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Is Nokia worth less than Skype?

Yesterday Nokia warned that its guidance for the quarter and the year were “no longer valid.” The surprise to me is that management was surprised. In February I warned that even if Nokia could fool consumers into buying products whose platform was publicly executed, distributors and operators would not likely go along with the deception. Pricing collapse is the proof of a channel breakdown.

That seemed predictable. What I struggled with was how Nokia itself could present such an optimistic forecast. Absent any explanation, Nokia’s forecast of robust sales for Symbian products into the near future belies a failure of understanding of the dynamics of platforms and especially the impact of destruction of trust and brand value that commenced in February. Distress is a slippery slope and it does not model well in a spreadsheet. It takes a leap of non-linear faith to predict the piling-on effect on the up- and the down-side.

Faith in the company’s guidance meant that the market reacted to the bad news by discounting Nokia down to a market cap of $26.7 billion. One analyst even cut his target price down to $4/share, 57% of yesterday’s close. How can this fair? What is Nokia’s phone business worth?

Here’s a quick sum-of-the-parts analysis. After yesterday’s hair cut Nokia’s overall enterprise value is about $20 billion. The Navteq part of the business (purchased for $8.1 billion in 2008) could get a value of $3 billion (based on about 3x sales) and the value of Nokia Siemens networks could be at $6b (less than 0.5x sales). That makes Nokia’s phone business worth about $11 billion.

An alternative view based on “the Motorola case study” $4 target price would imply an overall enterprise value of $11 billion. This either makes Navteq and NSN worthless and Phones worth $11 or it makes the phone business worth a lot less than $10 billion. Perhaps less than $8.5 billion which is what Microsoft paid for Skype. Should we be shocked? Nobody would argue that Nokia is worth more than Facebook so who’s to say that Skype or Twitter aren’t more valuable than a device company in crisis?

I don’t try to predict the market’s behavior, nevertheless, the markets are now very skeptical that there is much in Nokia to salvage. It’s perhaps unfair and illogical but this is the end game of disruption. It ends much more suddenly than it begins. It’s the consequence of nobody noticing the beginning that makes the end so shocking.

  • WKT

    Very interesting article. But there is one disputable assumption – why you think the martet value of Skype is B8.5$ ? It might be far overpriced value paid by Microsoft…

    • asymco

      The market price is by definition what is being paid.

      • http://twitter.com/timopg timopg

        Nokia has about $10 billion in net cash and the company has been shopping around a portion of Nokia-Siemens to private equity according to various news articles for about a $3 Billion valuation. I would imagine that Navteq would be part of the acquisition since much of Nokia's mapping technology is based on it.

  • Gromit1704

    Microsoft fiddles with Skype as the platform burns.
    Maybe I read it wrong, but Nokia was supposed to be Microsoft's lifeline. An instant marketshare for Windows Phone 7 OS, gatecrashing the party they are 3 years late for. If Nokia fail then the likelihood of WP7 failing seems more likely. I have to agree, the endgame of disruption.

    • CndnRschr

      Elop considered both Android and Windows Phone 7 for Nokia. Microsoft could not afford to have Android be bolstered by Nokia and so made an attractive counter offer for exclusivity. This conjoined their fate in this market. When two boats are taking on water, does it make sense to rope them together?

      • Walt French

        Indeed, nokia nominally can decide to change horses (say, to Android) and Microsoft nominally (actually) has the option to build closer relations with HTC or others; both options are forgone with an acquisition.

        Every option has value so the benefit of tying two behind-the-curve players would have to outweigh the lost optionality. To me, it looks the other way ’round: like a three-legged pair against world record holding milers.

        But the real reason I can’t imagine this merger is that it would paint a “no excuses anymore” bullseye on Ballmer’s forehead. If you’re clairvoyant at roulette, you put all your money on 00. Otherwise you play more winnable bets and hope luck runs your way long enough to cash out in the black.

  • timnash

    Perhaps it's time for Apple to make an offer to license Nokia's patent portfolio. Nokia's management will need cash to get through the transition to WP7 and would be foolish to refuse a reasonable offer, especially as that offer would be part of the evidence and could strengthen Apple's position in current and future patent cases where Nokia sues Apple.

