Thursday’s full-year results highlighted the once-great company’s sorry state.
Nokia’s share of the smartphone market fell from 40 per cent a year ago to
31 per cent in the latest quarter. Its pricing power has eroded too, pushing
the phone division’s gross margin from 34 to 29 per cent over the same
period.
Mr Elop knows Nokia’s smartphones need a better operating system with a bigger
ecosystem of applications. There are three possible routes.
First, pour more money into Nokia’s current proprietary systems. This would be
the path of least resistance, at least internally, but ruinous to short-term
profitability.
Android or Microsoft
Second, use Google’s (free) Android operating system instead. This would save
about €1bn a year in research and development, lifting operating margins by
4 percentage points or so. Sales would undoubtedly rise. Over time, though,
Nokia’s phones might seem much the same as all the other Android phones out
there. Nokia could end up like a commoditised PC maker, scraping a living on
gross margins of 10 to 15 per cent.
Third, Mr Elop could call up his old employer Microsoft. Its Windows Phone 7
is a great operating system with only a 3 per cent market share. Some sort
of proprietary tie-up might allow Nokia to avoid commoditisation and
Microsoft to avoid irrelevance. On the other hand, they could end up like
two old drunks trying to support each other.
All three options are risky, yet the bigger danger is that Mr Elop tries to
test the waters - a toe here, an elbow there - and hedge his bets. Nokia’s
shares, in spite of falling more than 70 per cent since 2007, might not be
cheap enough.
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