Forget Lumia, Nokia’s non-smartphone business has collapsed



In the first nine-odd weeks that Microsoft has owned Nokia, it contributed US$1.99-billion in revenue and a US$692-million net loss. It’s big enough to be material, given that Microsoft reported total revenue of US$19.9-billion and operating profit of US$6-billion in the quarter. Nokia is 10% of sales, and a significant drag on profits.

Between April 25 and June 30, the Nokia devices business sold 5.8-million Lumia smartphones and 30.3-million other devices (what it terms “non-Lumia phones”). That 30.3-million figure includes its short-lived flirtation with smartphones running Android (Nokia X), as well as its sort-of-but-not-quite smartphones Asha, and feature phone devices.

It’s hard to compare this performance to the prior quarter, given that Nokia (rather sensibly, given how rapidly sales were deteriorating) has not disclosed Lumia or non-Lumia volumes since the third quarter of last year.

We have a few numbers, though. According to the Wall Street Journal, it sold 8.2-million Lumia devices in the last three months of 2013. Traditionally, this is a seasonally strong quarter given Christmas, but its Lumia sales dropped by 7% (or 600 000 units) between Q3 and Q4! This was the first quarter-on-quarter drop in Lumia sales since launch. No wonder the Microsoft deal was so important.

Earlier this year (while the deal was closing), Nokia said it saw “higher smart devices unit volumes” in Q1. So, we can assume that figure was higher than 8.2-million. But, I’d argue it was only marginally so.

How did the most recent three months compare? If you extrapolate the sales from April 25 to June 30 to the full quarter, you get a figure of 7.8-million Lumia devices sold in the three months. That’s a roughly 6% drop from Q1.

Its non-smartphone business is collapsing even quicker. We don’t have figures for Q4 of 2013 or the first three months of this year. But in each of those quarters, Nokia did state that volumes dropped. A year ago, between April and June, Nokia sold 53.7-million non-Lumia phones. If you extrapolate the 30.3-million figure published by Microsoft overnight, you get 41.1-million for the same period this year. That’s a 24% decline, year-on-year.

In other words, a quarter of Nokia’s Asha and feature phone business has evaporated in 12 months (remember that Nokia X volumes are counted in this figure too, it would’ve likely been worse without the launch of the phones running Android).

Revenues are falling in line with volumes. Total revenue from the devices business was around US$3.5-billion in the April to June quarter last year. Again, by using Microsoft’s figure for the nine weeks, you get to US$2.7-billion in the same three months this year, a 23% drop.

Going down…

Overnight, Microsoft made it clear that its Lumia sales volumes were (still) being propped up by “low price point devices” (these “drove a majority of the Lumia smartphone volumes”). In its non-Lumia business, “phone volumes performed in line with the market for this category of devices”. That means Microsoft knows the non-smartphone category is collapsing. It’s being eaten alive by cheap, sub US$50 (Android) smartphones.

Why would anyone spend US$85 (or R899) on a Nokia Asha 306 or 210 device when operators in emerging markets are ranging smartphones at a similar (and cheaper price)? Vodacom, majority owned by Vodafone, has the Smart 4 device on sale in South Africa for exactly the same price as those two Asha phones!

No wonder Microsoft is killing everything else in the devices business and focusing only on Lumia. In a memo to staff on July 17, Stephen Elop (who now runs the Nokia devices business inside Microsoft) made the point that the company “must concentrate on the areas where we can add the most value”. It’s going to merge its Smart Devices (Lumia) and Mobile Phone (non-Lumia) businesses, and will double down on Windows Phone.

The Asha, S40 and Nokia X Android device units are shifting into maintenance mode immediately. That means development all but ceases on these platforms as they are phased out over the next 18 months.

Obviously, its important to see all of this in the context of the job cuts that were announced a week ago. Half (12 500) of the 25 000 Nokia employees that were transferred to Microsoft in late April will lose their jobs over the next year.

The deep and immediate cuts into Nokia’s legacy phone portfolio are only going to hasten the decline. That business will now enter a classic death spiral where, because investment and product development dries up, sales drop even faster. The knock-on to Microsoft’s focus on Lumia will be significant. As volumes as sales dry up in the phone business, so too does its leverage with mobile operators. Distribution and administration costs will go up. Microsoft will be able to absorb the impact of the latter, but the former is a big problem given that it doesn’t deal with operators. Hardware development costs will rise too.

Elop has a mammoth task on his hands. I’d be willing to bet that he doesn’t last another year.

Imagine if he’d picked Android instead in 2011 when he was running Nokia…

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