Nokia and Windows Phone have struggled through a tough first half as part of the handset maker's transition to the new smartphone platform. The poor financial results at Nokia ended with one bright point: sales of the Lumia Windows smartphones are growing, laying the base for a possibly better second half.
It's clear that 2012 will be no great year for the company. Nokia has admitted as much itself, calling 2012 a transition year. This suggests the company hopes to return to better results in 2013. The financial reporting since the start of 2012 points to the need for a turnaround.
Revenues in Q1 fell by 29 percent, and Nokia reported an operating loss of EUR 1.3 billion, versus a profit EUR 439 million a year earlier. The division Devices & Services generated sales of EUR 4.2 billion, down 40 percent year-on-year and 29 percent lower than Q4 2011. Nokia sold half as many smartphones in the period as a year earlier.
The trends of the first three months of the year continued in a disastrous second quarter. Nokia reported a second-quarter loss of EUR 1.4 billion, and revenues fell 19 percent to EUR 7.5 billion. But for the first time in six months, there was a small sign of hope: Nokia sold 4 million Lumia smartphones in the quarter, up from 2 million in the first quarter.
To date Microsoft has paid a total USD 750 million in so-called 'platform support' payments to Nokia as part of its switch to the Windows OS. With this money Nokia was able to sell around 7 million Lumia handsets, equal to a cost of USD 107 per phone for Microsoft. It should be noted that Microsoft is investing in the platform for the long term, and the investments are not expected to have a direct return. Much will be spent before any profits are realised. It's not known how much Nokia pays Microsoft for each handset sold, but rumours have suggested a royalty of USD 15 per unit. Over time, the royalties should balance out the platform support payments.
The companies will be working hard to reach such a balance in the next six months with the release of Windows Phone 8. Microsoft's partners for the latest version of its smartphone OS include, in addition to Nokia, Samsung, HTC, ZTE and Huawei. These are big names, but in the end it will depend how much attention they devote to Windows Phone. At the launch of Windows Phone 7 in the second half of 2010, Microsoft had Samsung, HTC, LG, Dell and Asus as partners. In the end they all chose to focus on Android, and Windows Phone was only a marginal business.
The partnership with Nokia announced in early 2011 sees Microsoft trying to boost the profile of Windows Phone. As Nokia enters the last six months of its transition phase, the company has just one choice to drive Lumia sales: it must compete aggressively on price in order to further build scale. This inevitably comes at the cost of margins, raising the question how long Microsoft is willing to shore up the project to bring Nokia's Windows Phones to the mass market.
This could clearly take some time. But does Microsoft have any other options? For its part, Nokia has already said it does have a ‘plan B’.
