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LONDON
— Shares of
Nokia Corp.
sank nearly 14 percent Friday as the Finnish company
unveiled sweeping changes, including plans to use
Microsoft Corp.'s
mobile operating system in its smart phones, in a
last-ditch effort to take on
Google Inc.
and
Apple Inc.
Nokia
also reorganized its leadership team to allow for faster
decision-making and revamped its structure by creating
two distinct units: smart devices and mobile phones, to
focus respectively on high-end smart phones and
mass-market handsets.
Nokia
said it expects 2011 and 2012 to be "transition
years." In the long term, it targets an adjusted
operating margin at the device division of at least 10
percent. It was just above 11 percent in the latest
quarter. Meanwhile, gross margins will decline as a
result of the royalty payments to
Microsoft
.
The
partnership with the U.S. giant will see
Nokia
use Windows Phone as its smart phone operating system of
choice and finally ditch Symbian, which analysts widely
deemed not to be competitive against
Google's
Android and
Apple's
iPhone operating system.
Symbian
will become what
Nokia
is calling a "franchise platform" in which the
Finnish firm will no longer invest any significant
research and development dollars. In the coming years,
as Symbian is gradually phased out,
Nokia
still expects to sell an additional 150 million devices
on that operating system.
Meanwhile,
MeeGo, the operating system
Nokia
was working on at the super high end, faces a hazy
future.
Nokia
will still launch a MeeGo product later this year but
the team behind it will then move on to focus on
"longer-term exploration of next-generation
devices" that could eventually include tablets.
With its
new strategy,
Nokia
hopes to stem steep market-share losses in the lucrative
smart phone segment. The company's value share of
industry profits had plummeted to only 17 percent by the
third quarter of 2010 from 67 percent in 2007. In the
fourth quarter, Symbian relinquished its spot as the
world's No.1 smart phone operating system to Android.
"
Nokia
and
Microsoft
will combine our strengths to deliver an ecosystem with
unrivalled global reach and scale. It's not a
three-horse race,"
Nokia
Chief Executive
Stephen Elop
said at the company's capital markets day in
London
.
Nokia
appointed Elop, a former
Microsoft
executive, as its CEO less than five months ago with the
mission of reviving its fortunes. Until now he had
focused mostly on cost-cutting, slashing 1,800 jobs.
In the
past few weeks, Elop has built a reputation as a
straight-talking executive. In an internal memo to
employees published by the
Wall Street Journal
on Wednesday, he compared
Nokia's
fate to that of a man standing on a burning oil rig and
forced to choose between jumping in the icy waters or
risk burning to death.
But the
markets gave his new strategy the thumbs-down on Friday.
Nokia's
shares closed down 14 percent in
Helsinki
and lost nearly the same percentage in trading on the
New York Stock Exchange
.
"
Nokia
CEO Elop failed to meet high expectations for an
effective new strategy, as we had expected, ending up
with a clumsy mix of long-term Windows plans and fading
support for Symbian and Meego," said
Tero Kuittinen
, an analyst at
MKM Partners
.
Though
analysts were generally relieved to see
Nokia
finally abandon Symbian, many expressed concern that a
partnership with
Microsoft
— which has struggled for years to gain a foothold in
the smart-phone market despite throwing inordinate
amounts of cash at the problem— might do little to
revive
Nokia's
fortunes.
"
Microsoft
is the big winner in the deal, but there are no silver
bullets for either company given the strength of the
iPhone and Android," said
Geoff Blaber
, an analyst at
U.K.
-based telecom consultancy CCS Insight, in e-mailed
comments.
Pierre
Ferragu, an analyst at Bernstein, drew attention to the
lack of traction of the latest Windows mobile devices.
Of 100 million smart phones shipped in the fourth
quarter, only 2 million were Windows handsets, despite
the support of brands like HTC and Samsung and heavy
marketing spending.
Ferragu
also cautioned it would take too long for the
Microsoft
partnership to bear fruit.
"This
partnership will take time to implement and time to
deliver phones to the market. This is what could kill
Nokia
," he said in e-mailed comments.
Some
analysts would clearly have preferred
Nokia
to jump on the Android bandwagon. This option was
carefully examined, Elop said, but would have left
Nokia
with little control over its destiny and killed its
ability to differentiate from rivals.
"We
felt we would be one of many and somehow late to the
game and we worried about gaining sufficient leverage to
differentiate," he said, although he admitted that
going with fast-growing Android would have given
Nokia
rapid weight in the crucial U.S. market.
"We
looked at all of this and said the
Google
option is a valid option but it felt a little bit too
much like giving up and not enough like fighting
back," he said.
Meanwhile,
management identified some major advantages to picking
Windows Phone over Android, such as fresh revenue
opportunities in search and location-based services.
"
Microsoft
is placing a critical bet on
Nokia
for a range of services. It's far more interesting than
a simple licensing deal. There is the potential to build
the next new ecosystem," Elop said.
But
Nokia
will have to work to differentiate on Windows Phone as
well, analysts said, as the operating system is licensed
to pretty nimble players such as
Taiwan
-based HTC and Samsung.
Ahead of
the announcement,
JPMorgan
predicted that a move to Windows Phone would boost
Nokia's
2010 earnings by 38 percent, assuming 10 million
additional units are sold.
The
broker also noted that differentiating on Android would
have been more expensive than joining hands with
Microsoft
.
Nokia
has been late to market on most of the major innovation
cycles in the past decade, including flip phones, thin
phones and touch-screen phones despite having the
industry's largest research-and-development budget at
more than
$4 billion
.
Elop on
Friday said the company would lower its R&D spending
in the future and cautioned that "significant"
job reductions will take place.
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