It is three months since Nokia’s new chief executive Stephen Elop plonked all
his chips down on an alliance with Microsoft. Shares in the world’s biggest
mobile phone maker, which fell more than 15 per cent on the day of his
announcement, have slid another 13 per cent since.
High-end smartphone
It is sinking in that Nokia is adrift in the high-end smartphone market. The
company announced the death of its old operating system in February but will
not produce a phone running Microsoft’s software until the end of 2011.
Meanwhile, investors expect accelerated market share loss and falling
margins as the company flogs its defunct smartphones on the cheap.
This sounds more serious than it is: UBS reckons that Nokia’s “smart devices”
unit only has an operating margin of 2 to 3 per cent. The real money is in
the normal “mobile phones” division, which brings in about the same amount
of revenue but has a margin of about 15 per cent.
Vulnerable emerging markets
It is handy to have a profitable cushion in a crisis. Unfortunately,
Nokia’s looks vulnerable. So-called white-box manufacturers are undercutting
its cheap mobile phones in emerging markets, especially in places like
India, where Nokia was slow to notice that people want phones that carry
more than one SIM card.
Meanwhile, the rapidly expanding smartphone market is cannibalising sales of
more expensive mobile phones. If competitors such as Samsung want to go for
the kill, this is where they will strike, by making cheaper smartphones that
can penetrate further into this area.
Investors focused on Nokia’s attempt to make a posh smartphone with Microsoft
(and now Skype) should keep an eye on its soft underbelly. The shares, at 11
times next year’s expected earnings, price in Nokia’s high-end problems but
not the risk of damage down below.
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