On April 21, 2011, Microsoft (MSFT) executives effectively boarded a plane for Finland and deposited briefcases lined with well-manicured bills at Nokia (NOK) headquarters. Microsoft and Nokia are now one year along a five-year / $1 billion agreement for these two firms to integrate software and hardware technologies together within the smartphone market. In the late nineties, Microsoft was the target of anti-trust hysteria, while Nokia dominated the cellular phone market. As a sign of the times, this prospective deal would have been promptly dismissed by the Department of Justice and unceremoniously heckled by the financial press.
Today, the Microsoft - Nokia partnership is yet another marriage between a staid corporate behemoth and a fading star long past its prime. Within the smartphone space, both of these businesses are laggards that must battle against the entrenched Google (GOOG) Android - Apple (AAPL) iOS duopoly for share. To compete, Microsoft and Nokia are banking on the success of Windows 8. For Nokia, anything less than a blockbuster Windows 8 would lead to bankruptcy. For Microsoft, a tepid Windows 8 release would simply be business as usual. Over the past decade, Microsoft shareholders have grown all too accustomed to this stock that merely tracks the S&P 500 and makes regular dividend payments.
Windows 8 is no savior.
The Smartphone Market
Apple effectively framed the terms and conditions of the consumer electronics market with its "I'm a Mac - I'm a PC" campaign that aired between 2006 and 2009. In these series of advertisements, Apple personifies itself as a chic, yet eager to please and functional hipster. Alternatively, Microsoft is the nuts and bolts company man in a tweed suit who can't get out of his own way. Amid this campaign, Apple launched its revolutionary iPhone onto the market in 2007. According to the financials, the iPhone is Apple's most important link within its closed and horizontally integrated suite of products. This ecosystem includes Apple's iMac, iPod, iTunes, iPhone, and iPad platforms.
For Q3 2012, Apple reports sales of 26 million iPhone units. Apple's iPhone sales accounted for roughly half, or $16.2 billion of the corporation's $35 billion total net sales during this latest quarterly period ended June 30, 2012. These figures calculate out to represent more than 20% growth in iPhone sales above the year-over-year quarter. Apple's smarthpone windfall is further evidence of its leverage above a duopoly that leaves Microsoft and Nokia shut out as marginal players.
Research firm comScore data indicate that the Google Android and Apple iOS operating systems garner 52% and 33% of the smartphone market, respectively. At the bottom of the heap, Research in Motion (RIMM), Nokia Symbian, and Microsoft Windows operating systems are left to claw over the remaining 15% of the smartphone market. At the end of this past second calendar quarter, Microsoft and Nokia operating systems combined for a meager 4% of all smartphone subscriptions.
Unfortunately for Nokia, Microsoft has already thrown this partnership under the bus. The Wall Street Journal reports that Microsoft refuses to offer Windows 8 upgrades on Lumia 900 phones already in circulation. Concurrently, Redmond also agrees to package its Windows software within Chinese Huawei Technologies handsets. Microsoft's double-dealing moves arrive in response to Lumia 900 sales that Stephen Elop, Nokia CEO, describes as "mixed." In other words, the Lumia 900 was a flop, after April's pomp of pageantry that included a Nicki Minaj concert at Times Square alongside the complimentary remarks of guru Steve Wozniak that lit up the blogosphere.
Meanwhile, Samsung is moving in on Nokia's left flank. Last month, Samsung beat Nokia to the punch and unveiled its ATIV S Windows 8 smartphone at the IFA trade show in Berlin. This phone is notable for its brushed aluminum finish, which is an aesthetic upgrade above Samsung's standard plastic look. Samsung executives, of course, will be forced to aggressively hawk these new Windows 8 phones in the aftermath of Apple's landmark U.S. District Court lawsuit. On August 24, a California jury ordered Samsung to pay $1.05 billion in damages to Apple for patent infringement. Although Samsung is expected to appeal its guilty verdict, many of this company's older phones are now effectively banned from the U.S. market.
These recent series of events have formed the perfectly imperfect storm for Nokia's demise.
Nokia Lumia 920 Windows 8 Phone Specifications
In reaction to Samsung's Berlin showing, reactionary Nokia is now hurriedly tripping over its own corporate feet to introduce its own Windows 8 to the marketplace. Nokia promotes a Lumia 920 phone that is "designed to wow" with multiple offerings across the color spectrum. Weighing in at 185 grams, Nokia's 920 is 10.7 millimeters wide and stands 5.1 inches tall by 2.8 inches wide. Nokia's 4.5-inch high definition screen is capable of displaying 16.7 million colors at 1280 x 768 pixel resolution. The Lumia 920 can also convert into two separate 1280 x 960 pixel cameras.
The Nokia Lumia 920 features 32GB worth of storage capacity and shares the same Qualcomm Snapdragon dual core 1.5 GHz processor as the Samsung ATIV S. In exchange for locking customers into the terms and conditions of a two-year contract, AT&T is likely to eat roughly $300 in subsidies to offer the 920 phone for $99. Unfortunately for the Nokia, the Lumia will compete alongside the technically similar Samsung ATIV S handset for shelf space at this introductory price point.
Wall Street is not impressed. On September 5, Nokia shares immediately lost 15% in value during a demonstration event for the Lumia 920.
The Bottom Line
The long-term trickle down to Nokia's bottom line, of course, is heavily reliant upon the ultimate acceptance of Windows 8 within the technological sphere. Set for an October 26 release, Dan Costa and PC Magazine, claim that Microsoft is taking a "huge gamble" that it can merge traditional desktop computer, laptop, tablet, and smartphone interfaces together beneath one universal Windows 8 operating system. For example, users can toggle through touch screen commands on personal computers, before picking up a Nokia Windows 8 smartphone and arranging tile icons that open up Word and Excel documents.
On this front, Nokia will again find itself stymied by Apple. Within the commoditized PC market, Microsoft Windows 8 will simply help usher in replacements for older desktops and laptops. In the hyper-growth tablet market, the Microsoft Surface will open the game playing from behind an Apple Corporation that shipped 17 million iPads last quarter. Apple's iPad sales unit count is an 84% improvement over the year-over-year period. Microsoft shareholders, of course, are largely content with a utility enterprise known for minimal profit growth, non-existent capital appreciation relative to the S&P 500, and regular dividend payments.
Microsoft is a beta stock and its Windows 8 launch will not be confused with revolution.
At $2.50, Nokia now trades like a volatile call option. Earlier this year in May, Google closed a $12.5 billion deal for Motorola. According to CNN Money, Google largely coveted Motorola's patent portfolio to defense its own Android platform against litigation. This deal may serve as evidence that Nokia is in no position to sell off intellectual capital for a solid infusion of cash to finance operations as a viable concern.
For Nokia's second quarter ended July 19, this company closed out its books with $286 million in losses. These losses follow Nokia's $1.3 billion Q1 2012 loss and a sharp 39% decline in year-over-year smartphone sales. Over the past year, Nokia has effectively generated zero in operational cash flow, while still paying out nearly $1 billion in cash dividends. Eliminating the dividend and issuing pink slips to thousands of workers will only buy time until Nokia's inevitable bankruptcy.
Nokia is fighting for its corporate life with a mere $10.9 billion in cash to cover $6.6 billion in interest bearing liabilities on the balance sheet. Investors who are in the Nokia market for a Detroit style turnaround and Ford story stock built upon cheap government loans will be severely disappointed. Business Tech reports that the Finnish government refuses to bailout beleaguered Nokia, which was once a national treasure.
According to Finland Prime Minister Jyrki Katainen, "this is not our business."
Disclosure: I am long AAPL.