $100 on up-front subsidies upon every Lumia phone sold at the expense of the Apple iPhone. Certainly, AT&T executives are issuing orders for retail associates to aggressively hawk Lumia phones out on the sales floor.
On January 10, Nokia closed out the trading session at $4.45, after 18% gains on the day. Heavy volume in Nokia emerged largely due to reports out of headquarters that the company was set to exceed quarterly financial expectations. At the time, Nokia executives telegraphed that the company had sold 4.4 million Lumia units during the quarter, and was set to turn a profit. In response, investors cheered the conference call as confirmation that Nokia's turnaround efforts have been successful at generating real results.
Alternatively, Research in Motion stock is largely trading off hope, in anticipation of the January 30 BlackBerry 10 release. RIM engineers are not likely to compete directly against Nokia and pander to popular culture. For success, Research in Motion can play to its historical strengths, which include security and organizational tools coveted by corporate technocrats. As part of the BlackBerry 10 launch, Research in Motion will introduce two separate handsets to market. The BlackBerry Z10 will be a touch screen device, while the X10 model maintains the QWERTY keyboard recognized as a staple of the Research in Motion brand. These two separate wings of the BlackBerry 10 platform are indicative of a corporation attempting to balance its staid, workaholic image against Web 2.0 chic.
Andy Boxall and Digital Trends speculate that an unlocked BlackBerry Z10 phone will retail for $799. At this price point, Research in Motion will compete directly against the premium iPhone 5 and Samsung Galaxy SIII handsets.
The Bottom Line
Nokia and Research in Motion will both "float the note" through financial engineering against the "winners take all" smart phone market backdrop. For now, the goal is survival, until either business introduces a blockbuster product to the marketplace. To unlock shareholder value, both corporations are likely to lay off staff, consolidate real estate, refinance debt, and monetize intellectual property. Patent portfolio valuations, of course, should be written down to reflect the realities of today's market. Last summer, Google closed out its $12.5 billion acquisition of Motorola, largely for access to patents. Earlier this month, the Federal Trade Commission ordered Google to provide competitors access to the very same former Motorola patents "on fair, reasonable and nondiscriminatory terms."
On December 20, 2012, Research in Motion released its latest quarterly report for period ended December 1, 2012. Research in Motion closed out its Q3 fiscal 2013 with a $12.6 billion balance sheet. Broken down further, this balance sheet lists $12.6 billion in assets over top of $3.3 billion in liabilities. Cash management is now a strength at RIM, as this corporation aggressively collected $1 billion in receivables, while also paring down $572 million worth of inventories. Liabilities also include $555 million worth of deferred revenue, which will fall off the balance sheet once RIM eventually delivers goods and services in exchange for advance payments.
On paper, RIM book value would then calculate out to be $9.8 billion, which is slightly above its current market capitalization of $9.1 billion. Research in Motion would still trade at or near book value, even after writing down intangible assets to $1 billion and subtracting out a net $300 million in cash for BlackBerry 10 selling, marketing, and administration costs. At these levels, Research in Motion stock is a buy through the BlackBerry 10 launch date, after which nervous investors may dump stock in response to a product flop. Aggressive investors can expect extreme volatility in any investment, such as RIM, that features a profile of relatively heavy short interest and institutional ownership against a small market capitalization and float.
On January 24, Nokia released its 2012 annual report. As part of this release, Nokia management declared that it would suspend dividend payments for the first time in more than two decades. In 2011, Nokia paid out a 27-cent per share dividend. Eliminating the dividend will help Nokia preserve $1 billion in retained earnings over the next year. Three weeks prior to this announcement, Nokia won a lawsuit against Research in Motion on patent infringement charges. As part of the settlement, Research in Motion agreed to pay Nokia an immediate $65 million in addition to ongoing royalty payments for the use of its intellectual property.
Last quarter, Nokia Group turned a $592 million operating profit. Improved results in Nokia's Devices and Services and Siemens Networks trickled down to this bottom line figure. Q4 2012 smart phone net sales increased to $1.6 billion, or by 26% above the prior quarter. Although this past fourth quarter represents a glimmer of hope, investors must recognize these figures overlay the Holiday Season, and are a mere end cap to a fiscal year during which Nokia reported $3.1 billion in operating losses. In terms of cash flow, Nokia used up $477 million in cash on operating activities throughout 2012. Certainly, sales activity will decline heading into this summer, and erode the strength of Nokia's balance sheet.
Nokia closed out its latest fiscal year with $40 billion in assets, over top of $28 billion worth of liabilities. Nokia's $40 billion in assets break down further to a combined $7.4 billion in goodwill and intangible assets. In order to hedge the financial risks of default and called loans, Nokia will be forced to aggressively convert $9.5 billion worth of receivables and inventories into liquid cash. Despite this precarious scenario, Wall Street still applies a $16 billion market capitalization price tag to Nokia's business. This valuation assumes that Nokia will remain profitable throughout 2013.
Conservative Nokia investors should now consider selling out and taking profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.