Nokia

How much does it cost to have the world's best maps?

The answer may seem simple: $8.1 billion.

That was the cost to Nokia in cash for buying Navteq in October 2007. It would seem that buying that asset (or another one like it) is a cut-and-dried solution to anyone needing a mapping "solution". But it's not an answer that is either complete or explanatory of how mapping solutions are valued.

Navteq was not priced as a database for an app. It was a business which was expected to create licensing revenues and profits[1]. The actual price for this business net of cash was $7.7 billion but the following graph shows the net sales and operating profits since Nokia began reporting its performance:

The blue area represents the difference between sales and costs and hence the operating expenses--the payments needed to "keep the lights on".

These total expenses over the 4.25 year time frame totals €6.5 billion. The total operating losses equal €2.6 billion. Therefore, as far as Nokia's shareholders are concerned, they paid $11 billion for Nokia maps, to date.

What do they have to show for it?

Nothing. The entire company is now worth only about $15 billion. It's hard to imagine maps being worth 73% of Nokia. What Nokia hoped to get for the product was some value in its devices. As other issues intruded, that value has not been realized. Nor has any external licensing revenue been realized. Net external licensing revenues are actually decreasing.

The situation looks even even uglier when the maps asset can be seen as costing €1.5 billion every year. Why would anyone want to be in this business?

I bring this up because, apparently, everyone wants to be in this business.

Via Twitter I received a suggestion (rumor?) that Google spends about $1 billion every year for maintaining their maps. (Using a conversion from Euros to Dollars yields a Nokia maps burn rate of nearly $2 billion/yr.) Furthermore, there seems to be a burning desire for Apple to also burn this money.

If so, then Apple might have to start spending $1 to $2 billion/yr to merely maintain a data set. That would be a minimum of an additional 7% in operating expenses.

Why would they do that?

If Apple cannot buy or license quality data, there may be no choice. Maps have become a hygiene factor for a platform. Not having them makes a platform repulsive but having them offers no attraction.

Another way of looking at the maps asset is like a component in a phone. A vendor needs a certain class of processor, memory or screen or battery. Not having a minimum level of functionality makes the product uncompetitive but having it does not guarantee success.

What's worse, the market may have been cornered—there may be no suppliers. Unlike hardware components, the maps component is not a commodity with a market of suppliers. The work needed to maintain the maps is a commodity but the aggregation and consolidation of the data is valuable and those who have gained control over the data and they are not likely to license it to any competitors for strategic (i.e. political) reasons.

So we have a perverse situation of a very costly, unprofitable asset requiring duplication of maintenance effort by politically motivated actors imprisoned by their own strategic interests.

If so then it fits perfectly with the mobile telecom industry. Like mobile networks, maps are very expensive and worth very little.

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Notes:

1. The revenues that Navteq was obtaining during the 2008/2009 time frame included that from customers such as Verizon, Garmin, Advertising, Traffic services, Microsoft Windows Live services. For the six months ended on December 31, 2008, Europe accounted for 44% of NAVTEQ’s net sales, North America 43%, Middle East & Africa 8 %, Asia-Pacific 2 %, Latin America 2% and Greater China 1%.

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Samsung's recent success in mobile phones has been spectacular. It overtook Nokia for the top spot in overall unit sales. 

It went from having almost no smartphone sales to selling over 50 million units per quarter in a matter of two years.

It now accounts for nearly 40% of all industry profits.

A key decision which made this success possible was to shift its portfolio to smartphones and to offer a large variety of such phones.

In Q1 2010 only 3% of the phones Samsung sold were smartphones. In the latest quarter the ratio was 54%. 

As a result the average selling price more than doubled, from $115 to $234.

Profit margins also soared in proportion: from 12% to 21%.

All this plus an overall growth in volumes from 64 million to over 100 million per quarter has meant that the company is raking in enormous profits. Not only did it overtake Nokia, the market share leader for 14 years, but is making more profits than Nokia ever did.

So much profit in fact that it has overtaken Google's decisively.

The reason I point this out is that Samsung's success is dependent on having ridden on the back of Android. Samsung's ascent can be precisely timed to their adoption of Android. The groundbreaking Samsung Galaxy launch was the Galaxy S which shipped in June 2010.

Meanwhile, indications are that "mobile" is causing a contraction in Google's margins.

