Nokia's Nightmare Scenario

12:05 AM -- The most alarming part about Nokia Corp. (NYSE: NOK)'s profit warning on Wednesday is that it revealed the extent to which the company has been caught off guard in emerging markets and how its strongholds there are crumbling. (See Nokia Dives on Lowered Device Outlook.)

The company now expects an operating margin of negative 3 percentage points in the first quarter as certain factors affected its device business "to a greater extent than previously expected." One of those factors was "competitive industry dynamics," which hit Nokia's net sales, particularly in Africa, China, India and the Middle East.

When I saw those markets flagged up, my first thought was, "Wait, isn't that where Nokia is doing well?"

Those are indeed the regions where Nokia is strong, according to Stela Bokun, Pyramid Research 's senior analyst and device market specialist, especially Africa and the Middle East. (See Nokia's Bright Spot.)

"However, those are also the regions that are becoming more and more competitive as we speak. If you see what’s going on in Africa, for instance, pressure from Samsung and from fake phones (gray market) is definitely getting stronger," she said. And she saw this trend back in July last year. (See Analyst: Nokia Faces Low-End Threat.)

"While Nokia was investing a lot of time and effort to launch high-end Lumia phones in the U.S. and Western Europe, it seems they have neglected the trends that were going on in the emerging world (penetration of cheap Android phones in particular).

"Don’t get me wrong," she added. "Nokia is still very strong in emerging markets, but the place is getting more crowded."

That means Nokia is well into the nightmare scenario of having to fight for its life to win a share of the high-end smartphone market while at the same time race to the price bottom to defend its position in emerging markets from low-cost competitors.

Nokia CEO Stephen Elop said on a call with media and analysts on Wednesday that it will push down prices of Windows Phone devices. "We're accelerating the rate we can push Windows Phone devices down market."

But will that be enough for Nokia to battle the growing armies of cheap Android smartphones in these markets?

Elop pointed to the 1,000-yuan (about US$150) Androids proliferating in China as a prime example of the low-cost smartphone phenomenon Nokia faces.

"The rate at which this is happening is beyond what we expected," he said.

Today's financial warning showed more than anything else that Nokia needs to put more focus and resources into the low end of the smartphone market.

— Michelle Donegan, European Editor, Light Reading Mobile

MSellebraten 12/5/2012 | 5:36:37 PM
re: Nokia's Nightmare Scenario

Looking back at Nokia's press conference at MWC this year, the one bit of news which in my eyes was the most interesting is that Nokia has worked on lowering the production cost of Windows Phones. This to address the very challenge which the profit warning yesterday addressed. Android phones and gray phones are heading straight towards traditional feature phone markets.

Michelle Donegan 12/5/2012 | 5:36:37 PM
re: Nokia's Nightmare Scenario

Hi MSellebraten!

They're on the case then. But I sure hope they can push those costs down soon enough, the pressure at the low-end appears to have cranked up faster than they expected.

Is the Lumia 610 the best answer to this? At 189 euros it's not a bad price. Any indication yet how it's doing and where? 

MSellebraten 12/5/2012 | 5:36:36 PM
re: Nokia's Nightmare Scenario

As I understand it, first the feature-phone-with-smartphone-functions Asha range, and then lower priced Windows Phones. Not sure they do have a Lumia which can really compete on the lowest prices at this point. My understanding is that they are working on it. But yes, the path of change has been accelerating and no company can sit back and look at a big market share. It can change over two quarters. Handset makers from Asia - inclusive gray - are very aggressive in many developing countries. Also, Google's content strategy towards feature phone users, ie. 2G Internet access via sms, should not be overlooked.

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