This time we’re doing analysis on Nokia’s 2010 Q4 results. First let’s take the version from “Tomi Ahonen, year 2012 edition”, dated two weeks back:
“The Nokia Symbian based smartphone sales grew – not declined, grew – unit sales (the first measure of performance). The Nokia Symbian based smartphone sales grew – not declined, grew – revenues (the second measure of performance). The Nokia Symbian based smartphone sales grew – not declined, grew – average sales prices (the third measure of performance). And Nokia Symbian based smartphones grew – not declined, grew – profit (the fourth and last measure of performance). By every measure that the industry uses, Nokia Symbian smartphone sales grew from Q3 of 2010 to Q4 of 2010, literally the last full quarter before Elop released his Burning Platforms memo.” 
I would like to point out that I’m no market analyst, neither am I economy expert. So I welcome any economy expert to comment here – yes Mr. Ahonen, you are included – and tell me if the analysis presented here is not correct. I’ll gladly fix my post unless the correction given is not having any facts behind it or is obvious lie.
That said, I’m going to let Tomi Ahonen do the majority of the speaking here. So we are here to hear how Tomi Ahonen felt about Nokia’s 2010 performance before he started to blame Windows Phone strategy for it. Let him begin:
“Previously, in most quarterly results, and most annual results, Nokia market share in all mobile phones, and in smartphones, was very stable. Thus Nokia’s growth numbers would be roughly in line with the industry growth number. If Nokia’s number was a little bit below the industry overall growth number – like from Q4 2009 to Q1 2010 – then of course Nokia’s market share would dip a little – one or two percentage points from one quarter to the next – and if Nokia performed better than the industry – as it did last year from Q1 to Q2 – then correspondingly Nokia’s market share would gain one or two percentage points. This is ‘normal’.” 
“Take Nokia smartphones. They grew 36% in one year! In any other industry you can imagine, in cars, in plasma screen TVs, in personal computers, in clothing, in soft drinks, whatever – if you grow 36% in one year, it is a fantastic year! Except if the industry grew 75% and you grew the slowest of any of the big competitors – it means you lost ground (compared to your rivals). While you grew numbers, you effectively lost sales that your rivals picked from you!” 
“Market share wins. Sony’s Betamax VCR was technically better, in every generation than the VHS video recorders, yet Betamax lost and VHS won (I remember, I owned VCRs on both standards haha). The Apple Macintosh was the clever smart ‘superior’ PC but the IBM-compatible/Windows-compatible PCs took over 90% of the market and the Mac sells at about 4% of all personal computers annually.” 
“In the mobile telecoms world, GSM took over from CDMA, not because it was somehow technically a better solution (in some ways it is, in other ways it is not) but because GSM got the market share, globally (about 90% of all mobile phones in use are now on GSM or compatible networks).” 
“Nokia did GROW smartphone unit sales. The 4Q Results tell us that Nokia grew smartphone sales 7% from Q3, and 36% from the same period one year ago. That alone seems to be good news. If the industry sales were ‘flat’ for the year, then any growth (or loss) of sales would directly relate to market share. If you grew 5% sales (in unit sales, not dollar value), and the world total sales number was flat, then your market share grew 5%. If the market shrunk 5%, and you simultaneously grew unit sales by 5%, that means your market share actually picked up 10%. You see what I mean. It is all about market share.” 
“In June of 2010, after Q2, 2010, Nokia’s smartphone market share stood at 39%. In Q3 it fell dramatically to 33%. Now in Q4 it fell further to 28%. Yes. In only six months, Nokia’s market share in smartphones fell from 39% to 28% – Nokia lost more than one quarter of its total market, in just six months!” 
“This does not happen anywhere! When Toyota the carmaker had its global recall problems with its breaks, it did not lose one quarter of its total market in a year, far less than in six months. A car-maker will have a great year if they pick up one tenth of their market and may have a horrid year (like Toyota did) if they lose one tenth of their market in one year. When Sprint-Nextel the US telecoms carrier/operator made its famous marketing blunder of ‘firiring the Sprint 1,000 customers who complained too much’ – Sprint experienced an instant exodus of customers, but it did not lose a quarter of its customers in a year, it lost about a tenth. When Motorola experienced the iPhone effect and suddenly the Razr went from the hottest phone on the planet to the undesirable, Motorola lost one quarter of its customers – in one year, not in six months.” 
“This level of Nokia market share loss is pretty much unprecedented. I have been a close follower of global business for over thirty years, I honestly do not remember any such instance in any industry where any major global brand lost a quarter of its total customer base in a period of only six months. Even airlines with air crashes or devastating strikes do not suffer this badly. Cars with ‘unintended acceleration’ (ie ‘killer cars’) like Audi experiences in 1995 did not destroy a quarter of their customer base globally in six months.” 
