On February 10, 2011, Nokia (NOK) and Microsoft (MSFT) outlined plans for a new partnership between these two technology brand stalwarts. The terms of this agreement effectively specify that Microsoft will put up marketing cash and software, in exchange for near exclusive licensing access to Nokia handsets. Taken further, the Microsoft - Nokia deal is part of a grander scheme for both companies to maintain relevance alongside the now dominant Google (GOOG) Android - Apple (AAPL) iOS duopoly. As a sign of the times, this Nokia - Microsoft agreement would have been unthinkable one decade ago, at a time when Windows faced anti-trust prosecution from The Department of Justice, while Nokia was the world's leading handset manufacturer. Today, Microsoft, and its bizarre behavior, is dead weight to the fortunes of Nokia shareholders.
I Am a Mac. And I Am a PC.
Apple aired its devastating "I am a Mac. And I am a PC." advertising campaign between 2006 and 2009. This series of advertisements personifies Apple as a chic, yet eager-to-please hipster. Alternatively, Microsoft is a dowdy technocrat in a tweed suit, who needs help to simply stay out of his own way. Against this backdrop, Apple brought the revolutionary iPhone, iPod, iPad, and iMac platforms to market. To date, the Steve Jobs halo effect reinforces the most financially successful telecommunications, computing, and entertainment ecosystem of the Web 2.0 Era.
Meanwhile, Microsoft is maddeningly consistent - with its zero-growth business model of jamming Windows software updates into copycat hardware. The Surface tablet, for example, is now a confirmed bust. This playbook will fail to revive Nokia, especially because Microsoft is notorious for competing against its own partners. Microsoft has already inked deals to supply its Windows software to both Huawei Technologies and Samsung. Furthermore, technology industry insiders speculate that Microsoft engineers are now developing a smart phone of their very own at Redmond. At this point, legendary musician Stevie Wonder would dismiss Nokia as Microsoft's "Part Time Lover."
Microsoft's brazen double-dealing will further confuse and alienate consumers at the bottom of the smart phone market. Nokia is now effectively an island unto itself, at a time when it needs support most. On February 6, 2013, research firm comScore released its latest December 2012 U.S. smart phone subscriber market share report. This report averages data for the quarterly period between October 2012 and December 2012. Alarmingly for Nokia shareholders, the Google Android - Apple iOS duopoly is still consolidating power - with a 3% increase in share above the prior quarter. The Android and iOS operating systems power a combined 90% share of U.S. smart phones. On the other side of the ledger, Samsung and Apple are a respective one and two on the list as original equipment manufacturers. This is the definition of a "winner-take-all" market, as Google is now the only brand capable of matching Apple, in terms of popularity.
A Game of Musical Chairs
At the bottom of the scrap heap, BlackBerry (BBRY), Microsoft - Windows, and the now effectively defunct Nokia - Symbian operating systems battle over the meager remaining 10% share of the smart phone market. The smart phone market has now degenerated into a rigged game of musical chairs - with Apple and Google already occupying two out of the three total seats. As a matter of mere survival, BlackBerry and Nokia now compete directly against each other in the hopes of building out a viable third wheel beside the Apple - Google duopoly. The victor of this opening round will then hope to generate unit sales comparable to future installments of the Samsung Galaxy and Apple iPhone.
Nokia released its latest annual report on January 24, 2013. For the fourth quarterly period ended December 31, 2012, Nokia reported sales of 4.4 million Lumia 920 handsets. This performance is a significant improvement above the prior quarter, when Nokia sold 2.9 million Lumia units. These results, however, do not provide exact confirmation that Nokia is back and has arrived. During the earnings conference call, Nokia executives warned that Lumia sales would deteriorate through fiscal 2013. Nokia bears, of course, would argue that improved Q4 2012 sales were a one-time, lightening-in-a-bottle symptom of Holiday Season shopping, combined alongside Apple iPhone 5 supply chain inefficiencies.
Again, Nokia effectively stands alone in this long-term siege to defend individual handsets against integrated ecosystems. Earlier this month, BlackBerry launched the BlackBerry 10 operating system, in conjunction with two separate X10 and Z10 phones. The X10 features BlackBerry's traditional QWERTY keyboard, while the Z10 offers the now standard touch screen. BlackBerry and Visa (V) executives have already negotiated a deal to transform BlackBerry 10 devices into virtual wallets - through near-field communication technology. The recent awarding of R&B singer Alicia Keys with title "global creative director," alongside BlackBerry's latest name change and product rollout, indicate that this business is now on a mission to capture both popular culture and IT professional buying power.
Nokia shareholders must now calculate the risks of the company's Windows phones effectively being shut out of the marketplace. Industry consolidation would then become a possibility. Nokia assets, of course, will depreciate towards zero, if this business cannot turn a significant profit over the next eighteen months.
The Bottom Line
Nokia closed out its latest fiscal year with a $40 billion balance sheet. Broken down further, this balance sheet includes $40 billion worth of assets over top of $27 billion in liabilities. For Nokia, $13 billion in tangible assets effectively back $15 billion worth of Wall Street capitalization. Nokia balance sheet asset valuations, and consequently, stock market performance will deteriorate sharply, if the Lumia cannot generate sustained buying interest. For the 2012 fiscal year, Nokia used up $473 million in cash in operating activities. The recent announcement to suspend dividend payments, however, will preserve $1 billion in cash flow and retained earnings. The decision to eliminate the dividend indicates that Nokia brass agree that this company remains in dire financial straits.
All technology investors must recognize the idea that the smart phone patent bubble has burst. In May 2012, Google closed out its $12.5 billion Motorola acquisition, as a defensive move to shield its own patent portfolio away from Apple versus Samsung litigation. Earlier this month, however, the Federal Trade Commission ordered Google to provide competitor access to these very same former Motorola patents "on fair, reasonable, and non-discriminatory terms."
Nokia now lists $7.4 billion in goodwill and intangible assets on the balance sheet. Most likely these assets will be written down significantly over the next year. In the event of a liquidity crisis, it is doubtful that a buyer will pony up top-dollar for Nokia patents. Early last January, BlackBerry agreed to a $65 million pay out to settle Nokia patent infringement charges in a case that Wired dismisses as the "saddest slap-fight of a patent war in recent memory."
Nokia now runs on borrowed time, as attempts to float the note through debt refinancing, layoffs, real estate consolidation, and dividend suspension run their course. Talks of embracing Android at Nokia may never result in real action, because this company cannot afford further confusion within its sphere of the marketplace. Nokia is now practically wedded to the ineffective Microsoft behemoth, until the bitter end.
Rather than accept prospects for enduring another maddening collapse, Nokia shareholders should sell stock now and take profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.