If nothing else, Android has created a very interesting industry. There are many questions of course: Is Samsung's trajectory sustainable? Why aren't there other vendors successful with Android? Why isn't Google successful with Android? Why isn't Google's Motorola successful with Android? What would happen if Samsung soaks up so much profit from mobile that it's in a position to acquire Google and control the trajectory of their enabling platform?

Here is an exchange with Robert van Apeldoorn, Journalist with Trends Tendances Magazine in Belgium. (www.trends.be/fr). The exchange took place in early September via e-mail.

Robert: -Information and Communications Technology (ICT) is considered in Europe as a way to push growth, and is a target of national and EU policies (digital growth,etc), but the result seems to be a failure: the European computer industry (hardware) is almost dead (ICL, Siemens computers bought by Fujitsu, Olivetti almost out of computer business, Nixdorf dead) since the 90’, and the telco industry seems to be in crisis. All European companies are out of the handset business (big and fading exception is Nokia, but with  American software), and Alcatel is suffering with telco equipement manufacturing. It seems that at best, Europe can be a good niche player, with companies like ARM (chips). Technology seems to be reduced to localized services (computer services), some software businesses. What do you thing about that point of view? Is it correct or exaggerated ?
What will remain to the European companies ?

The main problem is perphaps the creation of European platform/ecosystems. Almost all are American today: Apple IOS-iTunes, Android, Amazon,…

Why Symbian didn’t succeed as a competitive platform ?

Is it possible to create European platforms? After all, IOS succeed after a short period of time.

What are the European tech companies that could play an important role in the near future ?

My answer: You are correct in this observation. Europe has failed to generate growth on the basis of ICT. The reasons are that the rate of change in ICT is rapid and getting more so. If European businesses require intervention, support or other forms of assistance in terms of policy, the time for that coordination to take effect is longer than the cycle time of disruption.

Almost all growth has come from companies that entered the space. Google, Amazon, Apple and Facebook and even Microsoft came into positions of power from outside the industries they entered. Policy tends to offer means of sustaining incumbents or finding "logical" or defensible entrants. I should mention that the problem of industrial policy failing is not unique to Europe. Japan and to a lesser degree Korea are also facing crises of innovation due to policies designed to sustain rather than disrupt.

It's understandable given the need to justify spending other people's money. No policy maker wants to spend it recklessly. However, the process of unforeseen growth is, well, unforeseeable. It cannot be predicted and it's very likely to come from somewhere other than where you expect it.

This quickly becomes a lengthy discussion, but fundamentally the innovation process is chaotic. It's very similar to the process of artistic creation. The crisis in innovation comes from not having sufficient chaos. If Europe wants to preserve, sustain, nurture, and maintain it will do so at the expense of creative destruction. Nobody likes chaos but everybody wants innovation. Unfortunately they are concurrent things.

thank you very much for these interesting answer. Usually the answer is the lack of venture capital or the compartimented market.

So Nokia was an exception ?

If a lack of venture capital is the problem then what is the cause of a lack of venture capital? There is plenty of capital on the continent. Why should it not be allocated to ventures? Capital markets in Europe are quite free and liquid and capital will find the best opportunities. The problem is that there are few fundable opportunities.

I think Nokia was not an exception in the sense that it was not a "managed" success. The company (and Finland) emerged from a crisis in the early 90s. The crisis forced a re-evaluation of priorities and the success of Nokia could be attributed to a lack of emphasis in what was considered sustaining at the time (consumer electronics, TVs, natural resources, etc.) Entry into mobile phones was not what policy would have suggested was the biggest opportunity at the time. The market for mobile phones was projected to be insignificant in comparison to what was seen as success of the time (Sony, et. al.)

[Addendum: What are policy makers suggesting as the key investment themes? Which projects get funding today and which don't?]

Days after Nokia announced the end of life for the Symbian platform I wrote a post titled Who will buy the next 150 million Symbian smartphones? The reference was to claim by management that before there would be a complete transition to Windows Phone, 150 million legacy Symbian phones would be sold, keeping the company financially stable before the new ecosystem took root.

I reproduce the original forecast I made below with the addition of what actually happened.

[Note that the Actual stack area chart is independent of the forecast area chart as indicated by shading.]

My forecast in early 2011 was based on the 150 million Symbian phones being sold over a two year transition period. The implication with the forecast for Windows Phone was that this would still lead to a difficult contraction of volumes.

