| The ailing company is betting on a new smartphone but some believe salvation lies elsewhere  Sole focus: Stephen Elop, chief executive of Nokia, says it is committed to using only the Windows Phone operating system As Nokia was developing its latest smartphone, Stephen Elop came up with an unusual challenge for the engineers. Mr Elop, the Finnish company's Canadian chief executive, would stand in the darkened corner of a room while the engineers stood on the other side, taking his picture. The goal? To see if they could produce a photograph sharp enough so that you could tell the time on his watch. Eventually they did. Mr Elop's attention to the smallest detail makes sense. After dominating the global mobile phone business – at its peak in 2008, Nokia sold 468m handsets – the group is struggling to find its way in a market dominated by smartphones made by Apple and Samsung. The company sold just 123m handsets in the first half of this year, and is no longer even in the top five smartphone makers. Since 2011, it has clocked up more than €4bn in pre-tax losses. This means that a lot is riding on the new phone, the Lumia 1020, Nokia's most important product of the smartphone era. With its 41 megapixel camera – used by the engineers to zoom in on Mr Elop's watch – Nokia has finally made a smartphone that allows it to claim technology leadership. "We found our roots again," says Samuli Hanninen, head of software program management.
Dethroned Nokia and its rivals But despite a spate of good reviews, analysts fret that, based on anecdotal sales evidence, the 1020 will do little to lift Nokia out of its sales trough. Like BlackBerry , another fallen giant of the mobile phone world that recently put itself up for sale, the Finnish group was caught napping when Apple introduced the iPhone six years ago. BlackBerry stands as a cautionary tale for Nokia for what could happen if Mr Elop's big wager – a partnership with Microsoft – fails. Mr Elop, a former senior Microsoft executive, ditched Nokia's own operating systems shortly after taking over in 2010 and bet the company on the Windows Phone. The idea is that the platform from Microsoft – which has a spotty record with consumer devices – would become the third big operating system behind Apple's iOS and Google's Android. The problem is that Windows-based phones are so far behind – with global market share of 3.3 per cent compared with a combined 93.2 per cent for Google and Apple, according to research group Gartner – that many analysts and investors are calling for Nokia to come up with an alternative. "Many of the owners want to see a plan B," says Hannu Rauhala, analyst at Pohjola Bank in Helsinki. But Mr Elop is unwavering. "We are focused on Windows Phone," he says in an interview. Sitting in a meeting room at the group's seaside headquarters outside Helsinki – sold and leased back as part of a recent drive to preserve cash – the 49-year-old reflects on his call in 2011 to be judged in two years' time when Nokia had a full portfolio of Windows smartphones. "One of the things to judge, does Nokia have more manoeuvring room today than we did two years ago? And I would argue we definitely do and it's because we do have a handset business in Lumia that's now moving in the right direction," he says. Other parts of the business, largely obscured in recent years by the battle for relevance in smartphones, are creating their own strategic challenges. Basic mobile phones – long a cash cow because of heavy demand from emerging markets – are suffering a drop in sales as a result of competition from cheap Androids. NSN, its telecoms equipment business, has moved from a perennial underperformer to its strongest division. That raises the question of whether it could replace mobiles as the cornerstone of the company, especially amid rumours of a possible sale of the handsets unit. Nokia's recent €1.7bn move to buy partner Siemens out of NSN has also raised renewed questions about how strong its cash position is. A former member of Nokia's senior leadership team says: "In 2015 Nokia could look very different. The focus has all been on smartphones in recent years. But now Stephen has a lot of big decisions ahead across the company." Yet the question of smartphones remains the most crucial, with some analysts assigning the business no value against estimates of €5bn-€8bn for NSN. Lumia sales are rising, up one-third in the second quarter to 7.4m. But that pales into insignificance next to Samsung's 71.3m and Apple's 31.9m in the same quarter, according to Gartner. That leads to some ambivalence from telecoms operators – Nokia's real customers – which two years ago were desperate to have an alternative to Android and Apple. "The problems are being addressed at least," says one large Nokia customer. "Nokia is no longer in denial. They appreciate the problems. [But] it all depends on how long it takes to fix them." Operators say they are not willing to carry Windows phones forever if they do not gain market share. One telecoms executive says he is disappointed with Nokia's performance. Samsung, he adds, sells the phones customers want at present. The chief executive of a global mobile group says: "We are focused on supporting them in all our markets as it would be great news if Nokia could become a key player again, given the overconfidence of Apple. But it has been very hard in smartphones. I don't honestly see any recovery so far for them." Mr Elop says goodwill previously shown by operators has now in many cases "translated into commitment" from operators such as AT&T. The two companies are working together to set targets for market share, to train staff and share marketing costs. A European telecoms executive says his company's research shows that in almost every leading market the three top brands are Apple, Samsung and Nokia. "People haven't given up on the brand," he says. The problems, and opportunities, facing Nokia are summed up by data from another European telecoms operator. The confidential report shows that the company has had the highest increase in so-called "net promoter scores", which measures handsets being recommended by customers. It scored well on customer satisfaction, too. But the problem is getting customers even to try Nokia. Only 5 per cent of potential smartphone customers expect to buy one, and most of those already have one of its devices, the report found. It would be great news if Nokia became a player again. But it has been very hard. I don't see any recovery so far - The chief executive of a global mobile group Mr Elop says Nokia discussed introducing the Windows Phone alongside