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The Downfall of Nokia

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This article has been adapted from Fool U.K., our sister site across the pond.

Just over a decade ago, the Finnish mobile-phone maker Nokia  (NYSE: NOK  ) was the darling of the technology sector, and no share portfolio was complete without a chunk. In fact, if you bought some in the late '90s you could have made yourself a tidy packet -- provided you sold at around the time of the tech boom, before they started to slide.

Although there was some respite with a bit of a surge in 2007, the shares have fallen from their $56 peak of early 2000 to $7 today -- while over the same period, shares in iPhone maker Apple  (Nasdaq: AAPL  ) have risen around tenfold, and shares in Google (Nasdaq: GOOG  ) , the maker of the Android platform, are up about fivefold since flotation.

Profit warning
And on Tuesday of this week, the news for Nokia shareholders got worse, as the company issued a pretty severe profit warning.

Sales for the second quarter of 2011 are now going to be substantially lower than the forecasted range of 5.3 billion pounds to 5.7 billion pounds, and the company's operating margin will be substantially below the previously estimated 6%-9%.

Perhaps even more worryingly, the company has withdrawn all guidance for the full year. Further details of the current situation are expected toward the end of next month.

All of this comes on the back of last month's news of the loss of 7,000 worldwide jobs, as the company refocuses its strategy on smartphones -- a change that few will disagree is perhaps just a wee bit late.

Nokia is still hoping that its new smartphones, based on Microsoft software after it dropped its own Symbian system, will be released in the final quarter of this year -- more than four years after the first iPhone was launched.

What went wrong?
Nokia is still the world's largest seller of mobile phones (I have two, and they're both Nokia), but it's the plain old "just for talking to people" segment that it dominates, and there's less and less profit to be had there -- my last Nokia phone cost me less than 5 pounds, and even allowing for its subsidized price, there's no margin for anyone in that.

Nokia was successful in pioneering mobile-phone development because those old phones were what Nokia was best at. It was a telecommunications company, and it knew all about electronics, radio reception, signal processing, power management, and the like. 

Software was somewhat secondary -- get the communications protocols right, and provide a relatively simple user interface.

But today's phones aren't phones -- they're versatile computers that just happen to have telecommunications as one trick in the bag. And that's not what old-style telecoms companies do best -- it takes smart software companies. Symbian's development was too slow, it was too late to the smartphone arena, and it was quickly outclassed by Apple's iOS and Google's Android.

Poor choice
Dropping Symbian was a good move for Nokia, but what came next could, in my opinion, turn out to be a disaster. Instead of adopting the obvious Android platform, Nokia plumped for Microsoft.

One has-been jumping into bed with another has-been is rarely a sound technological plan, and though Microsoft may have many years of profitable business ahead of it from its very large legacy PC market, when it comes to new stuff like phones and MP3 players, it's a disappointing also-ran.

Windows Phone 7 is still in its very early days, and whether it will make it into new Nokia phones by the end of the year, as planned, is far from certain. Android, on the other hand, has been out there in many devices from a whole range of manufacturers for several years, has had a lot more real-world testing, and is popular. Would a jump to Android have impressive Nokia smartphones ready and bug-free a lot sooner?

Why did Nokia head for Microsoft's bed? Well, the answer to that seems simple -- the company's new CEO, Stephen Elop (the first non-Finn to head the company, having taken over the reins from Olli-Pekka Kallasvuo in September 2010), was previously the head of Microsoft's business division. I do hope Nokia shareholders will not come to rue his appointment.

And the competition …
Meanwhile, in a week's time, Apple will be hosting its 2011 Worldwide Developers Conference, with Steve Jobs delivering the keynote -- details of iOS 5 are expected, together with iCloud, the company's upcoming cloud-services development. Eyes will not be focused on Finland.

Reckon my fears of the death of Nokia greatly exaggerated? Let us know, below.

More from Alan Oscroft:

The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Google, creating a diagonal call position in Microsoft, and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2011, at 8:18 PM, Henry3Dogg wrote:

    Nokia should stick with Microsoft at least until the reviews of their first windows phones are in, and maybe a Kin of phones, before they switch to Android,... Or WebOS,... Or MeeGo.

  • Report this Comment On June 01, 2011, at 8:57 PM, jjhii wrote:

    Well just because I have an opinion...

    I have never used a IPhone so can't say....

    I use my wife's android phone sometimes and have a windows 7 phone. I think the windows 7 phone already works easier and better. Based on the features they are adding to the mango version I see it as being much nicer. I don't see android improving much, google is getting bored with it and has moved on to greener pastures.

    So where in the short run going with windows may not sound like a good idea I think in the long run it will work out for them.

    Now if they can just make the hardware it runs on...

  • Report this Comment On June 01, 2011, at 10:10 PM, karlm1 wrote:

    Nokia still has a large distribution channel and a history of reinventing themselves successfully. BTW they still make the highest quality phones on the market. The previous mgmt. did screw things up but its fixable. At this time next year I expect to see lots of sales momentum from the new Windows line up.

  • Report this Comment On June 02, 2011, at 12:38 AM, jesterisdead wrote:

    Good analysis. Nokia needs to light a fire under their development team. In Europe, they still seem to have some market appeal as their phones command quite a premium. In the US, they have long since faded away, with the iPhone taking the lead in popularity, likely followed by HTC and Samsung coming in fast with arguably the best tech available.

  • Report this Comment On June 02, 2011, at 12:41 AM, Takeoverman wrote:

    Nokia has better fundamentals that more than 90 percent of companies on US Stock exchanges. They are cash rich, with 10 billion more in cash than debt, and their closing share price today isn't much lower than their book value. This company will likely be taken over within the next year. Seems like a no brainer for someone to buy this $21 billion market cap company, if for no other reason than to get their cash. At its current selling price, it might draw interest of corporate raiders like Carl Ichan.

  • Report this Comment On June 02, 2011, at 9:50 AM, dlchase24 wrote:

    I think the choice of Windows Phone over Android was a smart one. Elop talks often about ecosystem, and Windows Phone provided an opportunity for Nokia to see some revenue from the services incorporated into the ecosystem. Of course, there could be an argument made that they should use both, instead of only using Windows Phone.

    Regardless, for Nokia, I think there is too much emphasis on smart phones. They are too late to the game to be a major player without something groundbreaking. That's unlikely to come from Microsoft or Nokia. Additionally, the delay in bringing a Windows Phone device to market only pushes them further behind and the resulting gap between the first Nokia Windows Phone and already established phones from Apple, HTC and Samsung with likely be insurmountable.

    The move to outsource the software was a good one, but Nokia now needs to learn how to make their entire portfolio of phones better and bring them to market faster if they want to remain relevant.

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