April 12, 2012 at 3:00 PM ET
It was a 'Groundhog Day' moment on Wednesday when Nokia lowered its projections for first quarter earnings based on declining sales and slipping margins. Investors pummeled the stock even as the company promised better strategies and new technology.
The shares shed over 2 percent more Thursday as investors pondered how Nokia can make up for lost ground against its rivals.
Like RIM and Palm, Inc., Nokia is scrambling to catch up to Apple and Google after making the same critical mistake as the other members of mobile's old guard: a reluctance to abandon a legacy operating system.
The Finnish cell phone giant warned that its first quarter operating margin will drop by 3 percent and second quarter performance will be "similar or below" that. In emerging markets where pricing competition is intense, it lost ground to Asian manufacturers that cranked out cheaper handsets. It sold only 2 million of its new Windows-driven Lumia smartphone line. Its recent U.S. launch of the much-hyped Lumia 900 was marred by a software bug that prevented some users from getting online.
"I wanted to see a higher volume," said Carolina Milanesi, a vice president of research at Gartner. More sales would have signaled to investors that Nokia had wireless carriers and distributors — the link between Nokia and consumers — on board. "3 or 3.5 million would have shown that the channel was buying into their message and started to trust them," she said.
The company is bending over backwards to ingratiate itself with carriers, presenting its products as a less expensive alternative to Apple's iPhone. Its margins have suffered as a result, which added to those first-quarter woes.
But the company's troubles began earlier. Like Palm and RIM, analysts say Nokia clung to Symbian, its old operating system, for too long. It failed to see that even the best OS would be obsolete in an era where smartphone users expect an integrated ecosystem of apps, maps, media and social networking capabilities. And after it partnered with Microsoft to develop Windows-based devices, customers who had already defected to iOS or Android robbed the company of the user base it needed to coax critical third-party app developers to flesh out that network. (Msnbc.com is a joint venture of Microsoft and NBCUniversal.)
"Mobile years are like dog years," said Thomas Husson, principal analyst at Forrester Research. "You have to react extremely quickly." The launch of Windows 8 will be the critical test to see if Nokia can compete with mobile's two heavyweights.
To its credit, Nokia did make some smart decisions that are paying off today. Its partnership with Microsoft was a better choice than jumping on the Android bandwagon, Milanesi said. "They would have been the cheap arm of Android… they would have lost out in having a brand that would matter to consumers," she said. "With Microsoft the needs each vendor has is pretty equal."
Google gained ground by positioning Android devices as an affordable alternative to iPhones with comparable technology. It's certainly possible for Nokia to do the same, but Husson said the two companies will need pitch-perfect branding to penetrate the American market. "The key challenge for Nokia, particularly in the U.S. where they've struggled to establish significant market share, is branding," he said. "It's clearly a long term challenge for them and its not just about one device."