Why did first Nokia Lumias fail and what it means to the prospects of Lumia 920 and other NWPs. Part 2

This is part 2 of Eldar Murtazin’s Mobile-Review.com article looking into why Nokia Lumia failed. The first part dealt with the mistakes Nokia management made during global Lumia launch. In part two we take a look at mistakes on a local market level and consequences the failed Lumia launch will have on Nokia’s Windows Phone 8 devices. All data is from #3 Nokia market – Russia. Device prices are in Russian Rubles, converted into US$ at current 1/31 rate. 

Nokia’s global missteps coincided with the problems in local markets, e.g. Russia. It is no secret that under the new Windows Phone promotion concept the careers of every employee depended on his involvement with the new product, and its success. Armed with the marketing club and daydreaming about the benefits from successful launch, Nokia employees introduced the new product into the market without bothering to really check the potential market size and actual demand. This also contributed to the failure of Lumia line.

In Russia, for example, Nokia gave away more than a thousand Lumia 800s for free to potential promoters. I received 8 Lumia smartphones as a gift from Nokia employees on a launch day, which coincided with my birthday. Nobody cared that a significant part of those free phones will end up on grey market, for a price which is lower than in official retail. Grey Lumia 800s went for 18-19K Rubles ($580-610)  (vs 21K – $670-  officially), and were rather widely available. But this was expected and not critical.

A lot of the first batch Lumia 800s were returned and/or exchanged due to manufacturing defects. Which affected the secondary market, where you could get the 800 for 17-18K Rubles ($550-580), only few weeks after launch. The term “refurbished” only tangentially applied to a product which was launched only several weeks ago, with a huge marketing campaign still underway. Very soon the difference between “refurbished” and new phones got to 30-50%. This created a certain expectations for some users that Lumia 800 should be priced there.

Growing inventories also led to the growth of grey market, when channel partners in other countries started dumping overstocks below cost. Which put additional pressure on prices.

I could continue to list the local Nokia missteps which created the wrong perception of the Lumia line. But they are neither that interesting, nor important as Lumia 800 advertising expenses during battering ram promotion stage.

Lumia 800 advertising expenses – ramming into the Skyscraper

It is quite often and unfortunate that people inside big corporations try not to dwell too much on some numbers, because doing so can lead to a pretty unexpected and unpleasant conclusions. For example – the total amount of money Nokia spent on Lumia 800 promotion in Russia wouldn’t show anything tragic. Especially if you compare it to the N9 marketing budget. Yes, it was higher, but not by an order of magnitude. Things start to look very different if you check Lumia 800 advertising costs per unit sold.

In the chart above you can clearly see how much did it cost to sell 1 Lumia 800 device during the “battering ram” marketing stage. Nokia would have been better of if it just gave Lumias away during January 2012. They would have saved money, and got even more “sales”. The costs above do not include the PR expenses and social network promotion costs under PR budget line.

So what’s different about Windows Phone 8 and Lumia 920 from business POV?

With Windows Phone 8 – we get new generation of smartphones, Windows RT tablets and – most importantly – full backwards compatibility guarantee from Microsoft. Up to 2014, through 3 iterations of WP8 releases. Windows Phone 9 is scheduled for 2014. It will have full app compatibility with WP8, but devices from late 2012 and early 2013 won’t be upgradable. But I don’t think it is a big problem – long upgrade cycle/support is not as important as some people insist.

Unfortunately for Nokia – they do not get a fresh start with the launch of Windows Phone 8, like they had with WP7.x. Last year, entering a completely new (for them) market, Nokia had quite a few advantages it currently lacks. Here are some of them:

• Higher customer loyalty, higher sales;
• Low awareness of Windows Phone platform;
• Lack of strong competition in this market;
• No licensing fees to Microsoft, $250 million a quarter in platform support payments from Redmond;
• Possibility to start from clean slate, no ties to other Nokia products;

From business POV, Nokia also got maximum PR benefits from the press (reviews of Lumia WP7 devices ranging from mildly positive to high praise). The amount of Lumia launch advertising reached record levels both for the company and market overall.

Now lets see what has changed in a year (from business POV), and how those changes will impact WP8 launch.

• Lower customer loyalty, as measured by absolute decline in Nokia smartphone unit sales;
• Negative perception of WP7 platform, stemming from the defects of Nokia smartphones, the whole flagship and pricing mess  - it will be transferred to WP8;
• Starting from 2013 Nokia will have to start paying licensing fees to Microsoft;
• High inventories of WP7 devices both in the partner channel and Nokia warehouses;

For Microsoft – Windows Phone 8 is more or less a clean break, and total abandonment of WP7.x. For Nokia – things are different. They have several million devices already in the channel, which will have to be sold, even if Nokia will have to dump prices. The Finns became hostages of WP7 failure and the efforts they expended earlier.

