Nokia Admits Risks with Windows Phone Transition: May Become Unprofitable, Lose Market Share

Nokia Warns About Potential Difficulties with Transition to Windows Phone

by Anton Shilov
03/16/2011 | 01:05 PM

Microsoft Corp. and Nokia Corp. announced plans to transit Nokia smartphones to Windows Phone operating system back in February. No actual agreements have been reached so far and the actual negotiations are ongoing. However, Nokia has already outlined a number of risks that it will run into during the transition period and as a result of such changeover.

From Symbian to Windows Phone: Hard Road Ahead


On February 11, 2011, Nokia and Microsoft announced decision to switch smartphones from the world's largest maker handsets to the operating system from Microsoft. Under the terms of the agreement, Nokia would adopt Windows Phone as its principal smartphone strategy, Nokia would help drive the future of Windows Phone and would contribute its expertise on hardware design, language support, and help bring Windows Phone to a larger range of price points, market segments and geographies. Besides, Nokia and Microsoft would closely collaborate on joint marketing initiatives and a shared development roadmap to align on the future evolution of mobile products. There are other points of proposed partnership, which is yet to be finalized an published, but Nokia has already published the list of risks that it will run into because of the switch.

The fact of the announcement to transit to Windows Phone operating system has already reduced interest towards Nokia Symbian platforms and thus towards actual smartphones based on them. But there are more risks for Nokia, which the company noted in a filing with the Security and Exchange Commission.

Nokia warns that the expected transition may prove to be too long to compete effectively in the smartphone market; Nokia's ability to innovate and customize on the Windows Phone platform may not materialize; new sources of revenue expected to be generated from the partnership may not emerge or may miss the goals; Nokia may prove to be unable to change its mode of working or culture to enable efficient partnership; the proposed Microsoft partnership may cause dissatisfaction among partners and employees, which affects terms of Nokia's business and operations; Nokia and Microsoft may not be able to properly integrate their services or fail to capitalize on the final product. Typically, 8-K and 20-F filings with SEC are full of various risks and uncertainties that almost never materialize, so not all of such factors should be considered in general.

But there are more fundamental risks for the company than just short-term or mid-term conditions or market situations. The long-term future of Nokia is determined by its ability to create leading-edge technologies, sustain the importance of its brand-name and ensure its market share and profitability.

Fear the Future

Since Nokia will no longer be developing its operating system, it may not be able to design and patent crucial technologies to support its phones in the future. Essentially, a lot of inventions will simply belong to Microsoft or Nokia and Microsoft.

"We will need to continue to innovate and find additional ways to create patentable inventions and other intellectual property, particularly as we would no longer be developing the core platform technology for our smartphones under the proposed Microsoft partnership. As a result, we may not be able to generate sufficient patentable inventions or other intellectual property to maintain, for example, the same size and/or quality patent portfolio as we have historically," reads the SEC filing.

Nokia is currently the world's 8th most valuable brand, according to Interbrand agency, and is the No. 1  mobile phone brand. While Microsoft is the world's 3rd most expensive brand, it is not exactly associated with cellphones. Furthermore, given the fact that Windows Phone platform is the one that is losing popularity, the combination of two brands will more likely decrease the value of Nokia brand than otherwise. In addition, many other phones use Microsoft operating system and for Nokia it will be harder to differentiate.

"The Microsoft partnership may erode our brand identity in markets where we are strong and may not enhance our brand identity in markets where we are weak. For example, our association with the Microsoft brand may impair our current strong market position in China and may not accelerate our access to a broader market in the United States," the statement by Nokia claims.

Most importantly, the company acknowledges that even without development costs of operating system, its necessity to acquire one from Microsoft and potential loss of market share (which means that its building costs will get higher given the fact that it will have to buy lower amount of components), may not allow it to sustain profitability.

"The proposed Microsoft partnership may not succeed in developing it into a sufficiently broad competitive smartphone platform. [...] We may not succeed in creating a profitable business model when we transition from our royalty-free smartphone platform to the royalty-based Windows Phone platform due to [...] our inability to offset our higher cost of sales resulting from our royalty payments to Microsoft with new revenue sources and a reduction of our operating expenses. [...] We may not be able to leverage our traditional competitive strengths of scale in manufacturing and logistics, as well as in our marketing and sales channels. [...] We may be unable to source the right amount of components and at affordable cost," said Nokia.

As Great As Before?

But while Nokia is bleeding market share, the top management of the company should rather address mid-term goals and constantly introduce competitive phones. Knowing Nokia, it is clear that its specialists will be able to properly improve Windows Phone operating system sometimes in future and even popularize it. Unfortunately, for now Windows Phone 7 is the largest risk for Nokia.

"The Windows Phone platform is a very recent, largely unproven addition to the market focused solely on high-end smartphones with currently very low adoption and consumer awareness relative to the Android and Apple platforms, and the proposed Microsoft partnership may not succeed in developing it into a sufficiently broad competitive smartphone platform," stated the company.

The result of the partnership between Nokia and Microsoft will materialize in the coming years. Microsoft is hardly interested in completely killing its mobile operating system which promises to bring the company billions of new customers, which is something impossible to do without Nokia. As a result, at some point in future Nokia's engineers may revive the ailing platform to make it competitive against Android and iOS. But the big question is whether Nokia will ever be as great as one day again.