“But Nokia’s market share in June of 2010 – half a year ago – was 39% of all smartphones. Its now 28%. How big is that loss? Its 11 million smartphone units of ‘opportunity cost’ as the economists say. This is what Nokia should have had. How big is that? Its more than all HTC smartphones! Or its more than all of Samsung’s smartphones. Or its more than all of Motorola and all of SonyEricsson smartphones – combined. That is how much of Nokia’s market has vanished in just six months.” 
“What is it in money? 11 million smartphones in one quarter at Nokia ASP for smartphones of 156 Euros is about 1.7 Billion Euros (2.2 Billion dollars). And at 12% profit margin for all phones (probably more for smartphones, but Nokia does not break down that number for us) means at least 265 Million dollars of abandoned profits. For a full year, Nokia has just destroyed almost 9 Billion dollars of total revenues and 1 Billion dollars of total profit! This is not market share that Nokia could have ‘attempted to gain’. It is market share that Nokia used to own! These were Nokia customers who had faithfully been loyal for years. They were not lost in 2007 when the iPhone came or 2008 when the App Store launched or 2009 when the N97 was a disasterous phone or 2010 when the N8 was delayed. Nokia lost one quarter of its customers in the past six months.”
“These customers were lost between June of 2010 and December of 2010, when Nokia had finally released its best touch screen operating system, when the Ovi Store was well established as the world’s second best-selling app store for handset makers behind only Apple, and with the N8 finally released. Do you understand now, why I obsess about market share. If someone focused on unit sales – Nokia grew 7% in just one quarter – that is excellent growth in most industries, in the car industry, seven percent growth in one YEAR is excellent growth. Nokia unit sales grew 36% in one year, that is fantastic growth in just about any other industry and the CEO would be getting fat bonuses. It was so disasterous at Nokia that the CEO was fired. You cannot study this industry by focusing (only) on unit sales. You have to look at market share.” 
At this point I have to step in and say that Tomi Ahonen should really read his own blog. For almost year-and-a-half he has been ranting how in Q4 2010 Nokia was increasing smartphone sales as per devices sold, smartphone average profit margin and smartphone business unit profits. All three. While losing market share, yes. But he has been saying it did not matter because Nokia was larger than its two closest rivals – combined. For over a year now.
Why is he now saying something so different as past has not changed?
Because Nokia changed the strategy, that’s why. He didn’t like it and started to spread lies. But hey, let him continue:
“Nokia also reported better margins, and better profits from the previous quarter. This in almost any other instance is good news. I am devastated. I fully support the need to be profitable, and a growth in profitability is good news, in most cases. But if the company is already profitable (as Nokia was in Q3) and the growth in profits comes at the expense of market share – that is a perilous situation. Market share is long term viability. I don’t believe in excessive profits, and I don’t believe in excessive market share. But a sudden drop in either (market share or profits) is bad news. I signalled it here on this blog when reviewing Nokia numbers earlier in the year, that the profit margin was slipping dangerously low, but that reflected a global economy, where most of Nokia’s traditional rivals (Motorola, SonyEricsson, LG etc) were reporting losses.” 
Anyone noticed? “This in almost any other instance is good news” SO IT WAS NOT GOOD NEWS!!! (But that is what Tomi Ahonen keeps telling us – now. Read from the very beginning of this post.)
“So what do we know. Nokia lost market share from 39% to 28% in only six months. That means, Nokia has abandoned one quarter of its total smartphone market in only half a year. I have never witnessed such a wholesale destruction of any company’s market share in a similar period of time. The nearest I can find, is Motorola which lost a quarter of its market in all handsets from 2006 to 2007 in a period of one year. Nokia smartphones today is twice as bad, as Motorola Razr led mobile phones was when facing the iPhone in 2007.” 
“Let me show with a familiar example. Lets go to my favorite analogy to phones: cars. The world’s biggest car-maker in 2010 is (by a slim margin still) Toyota ahead of GM. What would happen if Toyota lost one quarter of its market – I am not destroying 11 market share points because Toyota’s total market share is only 12%, so we can’t drop them to 1% haha, that is destroying nine out of ten customers. No, the same ‘ratio’ of loss. If Toyota lost one quarter of its market, and instead of selling 8.4 million cars, they would only sell 6.3 million cars. That is the same proportion of loss as Nokia going from 39 million to 28 million sales. If Toyota fell from 8.4 million to 6.3 million, Toyota would be in the news headlines all over as the ultimate catastrophic collapse of a global market juggernaut – Toyota would fall behind General Motors, AND Renault-Nissan AND even behind Volkswagen Group, landing in 4th place, just ahead of Ford Motor Company. Do you see what I mean? It is a totally exceptional situation in mobile telecoms, that Nokia has such a massive lead in its own industry, that even when it loses one quarter of its market, we ‘do not even notice’ because before this happened, Nokia was the biggest, and after it happened, Nokia is still the biggest. Nokia still today is bigger than RIM and Apple, the two nearest rivals making smartphones – combined.” 