As it turns out, only 96 million Symbian devices have been sold in the 7 quarters since the platform was deprecated. It's unlikely that there will be ever by 150 million units sold as last quarter only 3.4 million shipped. In any case, management has already retracted that claim.

What about the Windows Phone forecast? It turns out that by this point in time (Q3 2012) I had expected Lumia shipments to total 9 million. Actual shipments reached about 9.5 million, so not bad. However, the market grew faster than I had expected and overall Nokia smartphone market share turned out to be slightly lower (6.3% in Q2 vs. 10% estimated.)

The just ended quarter shares are not yet available but it's quite possible that overall Nokia smartphones could be well below 5%, and may slip to 3% during the transition period.

My warning in February 2012 was that 150 million Symbian units would not ship since I expected there would be a stigma associated with the products among distributors, even if consumers were fine with them (which they weren't).

The public execution of Symbian (and any other alternative being developed inside Nokia) will probably be a classic case study in disruption management. To wit: even if a platform needs to be led out to pasture, there are ways of managing decline other than suicide. Nokia's failure is not so much having chosen the wrong alternative to Symbian, but having chosen exclusively.

However, there's a twist. The company did not accept exclusivity of one supplier without a concession: In exchange for exclusivity, Nokia negotiated $250 million every quarter in the form of "platform support payments" from Microsoft. Nokia has to date received over $1 billion in such payments. (For the last quarter that amounts to $86 for each Lumia phone shipped.)

The tragedy comes from this $1 billion/yr not being enough. The foregone revenues from Symbian (assuming they had been able to maintain the decline to the level of 150 million units that they had originally forecast) would be about $9 billion. This means that had Nokia not knifed Symbian and had sold the shortfall units at an average price of $200 they would have received an additional $9 billion in sales. Furthermore, assuming a margin of 33% for those units, Nokia received from Microsoft one third from of what she gave up for exclusivity.

In other words, the net cost of the Microsoft exclusive relationship is at least $2 billion in operating profit.

This turns out to be the difference between being profitable and being distressed.

We will never know if this scenario would have ever happened, but the forecast management made 21 months ago suggests that at least they thought this was what they were going to get out of the bargain.

This reminds me of another article posted around the same time.

Last July I asked the question "How many Lumia phones were shipped in the US?"

My answer was 630k through the first half of this year.

I revisit this question following Nokia's latest quarterly report.

As a quick review, Nokia reported the following performance for its mobile phones operations:

 

The most worrying thing of all however is that Nokia's smartphone performance has collapsed. With only 6.3 million units shipped, the company may be the worst performer among eight competitors I track. They were below RIM's shipment total.

The value of 6.3 represents only 7.6% of their overall phone shipments.

As the graph above shows, Nokia is going in the wrong direction with respect to moving to a smartphone portfolio.[1]

Of the total 6.3 million smartphones (aka smart devices, as per Nokia's reporting nomenclature) 2.9 million were Lumia Windows Phone units.

Using information about average selling prices and total volumes into North America, I was able to estimate that there were about 180,000 units sold into North America during the last quarter.

Since launch, my estimate is that Lumia has sold 810k units in the North American market.

This cannot be seen as a good performance. There are mitigating factors such as the lack of upgradeability to Windows Phone 8 which probably deflated demand[2]. However, it's a poignant observation that during the last quarter the US reached 50% smartphone penetration by users. As traction is still absent from both Nokia and Microsoft in the US market, we are back to the question of how to compete.

As the market in the US transitions from competition against non-consumption to competition among rival platforms, the Lumia brand is being forced into targeting smartphone "switchers" rather than smartphone "adopters". The switching option is expensive, requiring aggressive advertising (see Samsung Electronics' $11 billion ad budget).

There's only one source of cash for that sort of strategy.

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Notes:

1. The caveat is that they market some of the Series 40 phones are "smartphones" on the basis of having "smartphone-equivalent" performance. However, smartphone equivalency is and has been purely subjective. On that basis there were many times in the last decade and a half that we could have counted Java-based or BREW-based or i-Mode-based phones "smartphone-like". Smartphone has been defined on the basis of running an operating system with native APIs for developers.
2. I imagine that the upgrade path could have been known to Nokia, AT&T and Microsoft nine months ago when the Lumia was unveiled for the US by the three CEOs and therefore expectations could have been modulated accordingly.

Matteo Fumagalli is a student of economics at University of Insubria, Italy. He is writing a thesis for a bachelor's degree analyzing the smartphone industry.

