Nokia Stumbles Big, Will WP7 Run Out of Time?

With the first Nokia Windows Phone 7 devices not expected to arrive until the fourth quarter, Nokia (s NOK)  is facing an increasingly tough transition, acknowledged Tuesday as the company lowered its second-quarter and full-year outlooks. The company said rising competition in both the smartphone and feature phone markets is taking a toll on average selling prices and margins, prompting the company to scale back its previous guidance. The latest update underscores the immense challenges ahead for Nokia as it looks to reshape itself around Windows Phone 7 (s MSFT) and hold on as the competition accelerates.
Nokia said sales for its Devices & Services division will be substantially below its earlier prediction of €6.1 billion to 6.6 billion ($8.7 to $9.5 billion USD) for the second quarter 2011 due largely to lower than previously expected average selling prices and mobile device volumes. In the second quarter, Nokia now expects Devices & Services’ operating margin to be substantially below its previously expected range of 6 to 9 percent and could end up being around break-even. For the full year, Nokia now says it’s no longer appropriate to provide an outlook for the year and said previous targets for the third and fourth quarter are no longer valid.
Nokia CEO Stephen Elop said sales of undifferentiated Android (s GOOG) devices in Europe are putting a lot of pricing pressure on Nokia smartphones. In China, increased competition along with channel inventory mismanagement and a lack of CDMA phones is hurting Nokia. He said the company is still positive about its long-term prospects and is even more confident about a fourth quarter launch of its first Windows Phone 7 devices. But the road ahead is proving to be extremely tough, especially as competitors take advantage of this shift.
“Going through this transition, it’s hard,” said Elop on a conference call. “There is definitely less visibility than we’d like. 2011 will be a difficult year.”
The challenges aren’t just in smartphones. Elop said Nokia is also facing similar challenges with feature phone sales, which should also be a significant concern for the company. Elop said Nokia is taking a number of steps to address the problems ahead, including continued investment in Symbian, which is in the process of releasing a new version called Anna. It also started selling dual SIM devices last week. And it’s working on being more responsive with pricing and promotions at retail to better compete with rival devices. The company reaffirmed its goal of reducing its Devices & Services operating expenses by €1 billion for 2013.

Gartner's Q1 smartphone sales data

This is, as we’ve noted, going to be a harrowing year for Nokia. It has to try to minimize its marketshare losses in the face of huge competition from Android and iOS (s AAPL), which is clearly taking its toll. And it has to keep trying to move Symbian devices even though its publicly said that the future of the company isn’t based on that operating system. Nokia’s share of the global smartphone market in the first quarter slipped to 27.4 percent, according to Gartner (s it), down from 44.2 percent a year earlier. Meanwhile, Windows Phone 7 is still getting off to a slow start, selling 1.6 million devices to end users in the first quarter, according to Gartner, less than the number of older Windows Mobile devices sold. Nokia’s overall share of all mobile phone sales also slipped 5.5 percent from 30.6 percent to 25.1 percent, with the company selling 2.5 million fewer units from a year ago.
Nokia needs to reverse those trends if it wants to be in a good position to compete when Windows Phone 7 devices arrive. Elop acknowledged it needs to have the channel well-lubricated with Nokia devices so they occupy plenty of shelf space at retail. But with each passing quarter, there is less incentive for operators and retailers to set aside space for Nokia products. Elop, however, said operators are anxious to find a third horse in the smartphone ecosystem and are talking with Nokia about how Windows Phone 7 can be that alternative. And he feels the company is committed to doing what it needs to do to succeed.
“We feel it’s hard to get through the transition in the meantime, but the company is very focused on the end goal, and we’ll be delivering some very encouraging results,” Elop said.
All of this means there is even more pressure for Nokia to make good on its Windows Phone 7 strategy and do it quickly. Microsoft is doing its part with an upcoming release of Mango, the next version of Windows Phone 7, scheduled to be out this fall. But Nokia will have to crank out not only a fair number of competitive devices, but really unique and differentiated ones. It will have to get that first wave of devices right or risk losing even more of its reputation. There’s still a chance of success, but Nokia will have to prove that it can fire on every last cylinder. The margin of error keeps getting smaller for Nokia with each passing quarter.