I know it’s being repetitive, but this is what he’s been saying for over a year: at end of 2010 Nokia had market share larger than its two largest rivals – combined. This has been his punchline to prove that Elop Destroyed a successful, profitable company. But before new strategy it was just the opposite. I wonder how he forgot that it was “afterstate” of this catastrophic market share loss – loss he said himself was by far greater than anything he can remember with his 30 years of global market experience?
Enough for that. This post is not about later part of 2011 events, this is about analysis made by world-class analyst Tomi Ahonen – an analysis I fully support, by the way.
“WHAT DID NOT CAUSE THIS
Something happened between Q2 of 2010 and Q3 of 2010. THAT is what we need to focus on. First, there was not abnormal external event, like terrorism, suddenly a Finnish Nokia exec writes some horrible cartoon about religious figures related to the Middle East and the world starts to boycott Nokia phones.. No, nothing like that.” 
“The reason cannot be ‘Symbian is the obsolete OS’ because it was equally obsolete in Q1, and more explicitly, the new OS was released at the start of Q4 – if Symbian was the reason, the fall should have happened in long before – and the decline should have mostly stopped by Q4.” 
“Remember, the Nokia market share GREW from Q1 to Q2 using that horrid Symbian OS.” 
“The reason is not Ovi store, for the same reason. The Ovi store was launched less than two years ago.” 
“In the beginning of the year, Ovi was achieving activity at the rate of less than half a billion downloads per year (Apple gets 7 B per yer), today Ovi is doing three times better at about 1.5 Billion downloads per year. There was steady almost linear growth of Ovi. If Ovi was the reason, we would have seen a dramatic failure of Ovi around June or July of 2010 and after that, an wholesale rejection of Ovi.” 
“Sorry, you guys who hate Ovi store – that is not the reason why Nokia lost market share.” 
“Something happened in the summer of 2010. Well, Nokia did its second delay of the N8. That was times right then in the summer, that could be it. Very good my dear Dr Watson, yes what of the N8? It was delayed once before and the industry expected it for exactly that Q3 period, when it was suddenly delayed again. That could be it. Big disappointement, big drop in Nokia sales in Q3. That part of the pattern makes sense – but then Q4 makes no sense at all. If delaying N8 causes 6 market share point drop in Q3, then the launch of N8 three months later must achieve at least a partial recoverly in Q4. Not complete recovery, fine, but must achieve a partial recovery! What happened in Q4, after the N8 was launched, Nokia market share crashed a further 5 points! It cannot be the N8. It cannot be the ‘delay to N8’ because that would mean that in Q4 we must have seen a recovery. Because Nokia market share crashed FURTHER even after the N8 was released, no – the N8 delay is not the cause for this crash, even though the delay announcement is conveniently timed. That cannot be the reason either.” 
“If not Nokia products, what of the competition then? Ah, yes! Now we have good cause to consider. The Apple loyalist have been waiting to yell out – obviously, the timing issue for June 2010 is the iPhone 4! The most celebrated and most anticipated new phone of the year. This is perfect cause and effect. Q2 of 2010 had only a couple of days of iPhone 4 sales in the USA, the iPhone 4 had its first real quarter of sales in Q3, and the iPhone market share explosion mirrors Nokia’s crash in Q3. Almost perfect parallel. This must be the reason! Apple market share shot up 4% from 14% in Q2 to 18% in Q3, while Nokia market share fell from 39% to 33%. Yes, Apple grew 4 market share points and Nokia fell six points, but at least the vast majority of the reason for Nokia’s crash is Apple. Has to be!” 
“That makes very compelling sense, for one quarter only. Now the theory breaks down in Q4. Apple market share declined from 18% to 16% – and Nokia further declined from 33% to 28%. If the two were linked, if in Q3, the sudden drop by Nokia was caused by Apple’s iPhone 4, then now that the iPhone market share has declined a little, then Nokia would have to have recovered roughly as much for Q4! It cannot be the reason. Yes, probably the iPhone 4 did take some Nokia sales but it also probably took some sales from Motorola and RIM and HTC etc in Q3. Because the pattern breaks down in Q4, we know it cannot be the reason. Nokia did not crash only one quarter, it crashed for two quarters straight – and in Q4, also Apple lost market share. The cause cannot be the iPhone 4 either.” 