He asked me to answer the following questions:

-First question is about you. Why did you found Asymco?

I founded the company to develop software, mainly apps. I began writing the blog as a way to drive traffic to the site. I would have preferred to build a blog only but did not think it was possible to earn any money doing that so I treated it as a hobby. Even after the site became more visible I changed from development to consulting and did not expect that writing in itself could be self-sustaining. It took about two years before I felt comfortable with the idea that I could do writing and speaking exclusively. I am still exploring additional business models however.

-You worked 8 years as analyst and business development manager at Nokia and you anticipated their current crisis with your first post on Asymco. Do you think Nokia will have the chance to recuperate, and eventually what will be the role of Windows Phone?

Nokia may recover or remain independent, at least. But it will be far smaller. The idea of a return to dominance or 40% share seems very unlikely. As I pointed out in the first post, the organization cannot cope with the new marketplace. Large organizations require extreme stress and damage to change. It's a phenomenon at all levels of society that success results in rigidity. From the individual to the nation to the civilization, success makes change very, very difficult.

Windows Phone is an attempt to create a third ecosystem. I am concerned that the logic of having a third alternative is not solving a consumer need but an operator need. In other words, consumers are not asking for a third option and when they are presented with a third option they are not excited by it. The consumer does not think in terms of increasing their options. They decide once every two years which phone to buy and that is the end of their thinking on the subject. By focusing on the operator's needs the platform is fundamentally mis-positioned.

What Windows Phone needs to be positioned as is either as fundamentally different, solving a different job for the consumer. Or fundamentally better along a new dimension like price or convenience. These are some of the claims it makes but they are very weak claims right now.

-What about RIM, other company which is going through difficult times? What do you think about their decision not to move to Android and stake everything on their closed OS?

The decision to remain with their own platform may sound risky but it's a simple decision about retaining their business model. RIM is not a general-purpose manufacturer. They have always made an incremental margin on services, messaging and email. For them to use a third party OS would force them to build within the constraints of that OS or platform. That would result in a difficult competitive environment and not one where the company could sustain margins vs. larger competitors. In other words, the company faced two risky alternatives. They chose the risk they were more familiar with or the one that they already had an operating company organized for.

-Recently Apple lost market share in Europe and China favoring Android. What will be the impact of iPhone5 on this situation? As expert of Apple strategy, do you think Apple has done something wrong in these last months?

Apple lost market share when considering the smartphone market. I agree with management (and I've argued this before they did) that the market for the iPhone is all phones, not just smartphones. In that context, Apple is increasing its share consistently. Since Apple has only one product in the market (with some residual older versions as well), it's very seasonal. It would be natural to see variance in share through the year. What should be watched is a four period average performance. Overall, Apple is growing its iPhone business faster than the overall phone market so it follows that its share is increasing. I see a long-term potential for the iPhone having 20% share of all phones. That would give it an installed base of over 1 billion users.

-Smartphone penetration is reaching 60% and we probably talk about saturation in next 2 years. What will be for you the future role of tablets and phablets, they will be threaths of substitution for smartphone or maybe an opportunity to offer complementary products?

The evidence so far is that buyers don't mind having more than one device. It makes sense if each device is hired for a different job and it cannot be general purpose enough. We've seen this phenomenon with mobile phones where penetration in many markets is above 100%. That implies that even a basic feature like a phone number cannot serve all the needs on one person. To me it seems likely that one person will have more than one device and more than one form factor.

-What do you think about legal battle between Apple and Samsung? There will be consequences also for Google and Android?

I defer to my blog post Deus Ex Machina. Legal battles are not strategy.

-What will be the role of the possible entry of Amazon in the smartphone industry? It's too late for them?

Amazon is a retailer. I find it hard seeing a retailer becoming a platform provider. Not only is retail a difficult to expand business model internationally, but it's hard to imagine partners being comfortable building an ecosystem on top of retail. Retail is not sufficiently flexible as a business model.

The US has reached 50% smartphone penetration.

comScore data shows July penetration at 48.8% and a monthly growth in penetration of nearly 2 percentage points. Given the rate of growth, it's nearly certain that we've crossed 50% in August.

The historic growth is shown below:

The platforms making up the smartphone market in the US have seen unequal shares of this new population of users. The following diagrams show how the install bases have changed in absolute and share terms.

 

To round out the analysis, here is the net user gains for the platforms showing the net addition or loss of users since early 2010.