  • Man on the moon

    Nokia has US$ 9.8 billion net cash after dividend paid last month. That is US$ 2.30 per share.

    • newtonrj

      Important point!

      Still, if AAPL licensed their portfolio, it would be revenue this quarter. And less legal costs ongoing. -RJ

    • asymco

      They also have debt. The net of those and the market cap yields enterprise value, which is what I started with ($20 billion).

      [edit: on looking at the data again today, Nokia's enterprise value has dropped to $15B. This puts the value of the phone business well in range of Skype]

  • Waveney

    Expect Apple to finally break out of the mid $350 range as this news sinks in. Investors will have no choice but to follow the money.
    The sense of deja vue is palpable when thinking about Microsoft's miss-steps, mis-timing and mistakes in the mobile arena – they could have done better by killing their corporate strategic planning dept. and reading Asymco for the last twelve months.

    'Distress is a slippery slope and it does not model well in a spreadsheet.' That is a quote to treasure.

  • 2sk21

    Nokia still seems to have a big presence in India (just got back from a trip there). However, India is still mostly a feature or dumb phone market at present. I inquired among my friends and nobody in India was aware of the demise of Symbian

    • pk de cville

      But the operators do! And their fleeing to whatever in droves.

      • asymco

        So what happens when people do find out? I think the market is less and less likely to make the bet that people will remain ignorant about software platforms as time goes by.

  • TheOtherGeoff

    Nokia has a big presence everywhere by footprint in the feature/dumb phone space…. it's just that it's overshadowed by the smartphone ARPU and associated Profits. I'm sure there were buggy whip makers that were cleaning up as the market consolidated in the early 20th century… doesn't mean it will carry going forward.

    The fact that Nokia is not innovating, and Microsoft will split the profits on any SmartPhone sales make any Apple like profits unlikely. Then announcing a year a head of time EOL (effectively) on symbian technology has to make the channels wary. You may have well said, 'buy WP7 phones from LG until Nokia tools up and delivers a compelling product, which may be never."

  • RobM

    Most would agree that Nokia's demise stems from Apple's iPhone entrance. It therefore beggars belief that Nokia's senior management did not look at how such product transitions have been handled by tech companies, where Apple's Mac-transition from PPC to Intel chips in 2005-06 is a textbook case of how to do it right!

    It is pretty obvious that Apple were well on the way with the transition before they announced it, and they had the transition well planned, including dealing with legacy apps on the new architecture. They said it would take a year, but the first Intel Macs appeared on the market within 6 months, and the whole transition was complete within 9-10 months.

    Nokia's major error was to announce the change before they started, to give a vague timetable which few believe they will adhere to, and to liquidate their legacy platform without having the transition in place.

    I love Horace's quote:
    '…this is the end game of disruption. It ends much more suddenly than it begins. It’s the consequence of nobody noticing the beginning that makes the end so shocking.'

    Nokia's smartphone collapse will be a textbook case for many years at the world's business schools!

    • asymco

      The sinister thing about disruption is that you don't sense it's happening. At least not with the senses you've developed while being rewarded for optimizing a business. For this reason, the notions that (a) you are in danger (b) that danger is significant (c) the cause of that danger is some company you don't respect or fear are not apparent until well after the threat has become clear and present. Some never believe it happened at all, even after the fact, and place blame in all sorts of places.

  • davel

    I take it Nokia has fallen off a cliff in Europe. What about the 3rd world? Are they still selling phones there?

    I would think Microsoft can throw it some $$ instead of burning its money by buying back stock.

    • chandra

      The (Western) concept of a 3rd world is a moveable feast which is fast disappearing as time passes.
      When one country is 'owned' by others, which world does each belong to in real terms?

    • Marcos_El_Malo

      I've got to sort of echo chandra here, although "ownership" of countries is a whole 'nother kettle of fish.

      In the post-coldwar period, the term Third World no longer means anything. There's Developed Countries, Developing Countries, and Undeveloped.

