On July 26, 2013, Nokia (NOK) is set to launch its Lumia 1020 as the latest flagship Windows phone. As always, the Microsoft (MSFT) marketing machine will join ranks with Wall Street speculators to hype the launch. Bullish traders, of course, are hopeful that a revolutionary Lumia 1020 smartphone will reorder the consumer electronics market, save Nokia from the death throes of ultimate bankruptcy, and spur growth at Microsoft's bottom line. As part of their analyses, Microsoft and Nokia shareholders will compare and contrast Lumia 1020 specifications against the leading Apple (AAPL) iPhone and Samsung Galaxy handsets. Many hypotheses and projections, however, will be fundamentally flawed. The Nokia Lumia is effectively a consumer outpost and dead end that is far removed from any destination ecosystem. For real growth, Microsoft and Nokia must consider dissolving terms of their partnership agreement.
Microsoft - Nokia Partnership
On February 11, 2011, Nokia and Microsoft issued a prepared statement outlining broad plans to partner up and develop a global ecosystem. At its core, this marriage is a union between Nokia hardware alongside Microsoft software and marketing cash. As auxiliary items, the two companies will horizontally integrate Nokia Maps and Microsoft Bing across multiple platforms. At this junction in time, Nokia and Microsoft desperately unite together in corporate matrimony as two over-the-hill has-beens, as opposed to growth juggernauts operating in their prime. Certainly, the thought of collusion between Nokia and Microsoft would have been shouted down and rejected as recently as the early half of the 2000-2010 decade, when Microsoft was coming off anti-trust litigation and Nokia was the world's leading handset maker.
Microsoft, by its actions, lacks confidence in this Nokia partnership. Before the proverbial ink dried, Microsoft immediately entered into arrangements with Samsung and Huawei Technologies to also manufacture Windows phones. On June 19, 2013, The Wall Street Journal reported that "people familiar with the matter" claimed that Microsoft held "advanced talks" with Nokia to acquire this original equipment maker. Microsoft allegedly rejected the deal at the eleventh hour and refused to pay a significant premium above Nokia's current $15 billion market capitalization. Cynics, of course, will speculate that all Microsoft - Nokia transactions are mere steps in a process towards ultimate merger and acquisition. Stephen Elop, Nokia CEO, is a former Microsoft Man. That being said, the Lumia 1020 may represent yet another half-hearted attempt to skirt immediate bankruptcy, instead of embracing aggressive risks that materialize into real growth.
Nokia Lumia 1020 Specifications
All Nokia Lumia 1020 reviews begin and end at the audiovisual capabilities of this Windows phone. The Lumia 1020 is most notable for its 41-megapixel camera. The 1020 camera takes pictures with 7712 x 5360-pixel resolution. As a video camera, the Nokia Lumia 1020 records footage at 30 frames per second and high definition resolution at 1920 x 1080-pixels. Qualcomm's popular 1.5 GHz Snapdragon S4 processor powers the 1020 smartphone. AT&T (T) offers the Nokia Lumia 1020 smartphone for $300, if customers agree to the terms and conditions of a two-year contract. At this price point, the Lumia 1020 remains in direct competition with the Apple iPhone 5, Samsung Galaxy S4, and even the BlackBerry Z10 as a premium phone. Unfortunately for Nokia shareholders, the Lumia 1020 is far out of its League, when matched up against Google Android and Apple iOS prototypes.
On June 28, 2013, research firm comScore released its report for May 2013 U.S. smartphone subscriber market share. The comScore report presents averages of data taken from the three-month period spanning between February 2013 and May 2013. The statistics confirm the extreme stratification of the smartphone and consumer electronics market. The Google Android and Apple iOS operating systems power respective 52% and 39% shares of the smartphone market. On the other side of the ledger, Apple and Samsung do control a combined 62% of the smartphone handset market as original equipment makers. Interestingly, each wing of the Google Android - Apple iOS duopoly has gained roughly 1% in market share above the prior quarter. At the bottom of the heap, BlackBerry (BBRY), Microsoft Windows, and the now defunct Nokia Symbian operating systems power the meager and remaining 8% share of the smartphone market.
The smartphone market is rapidly approaching the maturation stage of the business cycle. In other words, the smartphone is becoming a commodity that offers web browsing, text messaging, music downloading, and audiovisual technologies. Brand recognition and access to popular ecosystems and "killer" applications is now all important. The Nokia - Microsoft Windows alliance simply cannot compete. The timeless "Get a Mac" advertising campaign still defines this market. Personified against chic Apple, Microsoft remains a dowdy relic in a tweed suit who needs help simply to stay out of his own way. To hipsters, Nokia and Microsoft are not cool. To Wall Street, Nokia and Microsoft technocrats will be inevitably forced to write off goodwill.
The Bottom Line
On July 18, 2013, Nokia released an interim report for its second quarterly and semi-annual period ended June 30, 2013. Nokia closed out its Q2 2013 with $35 billion in assets above $18 billion in liabilities on the balance sheet for an intangible net worth of $17 billion, or $4.57 per share. The asset side of the equation does include $6.4 billion of goodwill, $485 million of other intangible assets, and $1.8 billion of property, plant and equipment, for a Q2 2013 total of $8.7 billion in intangible assets. For the last year-over-year period, in 2012, Nokia posted $10.1 billion in total intangible assets. The statement of cash flows indicates that Nokia has spent $1 billion on capital expenditures, while banking no cash on the disposal of any businesses over the past 18 months. Intangible assets are depreciating towards zero because they are not being leveraged to turn profits. The Lumia 1020 will be no savior delivering Nokia into profitability.
After subtracting away $8.7 billion in intangible assets, Nokia management operates with $8.3 billion, or $2.25 per share in tangible book value. Last quarter, Nokia tallied $367 million in losses, despite Microsoft forking over $250 million in "platform support payments" to the company. Nokia now owes a net $650 million to Microsoft. At worst, Microsoft could withdraw its financial support from Nokia, and pick up the scraps of the handset maker at a later date on the cheap, as a top creditor. Nokia shareholders must acknowledge the writing on the wall and sell stock immediately.
Ironically, Nokia will be doomed, if it refuses to either develop operating system software in-house as part of its own ecosystem, or wave the white flag and join ranks with Android. Microsoft, yet again, has proven itself to be the cancer that kills off original equipment makers.