What I look for in this data are signs of slowing adoption (so far there aren't many), subtle shifts in platform performance (as seen in RIM's move from consistent net gains to consistent net losses) and signs of churn or the transfer of users from one platform to another (rather than from non-consumers to consumers.)

The story in the latest data seems to be that Windows Phone has turned in a first significant gain in users (378k new users). Its share seems to have stabilized at around 4%. This is in contrast to BlackBerry whose hemorrhage continues (a net of 7 million users defected from the platform in the last 12 months.)

On this occasion of reaching what I've called the tipping point, it's worth reflecting on just how far we've come. In December 2009 the total number of smartphone users in the US was 39 million whereas now it's about 115 million. That's a total of 75 million new users in a bit more than two and a half years, quite a story there.

And yet, half of the phone users still remain to be converted. It's possible that the growth in adoption will remain steady but it's also possible that it might slow down and follow the "S-curve" adoption rate that new consumer products typically follow, perhaps reaching saturation at some point below 100%.

If growth slows immediately then there will be more churn between platforms. If rapid growth can be maintained then there will be more competition with non-consumption rather than between rivals for some time still.

The changing character of competition will need to be reflected in product strategies. Non-consumption is typically an easier competitor to beat with features. Switching users from a comparable product is harder and may require pricing pressure. To solve this in a time of transition, new products will have to split into a set offered to new users and another set offered to switch users.

You can see the pressure of this on the Windows Phone platform most of all. As a late comer, does the Lumia range from Nokia fit the bill as targeting non-consumers or switchers?

In other words, has the brand been positioned as a "better" smartphone or as a "good enough" smartphone? It matters because the "good enough" position has been held by Android overall while the "better" position has been held by iPhone. However, not exclusively. We've seen "better" positioning from Samsung's Galaxy S and Verizon's Droid brand and "good enough" positioning from the older variants of iPhones.

So it's quite difficult to see where Lumia fits in the US. There is no obvious opening. The next 75 million first time US smartphone users may be attractive to Microsoft and Nokia but it's not clear why, having waited so long, those buyers will be persuaded by the new brand. Perhaps subsidies will help. As indicated with the first US Lumia launch, the product was priced at a discount to the prevailing price point for a premium smartphone. Perhaps that's the "good enough at a good price" strategy.

If so, it has not been a home run. Perhaps there is still time for this strategy to play out in 2013 but what if Lumia is not actually being marketed this way?

At launch Nokia has tried to promote the brand as something "better". Better camera, better charging, better maps, better screen, etc. They have promoted on Twitter with the #switchtolumia hashtag. Microsoft has had the "Smoked by Windows Phone" campaign targeting specifically existing smartphones.

I don't want to suggest that one positioning is more appropriate or more likely to succeed than another. That's a tough call. Either could be the right choice. What I would suggest however is that there needs to be clarity of thought and communication on the matter.

Perhaps the launch of the new Lumias (920, 820) is part of a clear positioning toward the high end. But the absence of pricing and distribution and how the operators will be engaged leaves the question open. The strongest criticism of the effort so far is this lack of clarity about how the product is intended to be perceived by the buyer.

A lack of clarity in positioning is symptomatic of a lack of clarity, or maturity in strategy.

50.2 million.

That's the estimate from IDC. So why bother asking?

Because that is an estimate. Of the 104 million Android phones shipped in the quarter (itself an estimate from another, possibly different methodology), I could only account for 7 million actually reported. That figure comes from a close reading of an investor presentation from Sony. HTC does not report their shipment numbers. It stopped some time late last year. Neither does Motorola now that it's a part of Google. Huawei is silent except for setting targets and ZTE published a press release citing IDC's estimate of its own shipments.

But most glaring of all is the absence of any mention by Samsung of its performance. The company stopped reporting any data on either overall phone shipments or of smartphones within that total since Q3 2011. We may have been able to estimate Samsung if we had more competitor actuals, allowing us to back into a figure. But we don't.[1]

Which leaves us with IDC's estimate[2]. But the problem is that since the industry is growing so quickly it is very sensitive to assumptions. Consider how difficult it is for consensus estimates for Apple's iPhone shipments to come near the actuals--and that's for one quarter, and knowing all the previous quarters with precision. The absence of visibility into the assumptions made by market analysts (or their methods) should lower confidence in the results.

Consider that IDC specifies 50.2 million Samsung smartphones, implying an accuracy down to 100,000 units. Is this accuracy believable?

