Nokia's new chief executive has fluffed his big moment. Stephen Elop has tied the fate of the Finnish handset maker to Microsoft in a strategic partnership designed to regain ground in smartphones amid brutal competition from Apple and Google. The tie-up is Nokia's least bad option if it doesn't want to turn into a commoditised handset maker. But Elop's hotly anticipated strategic overhaul falls short by several measures.
The Microsoft alliance is radical. It means Nokia effectively ditches its proprietary Symbian software platform which has over 200 million users in favour a Windows operating system. This is an economic and psychological shift:
Symbian accounted for half of Nokia's sales in 2010, according to Arete Research. A successful partnership would bring brand awareness and reach to Windows Phone and help the Finnish group defend its 29 percent gross margin in the handset business. Microsoft's added financial muscle will also be a big boost in technology development.
Action was needed. Nokia's value has rapidly eroded with its market share. Its stock has shed 70 percent in little over three years; the Finnish group is now just one-tenth the size of Apple. During the same period, Google's Android operating system has come from nowhere to the point where it is about to overtake Nokia's Symbian platform for the top spot in the global smartphone space in terms of handset sales.
But Elop hasn't backed up his strategic moves with meaningful financial targets, even failing to provide any guidance on when the first handset will ship. That may give the impression that he shares market reservations about Microsoft's woeful track record in mobile and the limited current take-up of Windows Phone. What's more, the Finns won't have any exclusivity and will have to share Windows with smaller rivals like Samsung and Dell. And it isn't clear if Nokia will make any substantial cost savings. For now, the economics of the deal are anyone's guess.
The unanswered questions -- and perhaps also disappointment at the lack of a management shake-up -- explain the 9.3 percent plunge in Nokia's stock, which was trading at 13 forward earnings before news of the tie-up. To believe that Nokia can be a recovery play, investors need have faith in its leadership. Elop hasn't earned that yet.
Nokia and Microsoft announced a strategic partnership on Feb. 11 aimed at taking on rivals Google and Apple in the smartphone market.
-- The Finnish handset maker said it would adopt Windows Phone as its principal software platform in the high end market and gradually wind down its own Symbian software.
-- The group said it expects 2011 and 2012 will be transition years and said that it would not provide targets for the full year, instead switching to quarterly guidance.
-- Over the longer term, Nokia forecast that sales in its key handset unit would grow faster than the market and expected an operating margin of 10 percent or more.
-- Canadian-born Elop was appointed chief executive of Nokia in September and is the first non-Finn to lead the group.
-- Shares in Nokia fell 9.4 percent to 7.39 euros following the announcement. The company's shares have shed 74 percent since November 2007.
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