Why the Nokia and Microsoft Windows Phone partnership is in big trouble

So I have been wondering how Windows Phone 7.5 and the Nokia Lumia’s did in the United States and have been trying like hell to find out sales numbers.

Seriously, for months now I have been trying to find out.

Now we have the answer.

It’s tucked away in Nokia’s recently released Q2 interim report and it’s not great boys and girls.

It’s really not that great.

Before we get there, I wanted to talk a little about why I think that this partnership is not really heading to a great place.

I remember when Nokia and MSFT shook hands, i had a dreadful feeling that this wasn’t going to go that well. I documented some of my reservations here.

In April of 2011 I wrote:

Now my take on the deal..

I’m not sure that I see the value in the union. I understand from a strategy perspective why Microsoft had to do something but I’m not sure why Nokia would be the company that was chosen.

In the united States, Nokia is hardly the sexiest brand of smartphone even though they have tremendous smartphone coverage in Europe and Asia.

I’m just not certain that long term, this can be a successful union between these two companies. There is a lot to be worked out beyond signing the papers.

How do updates get rolled out? Who has the final say with deisgn decision? How are aesthetic conflicts resolved?

I’m just not sure how their final hybrid product will take on Apple and Google’s Android phones.

Well, we are starting to see how this union is working.

From Nokia’s report, we have some useful information. I’ll walk you through it.

Lumia Q2 volumes increased quarter-on-quarter to 4 million units. – *** Sounds like a great number. 4 million Nokia Lumia units sold worldwide in 3 months. Not shabby right?

Devices & Services Q2 non-IFRS operating margin negative 9.1%, adversely affected by EUR 220 million of inventory-related allowances for our Lumia, Symbian and MeeGo devices. Smart Devices Q2 gross margin and contribution adversely affected by the inventory-related allowances. Q3 expected to be a challenging quarter in Smart Devices due to product transitions. *** We’re going to lose money moving to Windows Phone 8 because of the way it was abruptly rolled out and all the stuff we bought for Windows Phone 7.5 and now will not be able to use

We shipped four million Lumia Smartphones in Q2, and we plan to provide updates to current Lumia products over time, well beyond the launch of Windows Phone 8. We believe the Windows Phone 8 launch will be an important catalyst for Lumia. *** It’s all going to come down to Windows 8 for the Lumia and the company’s future

The year-on-year decline in our Smart Devices volumes in the second quarter 2012 continued to be driven by the strong momentum of competing smartphone platforms relative to our Symbian devices, partially offset by sales of 4 million Lumia devices. All regions showed a significant year-on-year decline in the second quarter 2012 except for North America, where the sharp decline in sales of Symbian devices was more than offset by sales of our Lumia devices including the Lumia 900 with AT&T and the Lumia 710 with T-Mobile. ** *In the US, our stuff sucked but we sold some Lumia Phones so it kind helped hide the fact that nobody in that country is buying our phones..

Some sunny news about the Lumia

– In April, the Nokia Lumia 900 went on sale in the United States exclusively through AT&T. Lumia 900 sales exceeded our expectations from the start at AT&T and was consistently among the top selling smartphones on Amazon in the United States. The device is our first LTE phone and has won praise for its design. According to a survey of US customers conducted for Nokia by the independent research company Nielsen and published in July, 95% of Lumia 900 owners are willing to recommend the device to others. Nokia also launched a non-LTE version of the Lumia 900 in other parts of the world during the second quarter. *** People who buy our Lumia phones in the US love them and even though they say they will tell other prople, they just don’t tell anyone else

and then the Outlook

– Nokia expects its non-IFRS Devices & Services operating margin in the third quarter 2012 to be similar to the second quarter 2012 level of negative 9.1%, plus or minus four percentage points. This outlook is based on our expectations regarding a number of factors, including:
– competitive industry dynamics continuing to negatively affect the Smart Devices and Mobile Phones business units;
– consumer demand particularly related to our current Lumia products; and
– the macroeconomic environment.
– Nokia expects the third quarter 2012 to be a challenging quarter in Smart Devices due to product transitions.
*** It’s going to be a tough third quarter and we have to legally tell you that we’re not sure our phones are going to sell well. Our Lumia is in transition and the rest of our phones aren’t doing that great. Buyer beware.

So, the question is, how many phones did Nokia sell in the second quarter in the US?


That’s 900,000 less than the same time last year if the chart isn’t lying.

Let’s put this in perspective. Verizon alone (just Verizon) reported selling 2.7 million iPhones in the same period and that’s just Verizon!

So, where is all this going? What’s going to happen to this MSFT/Nokia union?

I have some opinions about where this will end.

This is especially tragic because everyone I know who has a Nokia Lumia LOVES it. They tell you how much they like it BUT they don’t evangelize.

They don’t seem to care if you have one too. I have never met a rabid Lumia fan who would do anything to get you to buy a Lumia too.

Ultimately, that seems to me to be the problem. Apple has disciples, Google has disciples and Windows Phone has happy users.

My theory is as follows:

Windows 8 will get here in October/November and will have the press and consumers buzzing with understandable confusion (Metro is a big change).

Windows Phone 8 will be tied to Windows 8 and there will be brand confusion for some time while consumers try and sort out what’s what.

In addition, there will be confusion from all the stories from consumers who feel screwed because they bought a phone in the summer that was replaced in the fall. Not a fun story (no matter how accurate or defensible you think that action was).

Right around then, the iPhone 5 will be released and the press will effectively help it sell at record levels (assuming there is no anomaly with the phone).

Nobody will care about the new Lumias because Apple (as usual) will just tell a better story.

Android will also have competitive units and between those 2 vendors, there will be very little room for a number 3.

There are several possbilities at that point.

  • Windows Phone 8 on the Lumia could be an amazing rip roaring success (hard to see but possible)
  • At some point in the future, Microsoft could buy Nokia (unlikely)
  • At some point in the future, Microsoft could make their own phones with Nokia (as opposed to the Lumia)
  • At some point in the future, Microsoft could make their own phones with someone else
  • At some point in the future, Microsoft could just invest and make their own phones

Only one of these options sees Nokia walking away happy and that’s a slim chance at best.

Bottom line is, this isn’t rocket science. The train is headed firmly off the tracks re: Windows Phone and the Nokia Lumia.

Both Microsoft and Nokia each need to have a plan B in the works for their companies otherwise this won’t end well.

Windows Phone 8 plays an integral part of the overall Microsoft vision.

I think it deserves better than this..

That’s what I think people.

What do you say?

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