There is reason for doubt.

I start with the following graph:

It shows the estimates for Samsung global shipments (latter four quarters are estimates without the benefit of company reports.) I separated the component of shipments that Samsung reported as part of its submission to the Samsung v. Apple trial in California. Note that this (orange) segment consists of most US smartphone shipments. It's not all US Samsung shipments. It notably excludes the Note, the latest Nexus and the Galaxy SIII.

Without these "non-accused" phones, it would appear that Samsung's US volumes dropped to 4% of global totals from a 10% average[3]. In order to return to 10%, the US totals would need to be adjusted as shown below:

 

I added 1.5 million units in Q1 and 4 million units in Q2 (to account for Galaxy SIII).

So far this seems consistent with the total estimated global shipments of 50.2 million from IDC. US units would result in 12% of global shipments.

However, there is more data we can test against. First, we are also given pricing for the US phone portfolio, or at least we have revenue per unit sold. This allows us to get an idea of what revenues can be obtained for the smartphones in the US, and possibly world-wide[4]. Knowing prices for smartphones and knowing global sales (which Samsung reports) and finally knowing global total phone shipments allows us to price the average non-smart phone.

Excluding the non-accused smartphones, the average revenue per smartphone in the US for Samsung in Q2 was $339. Adding in the estimated Galaxy SIII (4 million) at an average price of $470 gives a new "ASP" of $413.

This is where the analysis goes off the rails.

If we assume the global ASP is equal to the US ASP and knowing everything else about the mix of smartphones (54% of total) and revenues (as reported) yields a negative ASP for feature phones. Assuming the revenue figure is correct, either the number of smartphones is wrong (50.2 million) or the global ASP ($413) is wrong. The total phone number is also an analyst estimate which can be called into question.

There are many assumptions being multiplied here so I have very low confidence in the result, but we should ask "what do you need to believe" in order for the 50.2 million figure to be real. The following scenario for example has to be true:

1. Global Samsung phone shipments total 93 million units (which means 42.8 million feature phones sold as well as the 50.2 million smartphones).
2. 6 million smartphones shipped into the US, equivalent to about 50% increase y/y, roughly in-line with market growth
3. 4 million Galaxy SIII shipped (but not necessarily sold through) at an ASP of $450. This results in a US total smartphone ASP of $413
4. The global smartphone ASP is significantly lower (at 80% of the US or $330)
5. Global revenues of $18.14 billion is essentially all from phones
6. Global feature phones will have an average price of $36

If these conditions are met then it's possible that 50.2 million Samsung smartphones did ship.

The figure for feature phone ASP is difficult to accept as it would be lower than Nokia's. Also, the low global smartphone ASP is also difficult to accept but it might be possible to find a scenario with the above variables which makes the 50.2 million figure believable.

Unfortunately this is an unsatisfying analysis. I could propose another figure to answer the question in the title, based perhaps on more "believable" assumptions. But I have no means to defend my assumptions. The only option I have remaining is to caution that the total smartphones shipment estimate for Samsung remains precarious. The new evidence from the US trial places more doubt on it but it is not enough to disqualify it entirely.

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Notes:

1. This cone of silence over 93% of the most popular mobile platform is somewhat puzzling in contrast to the perfect information we are used to having about iOS, BlackBerry and even Symbian. It seems that the more open a platform, the less is revealed about its market performance. This extends to the licensed Windows Phone whose shipments are only revealed through Nokia's reporting of Lumia shipments.
2. In the PC market, vendors also selectively publish their units. The norm is, however, not to. As a result IDC et. al. are the only sources for global market data. However, the PC market can be sampled more easily than the phone market. PC retail measurement methods are more reliable compared with all the points of sale for phones.
3. Note that Apple sells about 30% of iPhones in the US.
4. Apple's pricing world-wide is very consistent with pricing in the US which makes sense from a channel management point of view. One would not want to create incentives for cross-border arbitrage of phones.

The US is a crucial market for both Nokia and Microsoft's strategies. This importance was highlighted during the launch at CES in January when not one but three CEOs (Microsoft's Steve Ballmer, Nokia's  Stephen Elop, and AT&T's Ralph de la Vega) were on stage to launch the Lumia. Knowing how well this strategy is working would be very useful to understanding how this market behaves.

