Nokia (NYSE:NOK) Maps is the definition of a Pyrrhic victory. While the Nokia Empire remains in danger of disintegrating towards bankruptcy, executives and technology gurus are slapping high fives over a maps app. Pride and arrogance, of course, come before the fall. At today's $2.56 per share, Nokia has effectively degenerated into a call option. For survival, Nokia must eke out share against a towering Google (NASDAQ:GOOG) - Apple (NASDAQ:AAPL) smartphone duopoly while simultaneously rehabilitating its stale 90's image. This daunting challenge goes far beyond map making. Nokia is no Rand McNally.
By all accounts, Nokia Maps is a success. With each upgrade, Nokia has improved upon the aesthetic appeal and functionality of its mapping software. The Nokia Maps application is notable for its clean look, thoughtful legend, and smooth transitions between satellite images. With Nokia, geography remains the focus of its mapping program. For highway enthusiasts, Nokia Maps is a welcome relief from Google's strategy of building applications around a search engine. Google Maps imagery is often busy, due to advertisements and competing businesses depicted on the interface as points of interest. According to Pino Bonetti, Nokia executive, "pretty isn't enough."
The dominance of Google Search, however, threatens to diminish the returns of any adjustments made to the Nokia mapping application interface. Desktop, iMac, and smartphone consumers accustomed to the Google Search bar have also grown comfortable with Google Maps. Toggling between integrated Google Search and Google Maps for global positioning system technology, address designation, and route planning, is a far easier adjustment than it is to become familiar with Nokia's separate program. This je ne sais quoi, or feel, is best described as "goodwill" on Wall Street.
Apple Maps, however, is neither functional nor popular. Apple's original mapping application has quickly become infamous for glitches, erroneous geography, and awkward 3-D imagery. Whereas Nokia Maps offers crisp reference points, the Apple mapping application provides a shockingly elementary amount of detail. Certainly, Apple Maps software bugs will precipitate a chain reaction, where third party developers find the going difficult to engineer complimentary software. CNET writer Josh Lowensohn opines that Cupertino's haste to launch Apple Maps alongside the iPhone 5 and iOS 6 operating system is now resulting in disastrous reviews.
Apparently, this new mapping application is the result of a break down in negotiations between Apple and Google brass, where the "don't be evil" guys were angling for more product control. I, however, would speculate that Apple's dismissal of Google Maps is the inevitable casualty of rival factions warring against each other in the courtroom.
Over the past year, Apple has targeted Samsung as an effective proxy for Google. Last August, U.S. District Court Judge Lucy Koh ordered Samsung to pay Apple $1.05 billion in damages for patent infringement. Recently, a Japanese court ruled Samsung innocent of the very same patent infringement charges. This legal wrangling signals that the telecommunications market is quickly becoming commoditized. Consumers are therefore more likely to make smartphone purchasing decisions based upon brand loyalty, rather than minor technical details. As a result, Nokia may win a small battle on mapping, but it will lose the sales war for survival.
Nokia Marries Microsoft Windows 8
A three-headed machine now dominates the smartphone market. This triumvirate includes Apple iOS and Google Android operating systems, alongside Samsung handsets. According to an August 2012 comScore report, Google and Apple operating systems control 53% and 34% of the smartphone market, respectively. On the original equipment maker (OEM) handset ledger, Apple and Samsung are first and third, respectively. Meanwhile, Research in Motion (RIMM) Blackberry, Microsoft (NASDAQ:MSFT) Windows, and Nokia Symbian operating systems must scrape the bottom over the barrel to share 13% of the remaining smartphone market.
