The smartphone race and Microsoft’s Mango update

On 19th of May Gartner released their quarterly report on the state of the mobile phone market. Here’s the press release.

The smartphone front looks like this as of Q1:

Android has had a phenomenal success over the last year going from 9.6 per cent market share to 36 per cent currently. It is starting to seem like Android is forming into another Windows. Symbian has gone to the other direction losing 17 percentage points. In total the smartphone market has doubled over the last year, which is frankly the only thing that has kept Symbian and Nokia barely profitable. But the really interesting part of the market is Microsoft and their new Windows Phone platform, which is going to get its first major update later this year. 3.6 million devices shipped with a Microsoft OS, though only 1.6 million of these were those new WP7 devices according to Gartner. I have discussed Microsoft’s ventures here.

I personally like the Windows Phone UI and the whole concept, but as I stated before they were late to the game and made some mistakes in their execution. Plus, everyday they are giving more advantage to Android and iOS. The fact that they only shipped 1.6 million WP7 devices against Apple’s 17 million and 36 million Androids spells, if not doom for the platform, then at least serious problems for Nokia. The platform will not get any boost from latest generation hardware this quarter and future seems murky at least when compared to the already shipping latest generation Androids. I expect the platform’s market share to drop further although some Symbian shoppers may have jumped ship.

The WP7 platform’s current state seems very problematic for Nokia who is supposed to go all in next year with Microsoft. It is not going to be easy to start with a platform that is closing in on zero in terms of market share while one’s own Symbian is doing the same. Android should be benefiting from this and I expect its market share to grow steadily in the next two quarters especially as the next iPhone is rumored to ship only after summer.

Microsoft today showed of its Mango or 7.1 update for the Windows Phone platform. See here Engadget’s liveblog from the event. Overall it seems like a very solid package for .1 update and will bring the OS closer to feature parity with its closest competitors, but the key take-away from the event is that there is not going to be new hardware or software until this fall. Moreover, Nokia states that this is the version that their first WP device will use raising the expectations that they will actually ship something for the holiday quarter.

Disclosure: I am a Mac/iPad/iPhone user

Just what on earth is Nokia doing with its R&D budget

Nokia today announced its plans to adjust its operations to match its new strategy of becoming a Microsoft OEM. Nokia will outsource all of its remaining Symbian resources including 3000 employees to Accenture and chop of further 4000 people from its payrolls. The plan is to reduce non-IFRS Devices and Services operating costs by 1 billion euros in 2013 compared to 2010. This is what the new CEO Stephen Elop had to say:

At Nokia, we have new clarity around our path forward, which is focused on our leadership across smart devices, mobile phones and future disruptions. However, with this new focus, we also will face reductions in our workforce. This is a difficult reality, and we are working closely with our employees and partners to identify long-term re-employment programs for the talented people of Nokia.

There’s nothing wrong with this, just your average corporate talk and seems all reasonable. But I cannot get over the fact that there have been 3000 employees working on Symbian software. No wonder its market share and especially mind share has tanked. The poor performance of Symbian has also been strongly reflected in Nokia’s results. Nokia now expects its 2nd and 2rd quarter non-IFRS operating margins to be as low as 6 per cent, which in IFRS language probably means pretty close to nothing.

Off-topic, isn’t it wonderful that pro-forma Ollila became non-IFRS Kallasvuo continued by non-IFRS Elop. Word of advice, Nokia would do well to concentrate more on fixing its business model than its financial statements.

The 3000 employees working on Symbian is not the only measure of bloated R&D yielding practically nothing. In fact, Nokia spent €1.5 billion on R&D during the first quarter of 2011, a few per cent increase over last year. That is almost half of its gross profit and more than 14 per cent of total revenues. In 2010 Nokia spent €5.8 billion on R&D, over 45 per cent of its gross profit and roughly 14 per cent of its revenues. Just as a point of reference, Apple spent less than $1.8 billion on R&D on its 2010 financial year, a figure that is about 2.7 per cent of its revenues and under 7 per cent of its gross profit.

I composed a little chart to illustrate R&D spending and efficiency in the IT sector for the 2010 financial year. Nokia’s figures have been translated into US dollars using 1.4 average rate. Can you spot the outliers? Nokia’s R&D really needs help, but I am not sure that is gonna happen as Elop told that they are going to spread the WP7 related development across the world. One would think that now that they don’t even have their own OS they could work from one place, but apparently not.

Ugly report from Nokia, to be barely profitable in Q2-Q3

Nokia today reported its Q1 earnings and net income came in at €344 million, EPS €0.09. Net sales were up 9 per cent year-over-year, but operating profit was down 10 per cent. Here is what the new CEO had to say:

In the first quarter, we shifted from defining our strategy to executing our strategy. On this front, I am pleased to report that we signed our definitive agreement with Microsoft and already our product design and engineering work is well under way. Following a solid first quarter, we expect a more challenging second quarter. However, we are encouraged by our roadmap of mobile phones and Symbian smartphones, which we will ship through the balance of the year. We are fully focused on delivering the needed accountability, speed and results to positively drive our future financial performance.

Nokia expects its non-IFRS margin to be 6-9 per cent for Devices & Services in Q2 and net sales to be between €6.1 and €6.6 billion. Sales grew mostly in Greater China and were down 5 per cent in Europe. North America is negligible at this point. Shipments were up 1 per cent and ASP was €65, up from €62. Smartphone ASP was down to €147. Just under half of gross profit went to research and development that does not seem to yield anything useful.

Strategy Analytics has noted that Apple has now passed Nokia and become the largest grossing mobile phone maker in the world.

AT&T and Verizon post good results, US about to become a duopoly

Both AT&T and Verizon posted solid Q1 results. AT&T reported EPS of 57 cents compared to 41 cents year ago and $31.2 billion in revenue. Verizon, on the other hand, reported EPS of 51 cents, a strong improvement over the 16 cents last year. Total revenues for Verizon were at $27 billion. The companies added almost 4 million subscribers. AT&T beat Verizon clearly in the iPhone activation race, 3.6 million versus 2.2 million. Overall, it seems that once the T-Mobile acquisition by AT&T goes through, US is on a track to become a duopoly (here I am ignoring the tiny local carriers) as there is no way Sprint, whose earnings are due next week, will be able to compete with two giants with its Wimax network.

HTC reports record profits

The Taiwanese based smartphone and tablet maker today reported record profits for its first quarter 2011. The company’s bottom line almost tripled to $513 million while revenues also beat expectations. The record profits can obviously be attributed to Google’s Android OS, which has become the number one smartphone platform in the world. This should prove that using Android is not just about pissing in one’s pants for warmth as former Nokia executive Vanjoki would have you believe. To add to the insult HTC surpassed Nokia in terms of market capitalization.


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