Nokia Could Be in Big Trouble

Nokia (NYSE: NOK  ) currently sits between a rock and hard place. Its feature phone business is feeling the effects of the smartphone revolution, and its smartphone business isn't necessarily knocking it out of the park. Between the two, it's safe to say that Nokia is lagging behind the competition, forcing it to make up for lost time. To compensate, Nokia has taken a rather aggressive approach in the way that it prices its smartphones relative to the competition. Focusing primarily in the emerging-market segment as its bread-and-butter opportunity, Nokia seems determined to give the competition a run for its money within markets that have lower smartphone saturation. However, it doesn't necessarily guarantee the company's success, especially for a company that's in Nokia's difficult position.

More pain ahead
Between its feature phone business and its smartphone business, Nokia is currently fighting a war on two fronts. Unfortunately, Nokia's feature phone business has one foot in the grave. IDC is forecasting that 2013 will be the year that smartphone shipments will surpass feature phone shipments for the first time. In other words, we're right on the cusp of the beginning of the end for feature phone shipments. Considering Nokia's feature phone business made up over 50% of the company's device revenue last quarter and it commanded a higher gross profit margin than its smartphone business, Nokia faces structural headwinds in the years ahead as the industry transitions away from feature phones.

Having largely missed the boat on the smartphone revolution, Nokia was practically forced into partnership with Microsoft (NASDAQ: MSFT  ) , which happens to share the same lack of success in smartphones. Together, this underdog couple hopes it can wage war in the smartphone market against the smartphone juggernauts, Apple and Google. On the surface, this partnership gives me the sense that it's a mutually beneficial arrangement. Nokia benefits from the support of a player with deep pockets like Microsoft, and Microsoft benefits from having an experienced OEM in its corner. However, once you dig deeper into the nature of this partnership, you quickly realize that Nokia is getting the short end of the stick.

Back-stabbing partner
In a recent filing with the SEC, Nokia admitted what many investors have already feared. Should Microsoft at any point decide that Nokia is not living up to its expectations, it could begin releasing smartphones on its own, which could be "detrimental" to Nokia's business model. This is not necessarily new news, but it marks the first time Nokia has publicly admitted it's at the mercy of Microsoft. The worst-case scenario for Nokia would be that Microsoft learns all it can from Nokia and then dumps it. What next, Android? Something tells me that wouldn't go over well with investors.

The nail in the coffin
Not only does Nokia have to deal with the threat of the feature phone dying and Mr. Softy dumping it, Samsung is about to release a $100 unsubsidized smartphone for the Indian market. Folks, the race to the bottom is officially here, and although Nokia's current smartphone portfolio is priced aggressively, increased competition from bigger players poses a serious threat to Nokia's future profit margins. This game of chicken will put all OEMs fighting for the lowest common smartphone denominator at risk of razor-thin profit margins. In an all-out price war, Android has the advantage against Windows Phone 8 since it gives away its license for free. Overall, Nokia seems to have the most to lose since it really needs to find an effective way to compensate for the decline of its feature phone business.

When the music stops
As investors, it's always a valuable exercise to consider the major risks that a company faces while pursuing its growth strategy. In the context of Nokia, there are many threats that remain largely unaddressed, which should cause concern for investors even at this depressed level. I'm left with the feeling that Nokia is currently under attack from all angles. For the sake of its future, I seriously hope the company truly understands the magnitude of what it's up against.

Nokia's been struggling in a world of Apple and Android smartphone dominance. However, the company has banked its future on its next generation of Windows smartphones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.


Read/Post Comments (15) | Recommend This Article (2)

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 March 13, 2013, at 8:34 PM, techy46 wrote:

    Nokia's Asha 100-300 featured phones are priced at $15-99 and the top ones macth many smart phone functions and Lumia 520-920 are priced at $186 to 886, Nokai will deliver Lumia 320 or 420 to fill in the $100-150 gap and a Lumia 928 and 940 to extend into iPhone 5s and 6 sweet spot.

  • Report this Comment On March 13, 2013, at 8:57 PM, ctyank99 wrote:

    Boy, what a negative outlook. I believe Nokia is in the midts of a turn around and has nowhere to go but up!!!! I'm long Nokia.

  • Report this Comment On March 13, 2013, at 9:28 PM, vireoman wrote:

    I've read innumerable articles on NOK, and I have to say that this one is devoid of anything that passes for an authentic insight on the topic.

  • Report this Comment On March 13, 2013, at 9:42 PM, TMFTopDown wrote:

    @vireoman --

    Care to elaborate?

    --Steve Heller (TMFTopDown)

  • Report this Comment On March 13, 2013, at 10:05 PM, ramaus wrote:

    Steve, - Elaborate - is what was asked of you.

    You were "devoid". Get it?

    But, I'll help you out.

    You said "Its feature phone business is feeling the effects of the smartphone revolution". Try explaining that again, knowing that Nokia has feature phones and smart phones covered, quite well, in fact.

  • Report this Comment On March 13, 2013, at 10:07 PM, jeffreber44 wrote:

    Nokia could be in big trouble BUT ITS NOT! I own a lot of shares and love the way they are executing the bussiness plan. You got to give them a lot of credit for how they are turning this ship around. Great portfolio of phones and with W8 catching on, more Nokia phones will be sold with every quarter. Just look at the PC MAG article from today! Great news. Check it out at pcmags website.

