Inside Business

April 26, 2012 8:13 pm

Nokia deserves time before investors hang up

The group’s transformational deal with Microsoft required careful preparation and execution

It would be stretching a point to say that if Nokia doesn’t make it, Europe won’t make it either. But the proud ascent and humbling descent of Finland’s totemic telecommunications company resonate in a continent that once thought it had scaled the heights with its single currency and is today confronting the abyss.

Neither Nokia nor the euro is all washed up – far from it. But whereas considerations of global financial stability provide a motive for non-European countries to prevent the collapse of Europe’s monetary union, there is no discernible incentive for Apple, Samsung Electronics or other competitors to ride to Nokia’s rescue. In other words, the world is a lonelier place for Stephen Elop, Nokia’s Canadian-born chief executive, than for Angela Merkel, Germany’s chancellor. How much patience investors will show Mr Elop is uncertain.

As recently as February last year, five months after his appointment, he bet Nokia’s future on a transformational deal with Microsoft. This involved abandoning Nokia’s Symbian operating system for Microsoft’s then untested Windows Phone software. Such a revolution in strategy for Nokia required careful preparation and execution. It was never going to transform its smartphone business fortunes in the space of one year. Mr Elop deserved time. For the moment, he still deserves it.

Courageously, Mr Elop has never made an explicit plea for patience from investors. Instead, he has preferred to emphasise that Nokia fell into a hole largely of its own making, and no one will extract it but the company itself. This was the thrust of a message he delivered to staff 14 months ago – the eloquent analysis of Nokia’s crisis that has gone down in business lore as “the burning platform memo”. “We fell behind, we missed big trends, and we lost time,” Mr Elop wrote. “We now find ourselves years behind ... Nokia, our platform is burning.”

Eighteen months or so into Mr Elop’s reign, there is a growing restlessness among Nokia investors. No doubt this indicates their awareness that the pace of change in the smartphone market is brutal – and is reflected no less rapidly in the share prices of technology companies.

Nokia’s shares traded this week at about €2.70, giving it a market capitalisation of less than €10bn. This is a stupendous plunge from €110bn at the end of 2007. It would be a strange shareholder indeed who did not ask what had gone wrong.

Then one must weigh Nokia’s disclosure this month that net cash and other liquid assets had shrunk to €4.9bn at the end of March, down from €5.6bn at the close of last year and from €6.4bn in March 2011. Burning cash at this rate is simply unsustainable, a danger that is reflected in the falling price of Nokia’s debt and rising credit default swaps.

Nokia is caught in a double bind. At the most lucrative end of the business, its efforts to use its Windows-based Lumia smartphones to seize market share from Apple and Samsung are still in a relatively early phase. But while it struggles to catch up with its rivals in that market segment, it is simultaneously losing ground in so-called feature phones, the cheaper and less technologically sophisticated business that is Nokia’s traditional field of supremacy.

Having lost top spot in the smartphone market last year to Apple and Samsung, Nokia is thought to have ceded its number one position in mobile phone sales volume to Samsung in the first quarter of this year. The Finnish company’s self-reinvention is coming at a punishing price.

Stephen Rosenman, writing recently in Seeking Alpha, the US stock market analysis website, put it nicely. Nokia, intent on saving itself, has jumped off its burning platform into the icy ocean below – but it is yet to figure out how to swim in iPhone and Android-infested waters.

In some respects, though, Mr Elop’s strategy is beginning to reap rewards. In the first quarter, Nokia shipped 2m Lumia devices. This is insufficient to dent the dominance of Apple and Samsung, but it represents a faster rate of shipment than Google managed after it launched its Android platform.

As the Lumia example suggests, Nokia under Mr Elop is learning the importance of speed in the smartphone business. Not long ago, Nokia spent up to two years developing a new model. But Mr Elop ensured that the first Lumia devices were on the market in less than 12 months.

None of this proves conclusively that he was right to go into partnership with Microsoft. On that the jury is still out. One day, of course, there must be a verdict. But the earliest moment at which judgment should be passed on Mr Elop is February 2013 – two years after he embarked on his audacious venture.

Tony Barber is the FT’s Europe Editor

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