My first take on this was when I asked the question How many Lumia phones were sold in the US? The answer suggested through the combination of survey data from Nielsen and comScore[1] was 330,000. The figure is quite small compared to expectations. As it's so extraordinary, it should be supported by good evidence. Unfortunately the methodology used is weak. The figure itself is probably close to the margin of error of such sampling techniques. It would be nice to have another way to calculate this.

Today Nokia offered another set of data which might help determine how many Lumia phones were shipped in the US. (Note the shipped versus sold distinction. Companies report shipments while surveys nominally measure consumption or usage.)

Unfortunately, Nokia did not offer specific data on US shipments. What they did offer was:

• Global Lumia shipments were 4 million in the last quarter
• Global average selling price was €186 for a Lumia phone
• North American[2] phone shipments were 600k. This includes all phone types and all operating systems.
• North American sales were €128 million.

That's all we have. So how can this help with the question of US shipments?

As often happens, it helps to look at the data historically. The following charts show North American shipments and sales with the Lumia launch date highlighted.

While unit shipments were flat, revenues increased significantly. This suggests that we could plot the average selling price of phones in North America (NA) specifically. I did that in the following chart:

Here the effect of Lumia is clear. The average revenue per phone in the US (blue line) jumped dramatically after the launch. So much so that it actually overtook the average global ASP for Lumia.

What we need therefore is a way to estimate the "mix" or percent of smart and non-smart phones sold into North America and derive perhaps the US portion of that and then finally try to separate the Lumia from all the smart volumes.

To help, I plotted the historic ASP for Smart and non-Smart devices as provided by the company.

Using a simple formula[3] it's possible to derive the mix which is shown as Green and Blue lines in the following chart.

Getting estimates for smartphone shipments (blue line) is pretty close to Lumia shipments, but we still have to correct for US/Canada split (estimated at 90:10) and Symbian/WP split among smartphones (estimated 50:50 in Q1 and 20:80 in Q2).

The result is the red line showing US Lumia shipments. The sum of the two quarters then comes to 630k.

This is nearly twice the estimate from consumer survey data however I would not draw too many conclusions from this. Mainly because there are many assumptions place in both estimates, but also because there is the distinction between shipments and usage.

However, it might be safe to say that US install base is somewhere between 400k and 1 million users. Is this good or bad?

It's good because it's progress and there is some growth. It's bad because it's frightfully small relative to the competition. Nokia itself acknowledges the challenge and states that "We believe the Windows Phone 8 launch will be an important catalyst for Lumia."

It seems that what Nokia needs most today is time. That is a very expensive asset. Perhaps infinitely so.

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Notes:

1. A practice neither company would condone, principally because they are competitors, but also because they use different sampling methods.
2. North America I take to mean US and Canada. Although geographically, Mexico is part of North America it's usually grouped as part of Latin America as a category. I'd like to get this confirmed.
3. There are a few implicit and explicit assumptions: (a) Global ASPs are roughly comparable with NA ASPs but (b) smartphone ASPs are higher in NA by about 30%

The number of BlackBerry phones sold fell 41% year-on-year in the last RIM fiscal quarter. Sequentially the fall was 30%. Though surprisingly poor, I note that Nokia's smartphone business fell even more dramatically last quarter (down 50% y/y and 39% sequentially). LG also saw a 44% decline in unit shipments in Q1.

The history of smartphone shipments for the largest vendors is shown in the following chart:

From forecasts made by Huawei it's probable that they overtook RIM in the last quarter, dropping RIM to 5th or 6th ranked vendor in smartphone units.

RIM's 7.8 million units is the same level of sales as it had in early 2009. The total market was only about 250 million units per quarter then. It's around 400 million today. A quick calculation shows that RIM's smartphone market share has fallen from a peak of 22% to about 6%.

RIM's stock performance reflects this performance relative to the market.

Hardware revenues were $1.652 billion. Matt Richman calculates the average hardware revenues for the BlackBerry of $203. I include service revenues in my ASP calculations (for Nokia and Apple these are also significant values) yielding $309 per BlackBerry. The history of total revenues, revenues per phone and operating margins are shown below relative to competitors.

Operating margin tells the most sobering story. As I've often repeated, historically no company has survived dipping into the grey zone.

To reiterate, the logic of irrevocability in this industry is as follows:

Success depends on three conditions being met by the vendor's products:

• consumers trust the platform's promise
• operator see the product as creating value to their core business
• developers offer investment to innovate on top of the platform

If all these factors are present, the vendor enjoys a virtuous cycle of growth. If any of these is lost, the others are also likely to be lost as well creating a vicious cycle of decline.