      You might argue, "you still know what I mean," but no, I don't. Use words that mean something, not outdated catchphrases or codewords, to say what you mean. If a changing world means updating your vocabulary, then so be it.

      This isn't an issue of political correctness. It's about effective communication.

      • davel

        Did I strike a nerve here?

        My apologies.

        I will rephrase "I take it Nokia has fallen off a cliff in Europe. What about the 3rd world? Are they still selling phones there? "

        to

        "I take it Nokia has fallen off a cliff in Europe. What about countries not including North America and Europe? Are they still selling phones there? "

      • Marcos_El_Malo

        Thank you, David. I appreciate the effort. Imprecise language is what strikes a nerve. "Third World" is an archaic term that is used out of laziness (and I'm lazy as well, so please don't feel I'm singling you out!).

        Anyway, we now end this tangent to get back to our regular program. Can someone answer David's question please?

      • davel

        I do not believe I was being imprecise but will try not to offend here.

        1 world – developed
        2 world – developing
        3 world – not developed

        are terms. in my case it is a rank 123. i was not trying to be pejorative. in the phone world as far as profits i would group europe/usa together and then everyone else.

        i realize china is making a mark on apple finances. india which is roughly in the same boat as china was slighted by apple when they did not ship when some there would have liked. my impression of india is that it doesnt have the infrastructure for apple mobile to pay too much attention to. i was watching a program where a guest stated that india's infrastructure is not as good as china's which surprised me.

        both are dynamic economies where there are large numbers of middle and upper class people and a much larger group of poor. they both have very developed areas and very expensive areas, but they do not play in the same mobile space as the us and europe right now do to many factors including politics.

      • asymco

        They are suffering a different sort of pressure in developing countries. Android is an issue but I suspect they are seeing erosion across their low end portfolio as well from "grey market" products.

  • Ajay

    Apple built a smartphone OS from scratch in couple of years without ever having made a phone or connected device before. Nokia, pioneers of smartphones in every sense, have no worthy answer 4 years after debut of iOS.

    Nokia is a classic case of companies being too invested in their past.

    • davel

      After reading various articles on Nokia it seems that they are heavily focused on hardware and not so much on software. Some of the things I read if true show complete incompetence with regard to managing software development.

      • simon

        I'd argue even their hardware isn't that desirable any more. The latest demand is to have a fast processor, a decent amount of RAM, large high resolution display, etc, and for most part Nokia's devices fall short against latest competition in almost every one of those categories.

        Instead of realizing where the market is going, Nokia invested more in getting signal and a sturdy metal casing, two things high end smartphone customers care less about. This is simply a terrible lack of guidance and market intel. from above and I just can't believe a dominant player would go down so quickly.

      • http://twitter.com/Niilolainen @Niilolainen

        I disagree

        I think that Nokia's HW design has been pretty optimal given the OS. Their displays, cameras, mechanics, audio, plus quality and reliability etc are second to none.

        I criticized (on this blog) the N8's processor, but on reflection I think that was unfair. I think they have taken good decisions based on their OS (Symbian). Symbian running on a Tegra 2 would be like putting a Ferrari engine into a VW Polo. I think they have selected processors and RAM based on this limitation.

        I am convinced that the HW for WinPhone will be excellent, just not convinced the industrial design will be up to snuff or that their partners from Redmond will deliver anything compelling

      • simon

        "Their displays… are second to none. "
        – Their displays are second to none? That seems a bit of a hyperbole. Even the E7 is substandard with a 4" screen of only 360×640 resolution. Just look at Android phones and the iPhone from last year let alone this year, most of them carrying large high resolution screens. Nokia is significantly behind here. ClearBlack is nice but not enough.

        – mechanics, audio and "quality and reliability" all have mostly become secondary buying criteria to the buyers of high end smartphones. You battle with user experience and specs, namely processor and display. The N8's camera is very nice but the phone is so much behind in other aspects.

        "Symbian running on a Tegra 2 would be like putting a Ferrari engine into a VW Polo."
        – Highly disagree. When I tried web surfing on the N8 it was painfully obvious the device was screaming for a faster CPU and more RAM as well as a better implemented graphic engine behind.