There is no clean break for Nokia. And that will have a few interesting consequences.

Let’s see which models dominate sales channels now. The answer is not as obvious as it looks. It is the flagship Lumia 900, and Lumia 610. After initial oversupply of Lumia 800, Nokia put this handset under tight control, and managed to get down to the acceptable  manufacturing to sales ratio. Other devices, for some reason, escaped the scrutiny and inventories piled up. Nokia now has two options – write down all the manufactured Lumias that they are unable to sell before WP8 launch, or try to sell them. Nokia already has an acute cash flow problem and is selling various assets to mitigate the loses it has to report. And in a situation like this – nobody will go for the huge write-off, they will try to sell the devices they have on hand.

This will be painful and protracted process, with a lot of discounts. And herein lies a time bomb not only for Nokia, but for the Windows Phone market as a whole. The difference between Nokia and other WP vendors is that none other depends on the success of Windows Phone. They can and are ready to sell Windows Phone in amounts they do today, at the same prices, and be happy with the profits they get. There’s no real competition between HTC and Samsung who will be #1 in Windows Phone market. It is too small and has no impact on business results of either. Nokia, however, is fully dependent on the success of Windows Phone.

And the company is about to make another a set of mistakes that’ll cost it its future.

First – Nokia will repeat the story of Lumia 800, and release the next flagship in January. They have dusted off and put into action the same old “rolling thunder” 2-3 month release cycle plan. Nokia will try to win U.S. market again with a refresh of Lumia 920, without any hope for success.  This is a gigantic mistake – every new device will cut into the sales of older models. Furthermore, the budget Nokia Windows Phones would run Windows 7.8 in an effort to move the remaining inventory of Lumia 610 in a new dress.

Second – there’s the pricing of Lumia family.  Nokia had already reduced wholesale Lumia prices by 15% worldwide in September. They had to – they are trying to clear the inventories. Although wholesale price reduction will not directly result into similar retail reductions – in some places costs will be higher, elsewhere they will be lower. Here’s the forecast for retail prices of current Lumia line for January 2013 in Russia:

Now try to squeeze in the Lumia 920 flagship in here, when Lumia 900 goes for 21K Rubles ($677).

Samsung Galaxy S3 costs 24000 Rubles  ($775). Because of that and according to Nokia ideology, its flagship should be priced at the same level. Nokia hoped that Samsung will keep its flagship prices higher (in the range of 27K ($870)  for one more quarter, but that didn’t happen. For Lumia 820 – the pricing puzzle is even simpler. To get any sales traction it should cost no more than 20K ($645). And this is the ideal, most optimistic forecast. It is possible that Nokia will decide to price Lumia 820 at 23 000 Rubles ($740) and Lumia 920 at 27 000 ($870), which will kill any possible sales completely. At that price new Nokia NWPs do not have a chance.

Unfortunately, as I said earlier, Nokia became a hostage of its own bad decisions and is unable to start from clean slate. Until Sept. 5th, in 10 months, Nokia said that they were able to sell only 7 million Lumia devices worldwide. To compare – Samsung sold 10 million Galaxy S3s in 3 months (100 days to be precise), and more than 50 million in the last quarter. The comparison is not in Nokia’s favor, they are simply losing the game. What’s more – this is a circumstantial proof that Nokia lacks a business case to make an impact with the launch of WP8 smartphones. There’s simply preconditions for that.

I would like to stress that I deliberately didn’t dwell on Windows Phone 8 consumer appeal. I was simply examining the business case. I think this article leaves no doubt that top Nokia management made a lot of mistakes, and, with persistence worthy of a better cause, insists on repeating them. Well, by now they didn’t have a way out of the situation they created, anyway. But they got into this hole all by themselves.

This is part 2 of our look into the reasons of Lumia failure. You can find part 1 of this article, here.

If you liked the post, you might find these interesting too:

• Why did first Nokia Lumias fail and what it means to the prospects of Lumia 920 and other NWPs. Part 1
• Nokia Lumia 800 vs Samsung Galaxy S2 vs iPhone 4S/4 price comparison and NWP shipment expectations
• Compal to start delivery of Windows Phones to Nokia in September. 2 million units ordered for Q4 2011
• New Nokia EOS Windows Phone 8 handset with PureView camera headed to AT&T?
• Nokia Lumia 610 launched in China for half the price of a Lumia 800

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