“It cannot be any of the other rivals either. Blackberry has been gradually losing market share, so it cannot be the cause. HTC and Samsung are not even big enough if all of their sales were the cause – and both were selling plenty of smartphones before Q3, the growth that either HTC or Samsung has had, is nowhere near enough, so it cannot be the Galaxy series of bada for that matter. No, the competition did not cause the Nokia market share crash. The competition probably gained from the change, but did not cause it.” 
“Understand, Stephen Elop took control in September (ie end of Q3) – the first market crash happened during Q3 – Mr Elop could not have been the cause.” 
That’s nice from him. Too bad he started to blame same Stephen Elop after February.
“So we hunt for the clues. What else changed between Q2 and now. Average sales prices are up. Nokia profits for handsets are up. Nokia profit margins are up. A-ha. At least part of the answer is here – Nokia has been transferring high market share in smartphones vs low profit margin, to higher average sales prices and higher profits, at the cost of market share. That much is clear to any Wall Street analyst. But it does not explain the sudden catastrophic drop. Nokia’s profitability did not experience a similar ‘dramatic jump’ in profits. The gain in profits is only modest, not nearly as big as the fall in market share. But we do have a critical clue.” 
“Now lets go back to history. From Q1 to Q2, Nokia profit margin and ASP for smartphones declined, but its market share grew! From 37% to 39%. We know after Q2, Nokia’s market share has been in free-fall and its average sales price and its handset profit margin has not recovered in similar proportion. What does this tell us. I think I know the answer for the market share crash. I think the evidence is overwhelming and the pattern is perfect. OPK had been buying market share into early 2010, by propping up an un-sustainable level of market share – by heavy discounts and/or marketing support of carriers/operators.”
“I think this is the reason. I think all evidence fits the theory, and no other viable suspect can fully explain, why Nokia market share grew from Q1 to Q2, then suddenly in Q3 and again Q4, Nokia market share fell like we’ve never seen in the mobile industry. I think it was a house of cards that Nokia had tried to build – probably well-intentioned, thinking that as the N8 and Symbian S^3 was delayed (again) that they needed to do this. It fits perfectly with the corresponding price changes, profitability changes and the management change. I think what we now are witnessing is a ‘correction’. The Nokia market share in smartphones of about 35% in 2010 was an unsustainable illusion, propped up by enormous price cuts. It was not sustainable. The real market share level is closer to 30%, perhaps 29% or less. Still biggest in the world but far less dominant. The Nokia Board saw what was happening, did not appreciate it, and fired the CEO and hired a new guy to take the company onto a more sustainable, healthy path. I am pretty confident this is what has happened, but I am very intersted in your view, what do you think?” 
Thank you, Tomi.
Now what do I think? I think Tomi Ahonen does a perfect analysis in there, but fails to see one critical detail.
The detail Mr. Ahonen missed – and this is important – Nokia lost equal percentage of its remaining market share in Q4 2010 as it lost in Q3 2010. I gathered this AND the 2011 development in my previous blog post.This means that the market share dive was not over – far from it. And therefore the ‘correction’ Mr. Ahonen mentions never took place. (Naturally Q1 2011 was continuing the very same trend as Nokia’s strategy change could not ruin Q1 2011 sales.)
Nokia had been buying market share. In Q4 2010 They shipped out N8 in vast amounts (Tomi Ahonen lists this as a sign of Symbian success), thus increasing the percentage of high-end devices in their portfolio and therefore increasing average selling price. All visible inQ4 2010 results. The heavy discounting was continuing, BUT Nokia already grew slower than industry (thus losing market share).
We know profit was on rise. We know profit margin was in rise. Actually – average sales price was in rise…
…which hides the bad news. Nokia was shipping out the new line of Symbian^3 devices (high-end N8 and mid-range C7), but at same time could not provide anything new to the low end that was offering same outdated Symbian devices. And understand this: if sales were going up in high end where smartphone market was NOT growing (at least not fast) and Nokia was still losing market share, it means things were CATASTROPHIC in low end, where the smartphone market grew in exploding speed.
Nokia fell off the cliff. Read cliff theory by Tomi Ahonen, you’ll notice he saw this coming. (Once again, saw it coming before and does not follow his own teachings now.)
Feel free to fill in the gaps I left if you find any.
If you want to know how much Nokia’s strategy change actually destroyed Nokia’s market share, you can try my post about it.
 Sherlock Holmes & Hound of Nokiaville
Guideline for commenting:
I hate the way Tomi Ahonen deletes criticizing comments from his blog. However, I plan to follow three of his principles: I’ll delete comments that are
- Personal insults to someone
In addition, if you wish to challenge my previous posts, please comment to those.