      • http://twitter.com/aegisdesign @aegisdesign

        I'd agree about the E7. It should have at least an 800×480 screen although the technology the screen uses itself is very good.

        Web surfing on the N8 is hamstrung by Nokia's awfully ancient browser. You only have to put Opera 11 on the N8 to see how it's quite capable of giving a modern smartphone browser experience. Nokia are very late (again) with an updated browser and javascript engine. It was supposed to have been released already but now it's looking like after the summer with a minor tweak to the existing browser coming in the PR2 'Anna' release due 'in the coming months' or 'next week' depending on who you read.

      • asymco

        You would be mistaken if you assumed "focus" is described by spending. Nokia spent more on software development than Apple spent on hardware and software development. http://www.asymco.com/2011/02/04/nokia-employs-as

    • r00tabega

      Ajay,

      It's best to think of the iPhone as a portable multitouch computer with a Phone app.

      Apple heavily leveraged their knowledge of operating systems, multi-touch, component design, UI magic, marketing, media savvy and supply-chain logistics.

      Looking at it this way, Nokia was clearly outclassed. All Nokia did were phones/OS and everyone hated Symbian.

      Quite a few folks back in 2007 spoke of the disruptive power (several of whom worked at Google, who quickly revamped Android to subsume iPhone features). None of them were heard at the top echelons of Nokia.

    • Geronimo

      Ajay, Apple most definitely did not build iPhone OS "from scratch". The part that was created from scratch is the multi-touch and user interface layers. Those come on top of a stripped down version of Mac OS X, an OS that has been in the making since the mid-80's (dating to Jobs's NeXT computers). And that is without even counting the Unix underpinnings of Mac OS X which go even further back to the 1970's. So, we are talking about a code base of many millions of lines of code and an investment of millions of man-hours. One should not underestimate the difficulty of creating a high-quality smartphone OS. Apple could do it by leveraging their expertise and intellectual property in operating systems and interface design, but that does not mean anybody can pull off a similar feat, even a company such as Nokia with expertise in traditional cell phone technologies.

      • handleym

        Of course Nokia had access to much the same code base…
        I assume, given the liberality of the BSD license, that they could have used (or at least licensed) BSD code; or they could have taken Meego more seriously.

        To my eyes, focussing on the technical details here is not helpful. The REAL problems, it seems to me are two-fold
        (a) Business model: Apple knew what it wanted to achieve. ONE device that did what it did really well, , and that sold to ONE target market — westerners with disposable cash.
        Nokia, on the other hand, tried to continue what they'd always done, selling both to impoverished Africans and wealthy Finns. That sort of attempt to be everything to all people almost always results in a less than satisfactory product. You can get away with it when the differentiators are in the manufacturing, but it becomes impossible to sustain when the differentiator is software. What seems to happen is that either your low-end compromises make your high-end experience suck, or you balkanize into so many slightly different pieces of software that no-one can write software that works well anywhere. We've see both MS and Sony go through versions of this experience, and it's not clear whether Android will follow this route.

        (b) Goal: Apple's goal was a kickass portable computer. Nokia's goal was a kickass cell phone. These different goals obviously lead to different emphases. The problem is that Nokia, against all evidence and common-sense, refused to believe, in 2007, that if people had to choose, most of them would choose the kickass portable computer against the kickass cell phone.
        The analogy here is the music industry which, likewise, refused to accept that people would prefer the convenience of portable mp3 players (at, perhaps, lower quality audio) over the "lossless fidelity" of CDs.

        (And it doesn't end.
        We saw the same thing with the intro of the MacBook Air, where again we heard a crescendo of idiots claiming that access to an optical drive was vastly more important than a thin, light portable computer.
        We saw it with the intro of the iMac, in all its various form factors, as people insisted that having access to expansion cards was top of every buyer's computer feature list.
        There seems to be some sort of mass stupidity in the tech industry that simply will not believe that new devices, that make DIFFERENT COMPROMISES from what has gone before, might nevertheless better match what most users want.0

      • David

        Collectively Android tries to address the different compromises angle by offering keyboards, or huge phones or really cheap phones, but now they get the fragmentation mainly because of the lack of topside leadership in the name of openness and lack of accountability(Don't blame me, the carrier did it.)