Loss of operating margin is an early indicator that at least one condition is not met. Usually, a failure of consumer trust leads to a drop in purchases which leads operators and distributors and retailers to flee and then developers defect.

It's been impossible to recover from this tailspin so far. There is a procedure which works in theory: accelerate downward by investing in a new platform. The move is counter-intuitive but essential in re-building trust, quality and relationships.

However, the reason it does not work in practice is that this struggle is not with gravity alone. While spinning downward, the company is also subject to competitive attack. Competitors fill the void and take customers into locked-in ecosystems. There is neither the time nor the ability to defend.

Cash runs out and customers are divided up between the survivors. Nokia and RIM face this scenario today.

There is no shortage of information about what happens to companies in distress. The cause of distress varies widely and is often not well understood but the actions and symptoms of distress are very consistent. We can look at examples in each industry, even in each product category for a rich set of distressed company data.

For over a year I've been chronicling the decline of incumbents in the mobile phone industry. However, decline cannot continue indefinitely. At some point a company "exits" the industry. Either through a sale or divestiture or, rarely bankruptcy. The list of exits is already long. The length and the correlation between exit and the lack of recovery implies that Nokia will also exit.

But how, exactly?

Will Nokia be acquired? If so, then by whom? What other options exist? How can we analyze this?

The easiest way to guess is to look at what happened to other companies in similar circumstances. The clearest and easiest comparison to apply is Motorola. Motorola was at one time the largest phone vendor and it went through a violent decline. Like Nokia, it was diversified into networks and a few other businesses. Unlike Motorola it's not an American company. This matters because American companies are more comfortable targets for corporate raiders. The legal and boardroom mechanics are not "better" or "easier" in the US than in Europe but they are more familiar to those who might engage in it.

So one avenue that Motorola traveled on was the intervention of activist investors who forced management change, affected strategy and pushed some tactical initiatives. This external pressure was successful in the case of Motorola. The company was split up, it was re-purposed and re-focused and, with a bit of good luck, was acquired.

The process however still took two years. In that time the company languished but stayed alive. Its headcount was reduced by nearly two thirds. It was in a precarious situation throughout. Its story is not over but ownership did change hands and those who took a risk with it while in distress managed to get a reward.

This example (and Sony's acquisition of Sony Ericsson and HP's acquisition of Palm) cannot apply to Nokia.  An activist investor is unlikely and the company has not yet made itself attractive to a buyer. So what would Nokia need to do to  be acquired?

The first step toward an acquisition will be divestiture of its Nokia Siemens venture. The second will be a spinoff or sale of its non-smart phone division. The third might be the allocation of its IP across these separate entities or in a separate holding.

As the company is broken up, value can be released. Investors will be able to value it better and make appropriate assessments of risk. Only at this point would an acquirer perhaps buy the "rump" Nokia smartphones group.

However, even this scenario is not without huge risks. By the time the split is completed, the operating companies could have deteriorated to such a degree that they are no longer viable. Timing is critical.

So if the smartphone group is isolated and made available, who could buy it? Microsoft is always cited as the primary buyer. I've been skeptical of this as Microsoft has found it difficult to make hardware work. It acquired Danger leading to Kin which failed. It has struggled with Xbox for a decade and has yet to recover all its costs for the effort. It has failed embarassingly with Zune. It also has shown no particular success with its original Surface table computer.

But management has re-committed itself to a new hardware effort with the new Surface. This renewed potential opens up the possibility of entering into the integration of a phone again into their business, and Nokia would be remarkably well positioned to help.

At this time, the possibility still seems remote. The company has dismissed speculation of building phones again and again. Unlike PCs, the phone platform is not yet mature and volumes and distribution are very different.

However, there is one other option.

Microsoft has historically "rescued" technology companies in distress with cash infusions for minority equity stakes. It injected some cash into Apple, Barnes & Noble and even Facebook. It did so not because they wanted to own these companies but because they wanted them to survive or thrive. The move acts as a signal to the industry, partners and developers. So what I see more likely than an acquisition is Microsoft capitalizing a spun-off Nokia Smartphones company in exchange for a small equity stake.

The valuation of this stake will be huge as I expect billions of dollars for single digit share ownership. However, Microsoft would not be doing it to get a return from those shares. It would probably later sell them at a loss. But it would be buying a strategic option whose value may be far greater.