Alarmingly for Nokia, the outlook is becoming even bleaker as time marches on. Taking together, Android and iOS are consolidating power with a 3.6% increase in share above the prior quarter. Conversely, Microsoft Windows and Nokia Symbian have lost a rough, 1% slice off their already meager position during the same time frame. This August data, of course, does not account for Apple's September iPhone 5 launch. Nokia's business performance is largely reliant upon the success of Windows 8. Microsoft, of course, has also struck deals with Samsung and Huawei Technologies to provide Windows smartphone software. The fact the Nokia Maps is positioned to dominate the small, Windows phone pond is of little consolation for shareholders.
For real profits at Nokia, Windows 8 must anchor an ecosystem that challenges both Apple and Google. At present, Apple's iPod, iTunes, iMac, iPad, and iPhone are the financial standard bearers for computing, entertainment, videoconferencing, and art. Windows 8 is a shift away from Apple's dogged customization. In essence, Windows 8 represents a fusion between traditional smartphone, tablet, and desktop interfaces. Microsoft will still generate mountains of cash, even if consumers extend a tepid embrace towards this software. Nokia, however, is finished, if Windows 8 is anything less than a blockbuster event.
The Nokia Lumia 920 Windows 8 smartphone is set for United States launch in November at AT&T. Nokia markets the Lumia 920 as a fun phone "designed to wow," in red, silver, black, gold, or blue. In addition to Nokia Maps, this Lumia is also notable for the picture clarity of its 8.7-megapixel camera. Qualcomm's 1.5 GHz dual-core processor powers both the Samsung ATIV S and Nokia Lumia 920 Windows 8 phones. Multiple reports indicate that Nokia will offer the 920 for between $770 and $836 on the European continent. At this price point, Nokia would compete directly against the market leading iPhone 5 and Samsung Galaxy SIII.
Nokia Maps, although highly effective, contributes little to the telecommunications business core. Lost iPhone 5 users can always stop at the nearest Exxon (NYSE:XOM) service station and ask for directions.
The Bottom Line
Nokia's deteriorating balance sheet alongside the rigidly stratified smartphone market indicate that this corporation must float the note, i.e., buy time through financial engineering until introducing a blockbuster product to market. Without this blockbuster product, Nokia as is, will cease to exist. Prior to bankruptcy, intellectual property, services, handsets, and even mapping technology can either be sold off as standalone operations, or purchased by aggressive deal making conglomerates, such as Oracle (NASDAQ:ORCL). If Nokia sales continue to stagnate, a controlled break up would unlock more value for shareholders than a forced fire sale.
Last year, Google closed on a $12.5 billion deal to acquire Motorola, largely as a defensive move for patents that would help ward off lawsuits against its Android Empire. Meanwhile, Nokia grapples with deafening silence regarding a proposed deal from major players for its intangible assets. For the second quarterly period ended June 30, Nokia posts $9.9 billion in goodwill, intangible assets, and property plant and equipment on a $40.5 billion balance sheet. If Nokia cannot turn a profit, however, these assets are theoretically worth zero and must be written down.
In terms of liquidity, Nokia carries $13.5 billion in cash and securities, with $7.1 billion in financial liabilities. This seemingly comfortable position, however, is challenged by the fact that Nokia lost $2 billion last quarter on a severe, 39% year-over-year decline in smartphone units sold. Last Spring, Stephen Elop, CEO, meekly described Lumia 900 sales as "mixed." Nokia will fail within the next two years, after the latest Lumia 920 offers a repeat performance. To buy time, Elop can order another round of layoffs, while also eliminating the dividend.
Last quarter, Nokia's $132 million in cash flow from operations was a small miracle. This performance trickled down to a minor $67 million decline in Nokia's cash for the period. For the year, Nokia has lost $712 million off its starting cash position. At present, Nokia trades for $2.56 per share, while offering an 18-cent per share annual dividend. Yes, Nokia management has signed on to offer a gaudy 7% dividend yield amid looming financial crisis. After the Lumia 920 release, Elop should consider eliminating Nokia's dividend altogether, in order to save more than $1 billion over the next 18 months.
Time is of the essence.
Disclosure: I am long AAPL, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.