Nokia must take radical steps to stop its continued decline

 Paul Rasmussen


Investors that purchased Nokia shares 12 months ago have lost two-thirds of their capital. Accepting that the original decision to invest in the company was a high-risk gamble, swallowing this level of financial damage is not only embarrassing, it's more than a little irritating.

Having torn the heart out of the company by dropping its Symbian strategy and forging a link with Microsoft--also labelled by some as a high-risk gamble--CEO Stephen Elop promised at this year's Mobile World Congress in Barcelona that the company was now running at a "changed clockspeed." He also indicated that there would be a wave of new devices and software becoming available at an accelerated pace.

While Elop should be acknowledged for kicking some energy back into Nokia and delivering new Windows Phone-based smartphones in record time, his efforts have fallen short.

The dismal news that Nokia's handset division would report a first quarter loss and no likelihood of any change in the second quarter, has unleashed a wave of calls for the company to take radical action.

These include selling off its low-end handset business, which, given that this sector of Nokia's business slumped by a third in the first quarter, is worthy of consideration.

Last year, Motorola managed to persuade Google into buying its phone business for more than $12 billion, but perhaps this stunt can't be pulled again quite so easily.

Selling Nokia in its entirety to Microsoft has been often speculated, but makes little sense to the US software company given its increasing range of handset partners.

Convincing a (Chinese?) company to take its 50 per cent holding in struggling Nokia Siemens Networks is also rumoured to be a possible solution. Navteq--which Nokia acquired for around $7.3 billion in 2008--could also be a target for selling.

One idea that might have legs is for Nokia to offer part of its patent portfolio to the highest bidders to rebuild its cash reserves, which are starting to dwindle.  Nokia is said to have only enough cash (€4.9 billion as of the end of its first quarter 2012) to see it through seven quarters like the last.

More job cuts have also been suggested as a possibility, together with the more unusual idea of relocating Nokia's head office to a low-cost country.

Speaking last week on a conference call that warned of the poor first quarter performance, Elop acknowledged that changes might be necessary to sharpen focus on particular devices and markets at the expense of others.

"When we talk about what those structural changes might be, we have to make decisions about are we concentrating on certain markets, are we emphasising certain product opportunities over others, do we sell off certain non-core assets along the way?" Elop said, according to Bloomberg.

Pondering these options does little to reassure unnerved handset buyers and institutional investors. 

Nokia is said to have sold more than 2 million Lumia phones in the first quarter. This compares to expected first quarter sales of more than 30 million iPhones and the 37 million Samsung smartphones, according to a poll of analysts conducted by Reuters.

These same industry observers concluded that Nokia needs to sell 27 million Lumia handsets this year, 55 million next year and 94 million in 2014--which looks a fairly tall order.

The market ratings firm Fitch issued a simple statement following Nokia's profits warning that the handset maker's half-yearly operating profits for this year were likely to be even lower than Fitch's current forecasts.

All told, the hill that Nokia has been attempting to climb now looks almost vertical. --Paul

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