Nokia Corporation (NOK) held its annual Nokia World event on September 5th and 6th, and at that event, it introduced its new Lumia 920 and new Lumia 820 smartphone devices. Like the Lumia Devices introduced last November, these phones are using Microsoft's (MSFT) Windows Phone operating system. This product announcement was widely anticipated by Nokia's stakeholders in the wake of its poor financial performance in the first half of 2012. The hopes and dreams of Nokia's stakeholders helped the ADR price double from $1.69 in July to $3.39 in late August, before settling down at $2.45 on September 6th. Nokia's ADRs were at $2.83 on September 4th, but declined by 15% on the 5th as the Lumia phones on Windows Phone 8 were announced. Unfortunately for Nokia, Nokia World's Lumia Launch ended up being another Stephen Elop Flop and that is what we will cover here.
Nokia and Microsoft collaborated on the Lumia Windows Phone devices in order to help Nokia regain its leadership in the mobile phone industry and Microsoft could regain its leadership in the smartphone operating system. We remember that in 2005, Nokia was on top of the mobile phone industry, and Microsoft's Windows Mobile was dominating the Smartphone operating system sector. That was before Apple (AAPL) introduced its cutting-edge iPhone device in 2007 and Samsung (SSNLF.PK) allegedly infringed upon Apple's iOS operating patents with help from Google (GOOG).
Everyone remembers Stephen Elop's famous memo in which he referred to Nokia's Symbian operating system as a Burning Platform in February 2011. We believe that if a CEO is going to call his company's product operating system as a "burning platform," he may want to take better efforts to keep that information within the company walls. As it happened, Nokia's smartphone market share dropped from 29% around Q4 2010 to 15% in Q2 2011 and was 6% as of Q2 2012. At least Elop was kind enough to fess up to the damage his memo wreaked on Symbian sales. At Saibus Research, we are more than aware about how it takes years of painful blood, sweat and tears to build a brand and that it can be destroyed by the most innocuous of things in a matter of nanoseconds.
At least nine months later, it announced its partnership with fellow tech has-been Microsoft in creating the Nokia Lumia smartphone series, which was to run on Microsoft's Windows Phone operating system. Nokia introduced the Lumia 610, 710, 800 and 900 between November 2011 and April 2012, and these phones ran on the Windows 7 operating system. The Nokia Lumia 900 was to serve as Nokia's answer to Apple's iPhone device and was to be its "high-end" smartphone.
We believe that Nokia staged its Nokia World event on September 5th in order to tout its new Lumia smartphone devices one week before Apple introduced its new iPhone device. Jonny Evans of Computerworld appears to share our view of this as well. The good news for Nokia is that it was at least able to introduce its new Lumia 920 and Lumia 820, which would be running on Windows Phone 8. The Lumia 920 was to serve as Nokia's "feature phone" and the Lumia 820 would be the mid-range phone. Even Steve Ballmer of Microsoft saw fit to grace Nokia World with his presence. The bad news is that in Nokia's rush to stage its Nokia World powwow before Apple launched its latest iPhone device; Nokia was light on the details with regards to its fancy new Windows Phone.
Nokia did not announce any carrier partnerships, specific launch dates or even pricing of these devices at the meeting. Nokia was kind enough to announce that the Lumia 920 would go on sale in European countries beginning in mid-to-late November on Friday, September 7th. Considering that AT&T (T) was the exclusive home of the Lumia 900 in the US and it spent $150M promoting the device in order to reduce handset subsidies pursuant to AT&T Mobility CEO Ralph de la Vega's demands, we were expecting a rhetorical announcement reiterating AT&T's role in selling Nokia's Lumia Phones and that it would at least be the first carrier to sell the Lumia 920. The big hope that Nokia's stakeholders had was that Verizon (VZ) and Sprint (S) would be offering the Lumia phones as well. We think that Nokia bulls are expecting too much on that end because Verizon is in love with the Android devices and Sprint is doing everything it can to stay abreast of its $15.5B purchase commitment to Apple. We think Ralph was drinking too much of Nokia's Kool-Aid when he said that the Nokia Lumia 900 Windows Phone was a great device that he thinks customers will like. Last time we checked, AT&T sold 3.7M iPhones even though the sales people were told to push Nokia Lumia devices by any means necessary.
While AT&T said it was pleased with the Nokia Lumia sales, a spokesflak pulled a runner when asked for a specific figure for Lumia devices sold by AT&T. Fortunately, we don't have to get a specific sales figure from AT&T with regards to the number of Lumia POS phones sold. We can go to Nokia's Q2 2012 6-K and see that Nokia sold a whopping 600K Lumia phones throughout North America. Unfortunately, it fell short of the 3.7M iPhones sold through AT&T, the 2.7M through Verizon and the 1.5M through Sprint.
Source: Q2 Company Earnings Releases
Nokia Nation can take comfort in a positive review of the Lumia 920 from TheVerge. TheVerge said that the Lumia 920 was what the Lumia 900 should have been if it wasn't wedded to WP7 requirements. However, we believe that was offset by the fact that Microsoft was not going to be unveiling all the new features of Windows Phone, and that it will incrementally reveal more functionality later on. R.W. Baird's Wireless Communications analyst William Power did not see any tangible improvements over the Lumia 900. Nokia also cut the price of its Lumia 800 by 15% and made smaller price cuts on its other Windows Phone devices. We think that's helpful considering that it didn't announce pricing for the Lumia 920 or the 820.
In conclusion, we were unimpressed with the launch of the Lumia 820 and 920. We gave Nokia kudos for harvesting $22M by agreeing to sell 500 patents to Vringo in August. We have seen a number of missteps by Stephen Elop since he has become CEO of Nokia, and we can add the bungling of the Windows Phone 8 devices to that ever growing list. Deutsche Bank forecasted that Q4 2012 Lumia shipments would be 4M, which is unchanged from Q2 2012 levels. At least Deutsche projected 25M Lumia devices to be sold in FY 2013. Unfortunately, that is still less than the 26M iPhones sold by Apple in Q3 2012, even though Apple was having a bad quarter then. We are glad that we did not get rattled by Apple's weaker than expected results in its most recent quarter and that we did not get rattled by Nokia's losses and declines coming in slightly better than anticipated. We can understand why Nokia's stakeholders hold on to their losing positions in the company as we see it as a way for them to avoid having to realize the loss in their investment, both from a tax perspective and an economic perspective. If you invest in Nokia, this is what you are exposed to:
- An unprofitable telecom equipment company (Nokia Siemens).
- A mapping technologies company (legacy Navteq) that saw a €1.04B goodwill impairment write-down last year.
- A has-been mobile device maker whose operating system has been compared to a burning oil platform. We see Nokia as the meat in the mobile device marketplace sandwich and Android and Apple are eating it up.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.