Mistakes, heavy competition forces Nokia to reboot

Microsoft is helping Nokia to further lower the cost of its smartphones, as it aims to better compete with Android

Nokia is betting on camera functionality, navigation technology and further price reductions for its Windows Phone-based products to turn the company around after a round of cost cuts. Breaking Apple's and Samsung's stranglehold on the smartphone market won't be easy, however.

Nokia's announcement Thursday that it will lay off 10,000 workers by the end of next year to cut annual operating costs by an additional €1.6 billion (US$2 billion) doesn't surprise analysts.

"It is definitely a move where Nokia is facing up to reality. The size of its business needs to reflect the market opportunity the company has today, and that is very different from Nokia in its heydey," said Ben Wood, director of research at CCS Insight.

Richard Windsor, global technology marketing analyst at Nomura International, agrees: "The company needed to announce something fairly drastic in order to realign itself with the reality it faces."

Earlier this year, Nokia announced that it would be laying off workers in Europe and Mexico and move some manufacturing capability to Asia to be more efficient.

For Nokia, a combination of factors have put the company in an increasingly difficult situation. Nokia's strategy simply isn't playing out as well as it had hoped, according Wood. Sales of its Windows Phone-based Lumia smartphones haven't taken off to the extent it needs, the appetite for Symbian-based smartphones has disappeared very quickly and Nokia has also struggled in the feature-phone sector.

In general, for companies that aren't Apple or Samsung Electronics, today's smartphone landscape is pretty grim.

"It is such a difficult, competitive market. The stranglehold that Apple and Samsung have on the market in terms of both units and profits is just leaving crumbs for the rest of the market to fight over," said Pete Cunningham, principal analyst at Canalys.

"The fundamental challenge has been breaking through the strength that Android and Apple have in the retail environment," Nokia CEO Stephen Elop said during a conference call related to the changes.

Ultimately, Nokia has to make its feature phones and smartphones more attractive to consumers. To achieve that, Nokia is betting big on imaging and location technology.

The Symbian-based PureView 808, with its 41-megapixel sensor, has changed the game in photography and will appear in the rest of Nokia's smartphone line-up in the future, according to Elop.

Nokia also plans to acquire imaging specialists as well as all technologies and intellectual property from Swedish company Scalado to boost its capabilities.

"The problem Nokia faces is that other manufacturers have really seized the agenda with camera capabilities ... But we are seeing signs with the PureView technology, although on the wrong software platform, that Nokia still has a very strong competitive edge," said Wood.

When it comes to navigation, Nokia Public Transport -- where users can do navigation that incorporates public transportation systems -- and the augmented reality features of Nokia City Lens show the company's lead, Elop said.

One of the challenges Nokia faces in the navigation sector is scale, which you need to be able to do to crowd-source data such as the location of traffic jams, according to Wood.

"Nokia does still have scale, but it is rapidly being caught up by Apple and Android," said Wood.

A key part of Nokia's plan is to offer lower-priced, Windows Phone-based smartphones in order to better compete with Android.

"We have plans already to go lower than the Lumia 610. But part of what we have been able to do with specific support from Microsoft is identify ways to go even further than we had anticipated," said Elop. In the U.K., for example, the Lumia 610 is priced at £160 including VAT but not including a contract.

Nokia needs to compete with Android aggressively, and the low-end price war is an important part of that, according to Elop. However, changes made by Elop to help turn around the company aren't related to just its phones but also to sales and marketing.

Jerri DeVard is stepping down as chief marketing officer, to be replaced by long-time employee Tuula Rytila, who has been a rising star within Nokia, according to Wood.

"DeVard's big focus was the Lumia products, and I think there were some mistakes made along the line with how the Lumia phones were marketed," said Cunningham.

The "amazing everyday" campaign was good to raise awareness, but it should have been followed by more product and feature-focused campaigns on why people should buy the phones, according to Cunningham.

How phones based on next generation of Windows Phones do is critical for Nokia, according to Windsor.

"With the cuts that Nokia has made, it is really cutting into the ability to develop things on its own. So the company becomes more dependent on Windows smartphones than it ever was before," said Windsor.

Elop isn't revealing much about the next versions of Microsoft's OSes.

"The catalyst of Windows and Windows Phone 8 coming out sometime, perhaps later this year, or whenever, is clearly attracting a lot of attention," said Elop.

Microsoft is expected to reveal more details about Windows Phone 8 on June 20 at the Windows Phone Developers Summit in San Francisco.

Even if Nokia is getting preferential treatment from Microsoft, it needs even more support from the company on Windows Phone; the OS isn't being developed quickly enough, according to Cunningham.

"Nokia is the main vendor and if it fails, Microsoft fails as well. They are in it together," said Cunningham.

Send news tips and comments to mikael_ricknas@idg.com

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