Nokia’s sad decline
Nokia, the Finnish telecommunications company, whose name is synonymous with the development of the cellular phone, the smart phone and was a key innovator of much of its technology, such as GSM (Global System for Mobile Communications), has been reduced to junk status by the Fitch global ratings agency. This is a sharp fall from grace, as its Nokia 1100 model, released in 2003, is still the most popular consumer electronic device ever sold with 200 million units (ahead of the 115 million PlayStation 2 consoles and 100 million iPods sold to date) and as recently as 2007, was seen as one the world’s most admired companies.
These problems first started in February 2011 when Nokia decided, as part of a strategic overhaul, to replace its ailing Symbian operating system with the struggling MS Windows Phone 7, instead of the well established Android system. This decision by CEO Stephen Elop, a former Microsoft employee, was greeted with surprise by investors and caused Noika’s share price to immediately drop 14% in value. Investors worried that the partnership would take time to deliver new phones would later have their fears confirmed when Nokia posted a 9% decline in turnover and a 51% decline in net income for the year.
The launch of the Lumia 900 4G smartphone in the US in November, when it sold over 2 million units, seemed to signal that things had turned for the better. Unfortunately its much maligned Windows 7 operating system was revealed to have a major memory bug, forcing Nokia to refund all purchases. In response Nokia expanded its cost cutting program which included laying off 14,000 employees but despite these measures this year it has posted a first quarter loss of €1.3 billion ($1.8 billion). Shares fell 19% following the announcement and have fallen 55% since the announcement to embrace the MS Windows operating system, their lowest level since the 1990s, prompting the junk status rating.
Where now for Nokia? Samsung is poised to overtake Nokia as the world’s biggest volume maker of cellphones, a title it has held since 1988 and its share of the global smartphone market has fallen from 30% to 12% in just a year and has less than 1% of the US smartphone market. Fitch has stated its junk status is due to deterioration in the company’s core devices and services division and said the company must show “substantial improvements” over the third and fourth quarters of 2012 and in 2013 to avoid further downgrades.
Nokia has responded by dropping its sales chief and its CFO Timo Ihamuotila has said “Nokia will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position.” Its CEO Stephen Elop has been emphasizing that the company remains in a transition period and has taken on a “clear sense of urgency” in responding to the challenges it faces. Unfortunately this “clear sense of urgency” includes rushing through new phones to compete with the forthcoming iPhone 5 from Apple and Galaxy S3 from Samsung, when in my view I feel that they need to slow down, refocus and develop products that people will be excited about and try and repair the damage to its brand.
Whatever Nokia decides to do, the real crunch period which will either make them or break them, will be in the Fall when they plan to release a new smartphone and a rumoured tablet on Microsoft’s latest operating system – Windows 8 Apollo. If this doesn’t work out I think Nokia will be unable to recover and it could be the end of this once iconic company.