Nokia Down, but Not Out in Smartphone Market: IDC

Nokia's struggles raise doubts about whether it's going to be able to help Windows Phone gain traction in the smartphone market, but an IDC analyst says Nokia still has potential.

Nokia and Microsoft both needed each other for Nokia to try to regain its smartphone dominance and for Microsoft to build sales of Windows Phone 7 devices. But analyst Ramon Llamos of IDC thinks both can still pull it off once Nokia gets its act together.

Doubts about whether Nokia could deliver for Microsoft were raised again last week when the Finnish phone maker announced about another 10,000 layoffs, on top of 20,000 previously announced, and another $2 billion in other spending cuts between now and the end of next year.

It also announced plans to shutter factories in Canada, Finland and Germany, according to news reports. This news comes just as Nokia is trying to roll out the first models of smartphones running Microsoft's Windows Phone 7 OS, which itself has had a slow start competing against phones running Google's Android OS and iPhones running Apple's iOS.

Nokia's troubles have also raised the possibility that it might be the right time for Microsoft to buy Nokia. Microsoft offered a curt no comment when asked if it was thinking of acquiring Nokia.

While the Windows Phone Summit, scheduled for this Wednesday and Thursday in San Francisco, will be a developer-focused event covering what is expected in Windows Phone 8, the successor to WP7, questions are expected on the status of the Microsoft-Nokia partnership.

But when asked if Nokia's apparent weakness means Microsoft bet on the wrong horse to build traction for WP7, IDC analyst Ramon Llamas replied, "Absolutely not."

"[Nokia] is in the midst of a very challenging transition," Llamas said, referring to the move from its original Symbian OS to WP7. "But Nokia brings a lot of great stuff to the table; smartphone expertise, a very strong brand and awesome distribution worldwide."

But all those qualities have failed to keep Nokia in the game, as IDC's own numbers show. For the first time in years, Nokia fell from first place in the rankings for worldwide sales of mobile phones (including smartphones) in the first quarter of 2012. Nokia fell to third place with unit shipments of 11.9 million, behind Apple's 35.1 million units and No. 1 Samsung's 42.2 million. Nokia's market share plummeted to 8.2 percent, from 23.8 percent in the first quarter of 2011. Nokia's sales fell by 51 percent in the same quarter, while Apple's rose by 88 percent and Samsung's by 267 percent.

Still, Nokia should get some credit for loyalty by going "all in" for Microsoft, said Llamos, while other smartphone makers "hedged their bets" by introducing some WP7 devices but mostly peddling smartphones running Google Android.

While still confident of Nokia's ability to pull out of this dive, Llamos is concerned that during a conference call announcing the cutbacks, Nokia executives said that many of the cuts will be in research and development (R&D). While R&D cuts provide some immediate cost savings, R&D is the future for any company, especially in the smartphone business where device makers are constantly pressured to come up with the next big thing, he said.

"Nokia's going to have to be very strategic, very nimble and a very sharp, [with a] laser focus as to where it's going to concentrate its resources today and tomorrow," Llamas said.

But others are much more bearish on Nokia. The Finnish news Website News24 noted that Nokia's long-term credit rating has been downgraded to junk status and quotes an analyst saying that Nokia's deal with Microsoft "was the wrong strategy from the beginning."

"Basically, they must succeed or die," said Andalys Oy analyst Ari Hakkarainen.

And the U.S.-based magazine Smart Money argued in a June 18 report that Microsoft should acquire Nokia in order to save it.

IDC's Llamos considers that scenario unlikely, given Microsoft's disastrous experience with the KIN One and KIN Two smartphones it rolled out in April 2010, only to kill them off in July of that year as a flop. He then added: "If Microsoft were to acquire Nokia, not only does that expose Microsoft to the gigantic market of smartphones, but also feature phones that the company has virtually no presence in."