Why did first Nokia Lumias fail and what it means to the prospects of Lumia 920 and other NWPs. Part 1
This post is a translation of the article written by Eldar Murtazin on Mobile-Review.com. It looks into the business and product planning mistakes that made the first Nokia Lumia Windows Phones such a failure in 2012. The data and analysis is mostly from retailer driven Russian market, but can be easily extrapolated to operator driven markets as well. We look into internal Nokia business and product line formation issues, for which operator subsidies do not matter much. The merits of Windows Phone OS itself, as well as product quality issues of Nokia devices are outside of the scope of this article too.
Today Lumia line has 4 devices running Windows 7.x and is the backbone of Nokia smartphone sales. Let’s try to remember how and when the 4 Lumia devices began selling in Russia:
To launch the new line Nokia chose simple and easy to understand strategy. First – a flagship, Lumia 800 was launched, then came cheaper devices – Lumia 710, followed by Lumia 610. But the key, representative smartphone was still the 800. All advertising and marketing activities in late 2011 and early 2012 were focused around it. Since the end of spring 2012 Nokia cut advertising budgets, and started promoting all 3 Lumia devices without making much distinctions among them.
It was a pretty usual smartphone launch process for Nokia, but it had one very serious shortcoming. The company was used to have one flagship device which, like a locomotive, was pulling all other sales. At the end of 2011 Lumia 800 became such a flagship. But, after only a bit more than a month, a new high-end Lumia 900 was announced, and made it obvious that 800 is only a temporary flagship. The situation in Russia was made even by previous heavy promotion of N9 as Nokia flagship device. For the market that works on a 1 year product renewal cycle (Russia) this plethora of flagships is not an advantage. People are used to invest their money into a phone for one year, and while they expect a gradual price decline, they also expect their device to be competitive during that year (e.g. SamsungGalaxy S/S2, iPhone 4/4s).
And it is not that Nokia didn’t understand it. Nokia knew perfectly well how to launch the new product lines pulled by one flagship device. The problem was on a technical side. The launch of Windows Phone wasn’t planned well in advance, and the company didn’t have engineers who knew how to work with Qualcomm platforms. Nokia was acting as a follower and was exploring a market that was new to it. And it didn’t have the ability to build a product that could compete with iPhone or Android smartphones in such a short time. Nokia management knew that and they decided to compromise.
In March 2011 Nokia adopted a Windows Phone device development plan that had foreseen a high rate of device renewal from the very start. “We should be launching new devices in a rhythm that might be every couple of months, every three months, something like that“, Nokia smartphone EVP Jo Harlow told PC Mag.
Nokia understood that such frequent device launches will cause problems with partners, manufacturing and logistics. But they decided that potential gains will be worth it. As the main benefit, Nokia was expecting the explosive growth of sales which would quickly clear the retail channels from the old models, making a place for the new ones. In the beginning of 2011 Nokia already knew that transition to Windows Phone 8 will be painful, and that old devices will not be upgradable. To create a solid basis of customers, which would promote Windows Phone 8 sales via their choice, Nokia set a key goal to deliver two generations of WP7 devices during the transition period. All the problems of WP7 to WP8 incompatibility were deemed to be acceptable risk, if company would be able to achieve the initial goals. Nokia allocated unprecedented promotion budget for Lumia 800 flagship, to kick-start the whole process. This model was supposed to become the battering ram to vault the new smartphone line into the market, consolidate Nokia’s position and pull the sales of additional models. Also – it should have set the stage for quick release of the second generation of Windows Phone 7 devices. It didn’t happen.
The management believed that Nokia customer and brand loyalty is still high enough for the explosive growth of Lumia 800. And made a risky bet on that assumption, openly ignoring InterBrand data which showed 6 point year on year decline for the Finns.
Unable to correctly gauge its position in the market, Nokia made several minor miscalculations, none of each was fatal. But added together they grew into a set of mistakes that killed all company initiatives. The euphoria around the PR from the new Nokia Windows Phone device launch leaked into product and inventory planning. As a result, Nokia made 3.5 times more devices than they were able to sell in one quarter. Initial Lumia 800 sales promotion via advertising and bonuses to partners pushed Nokia to the next mistake. Lumia 800 sales were pronounced successful before the real the retail results rolled in. To fulfill this phantom demand, Nokia further increased device manufacturing orders.
In the beginning of January Nokia learned that Lumia 800/710 sales were way below forecasts in every launch country, including Finland. And that it will take until the end of the second quarter just to sell the devices that were already in the channel. Nokia fell into the faulty product planning trap – new volumes of products kept arriving and they had to sell, because the second generation of devices was about to be launched.
Partners also were already putting big pressure on Nokia to do something. And the only solution to the stale inventory problem Finnish company was able to find, was a rapid price reduction for Lumia 800/710. Nokia 710 went on sale on Dec 15th for a price of 13 490 Rubles, a month later you could buy it for 10 990 or, if you tried hard enough, even cheaper. 18.5% price decline in 30 days. What’s interesting, Nokia barely changed their official prices since then. They couldn’t – they’ve reached the price cutting bottom they could afford. Lumia 800 price went down 10% in a month back then.
In the beginning of January 2012 Nokia turned to price cutting because they were forced to. It was a necessary measure to clear excess inventory. It wasn’t anything catastrophic… yet. If Nokia would have cancelled the two budget devices – Lumia 610 and 510 – and quickly pivoted to the production of second generation of WP7 phones. Unfortunately, Nokia managers decided to compromise – they cancelled 510, decided to keep Lumia 610, but moved its launch to spring 2012. At the end of March Nokia understood that the sales of Lumia line were not simply below the forecasts – they were catastrophically low.
Before that day – Nokia still optimistically believed that Windows Phone will replace Symbian sales without a drop in volumes. A completely unsubstantiated hope.
Take a look at a chart above [from Feb 11th presentation, ed]. Inside Nokia – they believed that they would be able to fully replace Symbian sales with Windows Phone. But that didn’t happen, for many reasons, the main one being Windows Phone 7.5 OS itself.
The situation was made even worse by the presence of Lumia 900, which was a necessary device for the United States. But for Nokia to make it the least bit cost-effective – they had to launch it worldwide. Which got them the new flagship. By March 2012 Nokia finally cancelled the second generation of Windows 7.x Phones, and refocused all their efforts to the launch of Windows Phone 8 by the end of the year. In spring 2012 the idea of the marketing battering ram was abandoned, the advertising for current models slashed to the level of affordable support to the current sales numbers.
Lumia consumer appeal, the defects of first Nokia 800 and then 710 phones are deliberately not a part of this story. Those issues do not matter from the business point of view. If you look at the situation from biz POV, the main fault for Lumia sales crash rests not with the market, and not with deficiencies of Windows Phone 7.5. Samsung, for example, was able to plan and sell Windows Phones 7.5 profitably. The failure rests squarely with Nokia management and mistakes they made. They have invested money and employee time into the devices that were doomed from the start (WP7.5 second gen.) and then cancelled them. Faulty market forecasts, mistakes in logistics and worsening overall Nokia situation, including perception and PR – all of that hurt them. But the amount of devastation should have been so much less, if only Nokia would have adequately gauged the demand for Windows Phone smartphones and didn’t make product planning mistakes.
This is the first part of the article, where we took a detailed look at Nokia mistakes that doomed Lumia line in 2012. In the second part we’ll look at the consequences of those mistakes and what it means to the prospects of Nokia Windows Phone 8 devices.