  • Report this Comment On March 13, 2013, at 10:24 PM, marv08 wrote:

    Well, the SEC filings have to list all possible risks, even highly hypothetical ones, as a mean of legal CYA. They are no indication of a likelihood, at least not necessarily.

    MS is definitely interested in building more own devices. They expand their retail presence for a reason. The question is at what point they will go in full reverse. Outside the Xbox and Kinect, everything they tried was a disaster... Zune, Kin, Surface RT, Surface Pro, all going nowhere and the latter two have even damaged standings with OEMs. Even long-standing MS-shops suddenly offer Linux notebooks and Android tablets. If MS should come to their senses, they might drop the own phone idea.

    The question is not really IF Nokia can increase market share, if you are cheap enough this is always possible. But selling any real smartphone (Nokia's Asha series and Samsung's sub-$100 models are not) for less than $200 without subsidies can only happen at a loss. If Nokia does not figure out a way to generate at least a 10% margin in smartphones, MS walking away is the lesser threat. Companies like Samsung, with a marketing budget higher than Nokia's market value, can play the bottom-scraping game much better and longer.

  • Report this Comment On March 13, 2013, at 10:31 PM, jeffdp wrote:

    For the record... I just went to PCMag's site. I went through about 10 pages of search results on "Nokia" and gave up. I went through tens of articles dated today, nothing about Nokia.

    When you have something cool to show, how about a link??

    Not that I would expect PC Mag to have an exclusive on Nokia, a good Google news search usually finds the real news. Still, don't know what you're excited about...

  • Report this Comment On March 13, 2013, at 10:48 PM, marv08 wrote:

    @ramaus: "You said "Its feature phone business is feeling the effects of the smartphone revolution". Try explaining that again, knowing that Nokia has feature phones and smart phones covered, quite well, in fact."

    Well, he explained it quite well actually... The feature phone business is going away and Nokia is not at all compensating the declining feature phone sales by additional smartphone sales. In fact, their shipments are declining in both segments.

    Nokia cell phone (feature and smart) market share:

    2009: 36.4%

    2010: 28.9%

    2011: 23.8%

    2012: 19.1%

    Feature phone revenue development 2011 & 2012: -34%

    Smart phone revenue development 2011 & 2012: -64%

    Industry revenue growth in that timeframe: >100%.

    There may be a turnaround in 2013, but factually, there is no sign of such a thing happening.

  • Report this Comment On March 13, 2013, at 10:55 PM, colwav wrote:

    -jeffdp

    PCMag awarded the reader's choice awards today:

    http://www.pcmag.com/readers-choice

    windows phone 8 received the award for operating system:

    http://www.pcmag.com/article2/0,2817,2416521,00.asp#microsof...

    and nokia won in the att smartphone category:

    http://www.pcmag.com/article2/0,2817,2416522,00.asp#nokiaatt

  • Report this Comment On March 13, 2013, at 10:56 PM, marv08 wrote:

    @jeffdp: I assume he was referring to http://www.pcmag.com/article2/0,2817,2416521,00.asp

    (PCMag Reader's Choice Awards)

    A nice result for WP8, but as they do not give the number of voters for each platform, I have some severe doubts about the statistical integrity of this picture.

  • Report this Comment On March 14, 2013, at 6:29 AM, Pimust wrote:

    Have you guys ever heard of the upcoming Lumia 720, 620 and 520 models? What are these if not upgrades from current featurephones? Why do you try to forecast the future from last years tea leaves instead of looking around to see what's happening in the cellphone world right now?

  • Report this Comment On March 14, 2013, at 8:12 AM, ImperialDynamics wrote:

    Clearly the author is totally clueless. About a month ago Nokia announced a 15 euro phone. Can you think of any smartphone that costs anywhere near that? A third of Earth's population have never ever used a cellphone and you are talking about apples. Get out of your glass tower then you'll realize that Nokia has a huge market to address.

    Finally the author thinks Android is totally free. Aside from Google, Microsoft receives royalties from Android. In fact Microsoft makes THREE times more money from android (yes android) than Google themselves!!. Know at least the basic facts before you write an article.

  • Report this Comment On March 15, 2013, at 3:59 AM, ctyank99 wrote:

    Nokia and WP8 are just catching on.... "VimpelCom customers will be able to use their mobile accounts to easily find, try and buy digital content from the Windows Phone Store. The cost of any purchased application, game or music will be simply deducted from a customer's prepaid credit or conveniently added to their monthly bill.

    The Windows Phone ecosystem is expanding rapidly worldwide, with Windows Phone devices rolling out to more than 70 countries over the next 12 months and support for 50 display languages. Furthermore, Windows Phone Store offers more than 125,000 apps and games in 191 countries.

    Nokia Lumia smartphones are powered by Windows Phone and, with Nokia being a leading device brand in many of VimpelCom's markets, this provides a strong platform for VimpelCom to offer an enhanced mobile experience to both new and existing customers."

    Go long!

  • Report this Comment On March 15, 2013, at 4:05 AM, ctyank99 wrote:

    It's almost as if the Motley Fool is just intentionally knocking Nokia for reason! Always negative and always talking the past five years. The last five years are over! They are a great position with the Lumia line and WP8. WP8 is just stating to catch on and Nokia is in a great cash position.... from what a understand they have resolved their production issues. They just need to market their great products and start selling!!!

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