  • http://www.informationworkshop.org Mark Hernandez

    I know this post is about the valuation of Nokia, but Nokia's value is tied to how it can address its customer base.

    Here's something it appears no one has yet considered, which I think may be pretty HUGE…

    It appears to me that Nokia may have hitched its wagon to a less than optimal solution in the smartphone arena.

    First consider the range of customers out there, from those in some spheres where having simply a dumb phone means power and freedom, all the way to the top end where having an iPhone offers one a sharp competitive advantage.

    Now consider the current offerings. iOS, WebOS, Android, WP7, and, well QNX/Blackberry.

    iOS clearly has the widest "dynamic range." It's so dead simple an infant or a grandma immediately knows how to make it go.

    On the other end of the spectrum, I myself in a typical week use the following iPhone apps frequently: OmniFocus, Square, BankOfAmerica, Netflix/HuluPlus/YouTube, Facebook, Woopra, WordsWithFriends, Shazam, PocketTunes, Instapaper (yay!), AccuFuel, PomodoroPro, 1Password, RedLaser, Yelp, Starbucks MobileCard, Twitter (begrudgingly), Star Walk (into stargazing) besides the built-in stuff like synched Calendar/Contacts/Notes, browser, maps, MMS, camera, listening to tech podcasts at the gym, and Personal Hotspot. (Don't ask me what I do with my iPad!)

    Whew! That's one helluva "dynamic range" for a single simple platform.

    Next in line, I see WebOS having the most iOS-like dynamic range. Then Android which is more geeky and it's UI is not dead-simple and more like using a PC.

    Now think of WP7.

    Can anyone imagine grandma picking up a WP7 phone and getting along with it right away? And what about the high end? Has anyone other than me imagined what it would be like to use all the apps I mentioned above on a Windows Phone? I would seem that WP7's "app ceiling" is much much lower as there is too much mental power required to remember what a tile is or where it might live. WP7 is dripping in "style" and iOS has virtually none. You get the idea.

    The point is this: Has Nokia hooked up with a smartphone platform that has a much smaller "dynamic range" in servicing the diverse needs of its planet-wide customer base? This IS an important part of the equation is it not?

    • davel

      I haven't held the various phone OS's listed here so will not comment on the relative strengths of the above.

      I will say this about the range of customers you need to address. Smart phones are very useful but have a short life. It would be nice to use a phone for more than 10 hours. Phones used to do that, but the new high end phones do not. The faster processors and big screens kill the battery.

      My understanding is RIM does well in markets that want email, phone and text.

    • http://twitter.com/aegisdesign @aegisdesign

      Symbian and certainly Maemo/MeeGo have a lot more 'power user' features than any other platforms – full multitasking, SIP built in, full bluetooth stacks, USB-On-the-Go, root shell etc. WP7 has none of those, iOS some, Android some more. WP7.5 gets some of those but like iOS and Android, they're neutered so as to not suck battery life rather than pulling Symbian's trick of having a really efficient kernel and coding practices that enforce efficiency.

      Android is starting to get quite a few of the traditionally Symbian only features and that's where most ex-Symbian 'power users' I know seem to have gone. The people more into fashion or really just feature phone users – iPhone. low/mid end Symbian users – Android and Blackberry. I don't know anybody selected a Windows phone knowingly.

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  • http://twitter.com/Niilolainen @Niilolainen

    Nice parallels

  • http://www.loudscreen.com vinner57

    Like many others here I predicted a precipitous fall but I certainly didn't expect it to be this quick. They are clearly being punished for the ridiculously optimistic earlier guidance. The Street will have its revenge.

    I'm just astonished at how this is being handled by Nokia – it's not fun to watch any more.

  • chandra

    This was a well-crafted article Horace.
    Thank you.

  • http://twitter.com/greyarea @greyarea

    Thank you sire, i am smarter than i was five mins ago.

