As bad as it seems now, Nokia’s future looks worse

After revising its earnings estimates downward in May, on Thursday Nokia shared abysmal results for the second quarter. The onetime clear leader of the first smartphone era has tumbled down to what looks like the third spot for smartphone sales, definitely behind Apple (s aapl) and likely behind Samsung as well. With a new CEO in Stephen Elop, Nokia (s nok) is surely in a transition, but a transition to what?

My first reaction to today’s results was twofold: one of sympathy and one of optimism. I thought to myself that one of Elop’s major actions so far, choosing Microsoft’s Windows Phone 7 (s msft) platform for the future, was akin to quickly yanking a Band-Aid from a wound: Sometimes it’s best to just get the pain over with. But after digesting the news a little more and thinking about the path Nokia traveled to get to its current low point, I don’t see how the bleeding is going to stop this year, now that the Band-Aid is off. Here are five reasons why.

  • Feature phones can’t save the day. Each time I’ve pointed out Nokia’s challenges, the company’s faithful have railed at me and rallied on the general platform of “. . . but Nokia sells more feature phones than most others combined!” While that’s always been a valid point, it’s less relevant as the world transitions to smartphones. Nokia’s own sales numbers reflect this point: Total mobile-phone-handset sales revenue declined 20 percent from the year-ago period and 25 percent from the prior quarter. Combine the sales drop with a 3 percent decline in the ASP of Nokia’s mobile phones, now 36 euros ($51.20), and you can see that Nokia’s bread and butter contributed to its $692 million quarterly loss.
  • Existing smartphones aren’t helping. So as feature-phone sales are in decline, one would hope that high-profit-margin smartphones can help make up the difference. That’s not happening, given that the company didn’t capitalize on the smartphone market like Apple and Samsung, for example. Apple just reported 20.34 million iPhone sales for the quarter, a 142 percent boost from a year ago, while Samsung is estimated to have sold around 20 million smartphones in the same time period. This happened while Nokia’s smartphone sales declined 34 percent from a year ago, with 16.7 million smartphones sold. The ASP did rise 2 percent, but that’s not enough to offset the sales dropoff.
  • A smartphone answer doesn’t exist yet. Nokia is still at least one, if not two, quarters away from even beginning a sales transition to Microsoft Windows Phone 7 devices. Elop today confirmed that Nokia would launch a Microsoft-powered device by the end of the year. That means sales and revenues in the high end are likely to continue declining throughout 2011. And there’s still uncertainty about the first WP7 handsets from Nokia: What will make them different from those offered by LG, Samsung and HTC, for example? Again, the Nokia faithful will chant that Nokia makes hardware second to none. I’d be the first to agree with that, but there are two problems with the mantra. Nokia always made good hardware, and yet that alone hasn’t saved the company. Second: Nokia may not be manufacturing its first Microsoft phones. Instead, it reportedly outsourced the production to Compal, in Taiwan. In other words: Nokia’s smartphone transition is still fraught with risks for many reasons, and it’s going to take time for Nokia to hone its skills on a new platform.
  • Android squeezes at the top and bottom. Clearly, Nokia isn’t competing well in smartphones, given the growth rates shown by devices running iOS and Android (s goog). It’s the latter of the two that may have hurt Nokia the most. Why? Google is activating 550,000 Android devices per day — both handsets and tablets, but the vast majority are phones — and that number is composed of devices at both the top and bottom. High-end smartphones are selling well in regions that can afford them. At the same time, cheap Android smartphones are popping up in areas where feature phones once reigned. Think of India and the next 500 million mobile users. Look to China, where Nokia moved 52 percent fewer phones this quarter as compared to the past one. In these areas, inexpensive, low- to mid-tier Android phones are arriving and offering much more functionality for just a little more money over feature phones. We’re even seeing these in the U.S.: This year offered $149 no-contract Androids with expectations of prices dipping below $100 by the end of the year.
  • How much destruction can one brand take? Among the many negative tangible results for Nokia today, there’s a massive intangible one as well: a tarnished brand. Tomi Ahonen illustrates the global branding Nokia has on his blog today, saying “[M]ore people use a Nokia phone than drink a Coca Cola, than wear Levis’s jeans, than tell time on a Timex watch, than wear Nike running shoes, than smoke Marlboro cigarettes, or write with a Bic pen.” As sales of Nokia devices continue to stumble, the brand itself loses value in terms of consumer and investor confidence. With smartphones, the brand is tied not just to hardware but also to software and services: Consumers are purchasing brand platforms and ecosystems when they buy a handset. Think of it this way: When consumers purchase an iPhone, they equate the full package with Apple, a company that arguably sets a high bar for the entire user experience. What will customers think of when they see a Nokia smartphone after the company’s fall from grace?
I still have the same sympathy for Nokia that I had over my first cup of morning java. It’s never good to see a global leader heading toward “has been” status, especially with all the innovation Nokia has brought to so many people around the globe. But the optimism I had dissolved faster than the sugar in my coffee, faster maybe than Nokia’s overall profits and sales.
Image courtesy of Flickr user ecastro