This week, Nokia (NOK) shares dropped further from where it was last Friday, making new lows every day. The market has pretty much written off Nokia as a major player in the smartphone market. The main reasons for this are not that surprising, as I pointed out in earlier articles, it's a combination of (1) Microsoft's (MSFT) announcement of Window 8, and the non-upgradeable from all current Lumia phones and (2) the poor performance of Eurozone stock markets.
Today, I talked with a friend who works for Nokia in Asia. This is what he described the current situation:
Since current Nokia phones will only work on Windows 7, the OEMs have stopped supporting the phones. They are very close to stop manufacturing parts for the phones, with the anticipation that these phones will become entirely obsolete in three months. In the meantime, the new phones developed for Windows 8 are yet to start manufacturing. Without much funding budgeted for new product development, the whole company has been sitting somewhat idly waiting for business to start on with the release of Windows 8.
Wow, Uglier than I thought.
So it appears Microsoft really duped Nokia, on two fronts.
In the short term, Nokia introduced Lumia 900 in April and Microsoft will launch Windows 8 in October. This makes Lumia 900's life cycle much shorter than the one-year time window most smartphones get. Since the last three months are generally "osbourned" with the announcement of the new product, Lumia 900 has in fact received only one third of the 9-month lifetime most smartphones have. This is perhaps partly to blame on Nokia itself, for not being able to come up with a smartphone for the holiday season last year. Now that Nokia already announced that it will phase out the Symbian system, its low end smartphones are osbourned as well. The sales figure this quarter will be the ugliest on record.
In the long run, Nokia's contract with Microsoft -- to be Windows Phone system exclusive and in return to get funded from Microsoft -- makes it impossible to be a takeover target. Big players like Apple (AAPL) or Samsung will not purchase Nokia, because their bid will be deemed as anti-competitive. Small or new players such as Amazon (AMZN), Huawei, or ZTE, will not purchase Nokia, because they cannot easily get out of the exclusive contract with Microsoft. And they perhaps wouldn't want to have a confrontation with Microsoft either.
By handing Nokia $1 billion a year, Microsoft has basically ripped Nokia off any possibility of being acquired by another company. Considering Nokia was still worth $40 billion at the beginning of 2010, Microsoft really got this deal cheap, and without having to acquire and deal with the trouble of managing a hardware company.
Looking forward, what will happen to Nokia? The stock may go further down when the bad news this quarter turns out to be uglier than people's wildest speculation. After that, depending on the upcoming news, investors can start considering buying shares.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