    • David

      "sire"? Now THAT'S devotion. I salute you sire! ;-)

      • http://twitter.com/greyarea @greyarea

        :-)

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  • rjn

    It looks as if they jumped from a burning platform to drowning at sea. They gave up their high end profits to Apple, their losing their low end volume to new entrants like Huawei, while given up the middle ground to Android.

    Nokia is stuck with trying to produce a high end WP7 with few exclusive features that will not be duplicated for less while losing the volume that has historically gave them cost advantage in the moderate and low price points.

    Even if the company get past this crunch where is their future as a phone manufacture?

  • asymco

    Companies in a state of distress show symptoms of poor judgement.

  • N8nNC

    Nokia mistook the iPhone as a phone, as opposed to a "Really Personal Computer" with a voice communication app (plus many other apps). They attempted to respond by building a "better" phone – a classic response by incumbents to market disruption. Google is fortunate that android wasn't further along, so that they didn't have so much history to throw away (and, of course, android has the advantage of Linux roots making it more flexible than symbian and windows).

    The earlier comment of Apple starting iPhone "from scratch" I believe was intended to mean its user experience was built without presumption of it being a phone or a computer and the shoe-horning it into a different package, but instead starting from a blank slate. It seems to me that Apple started with a thought of the end and then worked backward to what was achievable with technology available in 2007, rather than evolving forward from phones (or computers) made in 2006.

    • http://twitter.com/aegisdesign @aegisdesign

      It doesn't really matter what Google use underneath to a point since it's Java on top anyway and of course Nokia wasn't without it's own Linux based OS that they've failed to capitalise on, Maemo, which IMHO has a better UX than any other phone OS out there. Maemo 5 on the N900 is a power users dream and makes my iPad look and feel like a toy.

  • Senator Gronk

    N8nNC: “It seems to me that Apple started with a thought of the end and then worked backward to what was achievable with technology available in 2007, rather than evolving forward from phones (or computers) made in 2006.”

    Apple’s 35-year-old trade secret in full view. And yet no one can see it.

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  • http://twitter.com/aegisdesign @aegisdesign

    That's how Nokia roll.

    They have a history of announcing things months in advance, then being late.

    Or, as in the N900, releasing it as 'experimental', being surprised that it's a minor hit, announcing the OS is EOLd and the developers need to shift SDKs, announcing a replacement OS that won't run on it, announcing a replacement device, not delivering it on time, announcing a new date, being late again, putting the entire OS on the back burner, announcing we're finally going to ship something, teasing us with trailers and 80's songs before possibly shipping something that is 18 months late and probably 6 months behind the curve before sacking half the developers and setting up an official skunkworks division that will probably release some nice prototypes but nothing concrete.

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  • Bazz

    Look I liked Symbian OS in the dumb phones – it had an index of four numbers that would get you to a page you wanted if you remembered the number.
    All OS's depend on indexing iOS uses visual clues. If Nokia had gone alphanumeric system their smartphones would still be in the lead! For example G12A33 could mean GAME 12 Complexity A Speed 33.
    It was just getting the numbers right and some time in learning the meaning in the first letter.

    • http://twitter.com/aegisdesign @aegisdesign

      That's not Symbian. That's S40 or even S30 on their dumbphones.

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  • M.O.D.

    Hi Horace,
    I would go to the Finnish govt and ask them to press Nokia to work with Apple instead. That way they keep the taxes coming. An Apple-Nokia liaison may make sense, to counteract Android's expansion.

  • Billy

    Nokia has just become Palm #2

  • chandra2

    "I fear NOK has to drop a couple more billion in market value before it tempts a bottom fisher.."

    It has indeed dropped a few more billions now ( $5.88/Share, $21.91B). Is it now time to bottom fish? Are all bad news in?

    Also the dividend of 7.8% is very tempting as well, assuming they would not cut the dividends. Of course, the price risk is there.

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  • zmilojko

    So, turns out Nokia was cheaper (well, the phone devision, i.e. the Nokia mobile phones). Just bought for a total of under 7.5B.

    Nice guess Horace.

  • dilharo

    google should have bought nokia for half the price