other operating systems but decided against it. He adds that "there are no debates within the company: should we do this camera feature on Windows Phone, should we do it on some other operating system? Should we do it on both? No time wasted on that." Samsung's domination of the Android market – with four out of five sales – means it would be difficult for Nokia to stand out, Mr Elop says. His company is dominant in the Windows Phone market as other manufacturers lose interest or are forced to focus more on Android to counter Samsung. Nokia accounts for 87 per cent of Windows sales now, according to a report from AdDuplex. That is both good and bad for Nokia: the positive is that Microsoft and operators are focused on Nokia rather than dividing attention on other groups such as HTC and Samsung. The negative is that Nokia is wedded to Microsoft's operating system and needs it to succeed. Gaining momentum is harder if Nokia is the only group really to adopt Windows, which has far fewer apps than Android or iOS – including important ones such as Instagram. This had led to some frustration between Nokia and Microsoft. In recent months an intriguing plan B has emerged – a sale of Nokia's mobile business. Microsoft reportedly held talks with Nokia over the prospect. Mr Elop says he has "no comment whatsoever". Analysts say it makes sense, given the company has become the de facto provider of Microsoft's mobile devices. Huawei's handsets chief said in June it could consider buying Nokia. A banker close to Nokia says: "Nokia is a very pragmatic company. I don't think they feel secure. Things are going better but they are coming off a low base." He adds: "They think that if they want to pull the plug on devices they can go with NSN." NSN has emerged from a deep restructuring as the one division that is profitable at an operating level. The €1.7bn paid to Siemens for its 50 per cent stake is widely seen as a bargain. And that raises the prospect for some of a Nokia built around NSN. Pierre Ferragu, an analyst at Bernstein Research, says NSN is "where the future is. At some point they will stop losing money on handsets but it remains a low-margin feature phone business with a smartphone niche, whereas NSN is the number-two provider of wireless in the world." Mr Elop argues that Nokia's options with NSN have increased. "We could IPO it, we could distribute it to our shareholders, we could do different things. It could become more strategic as well." The NSN deal also has analysts focusing on Nokia's balance sheet again. Its net cash position will fall to €2.4bn after paying Siemens, down from €7bn at the end of 2010. Some analysts have even speculated that at the current cash burn rate it could run out some time next year. (Underlining the concern, Moody's on Thursday downgraded Nokia's credit rating to B1, saying the company was unlikely to reach break-even on a cash flow basis before well into 2014.) Mr Elop dismisses concerns that Nokia will run out of cash, adding that it can always cut investments if needed. Not that he thinks that will be necessary, especially as NSN is generating good cash revenue at present. Kristian Pullola, Nokia's financial controller, says its mobile business came close to breaking even in cash terms in the second quarter once restructuring costs were stripped out. Despite NSN's success and the struggles of the mobile business, Mr Elop says he will keep investing heavily in handsets. He points to the analyst reports giving no value to mobiles and says that means the potential upside is infinite. "My point being that as we continue to build that momentum, that will attract value. So the way you look at these things is to the extent that you believe that through investment you can drive a significant increase in shareholder value, then it's worth pursuing." Two years after asking investors to withhold judgment until now, Mr Elop remains in a battle to keep Nokia relevant in a fast-moving world. "I would love to be further along, I would love for things to be moving up faster but I sure love that they're going in the right direction, so it's a good place to be," he says. Rivals already looking past the smartphone Before the mobile phone revolution made it one of the biggest tech companies in the world, Nokia seriously considered selling its (then) tiny handset business, writes Daniel Thomas in London. Nokia veterans point to this story, dating to the early 1990s, to make a point: never rule out the Finns. But the company's dilemma is different now. Back then, the world was on the verge of a decade-long explosion in mobile phone use. This time, however, the company is coming at the tail-end of the smartphone boom. Some warn that the market could be all but over. Two years after the launch of Windows Phones, Nokia has introduced new products that are slowly clawing back ground lost to rivals. But analysts warn that the company may have left it too late to enjoy the profits in a competitive market where margins are falling as Asian manufacturers begin to dominate. More worrying for some telecoms executives, there appears to be a lack of innovation in the smartphone market, even at the higher end. Questions about its ability to keep innovating have dogged Apple, which helped create the smartphone market. "We have just reached the end of the smartphone cycle," said a senior global telecoms executive with knowledge of future "road maps" of handset makers. "There is nothing very exciting to come now that no one has seen before," he claims. "Something new will need to come along." Profits in the mobile telecoms market are shifting to companies that find innovative ways to use the mobile internet, with names such as Facebook and Google putting mobile at the heart of their strategies. Other companies, such as Apple and Samsung, seem to be moving on. Both are said to be vying to produce smart watches that use the touchscreen, camera, speakers and motion sensors of the modern smartphone. Google is unlikely to stop at its already launched internet-connected glasses. Finding the next market is key for these groups as well as Nokia. In a fast-moving industry, consumer preference is constantly shifting and able to pull down even the best-loved brands – as Nokia has already found more than once to its heavy cost. Copyright The Financial Times Limited 2013. You may share using our article tools.  via Technology - Google News http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNEzpeJBZI9a_HGTdseYpv8WBuTF7Q&url=http://www.ft.com/cms/s/0/d820c44c-098f-11e3-ad07-00144feabdc0.html | |||
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