With Nokia's Friends Like Microsoft And ATT Who Needs Enemies?

Nokia CEO, Canadian Stephen Elop, unveils the Nokia Lumia 1020, a Windows Phone with a 41-megapixel camera during an event in New York City July 11, 2013. Nokia's next marquee Windows phone, which will sell exclusively in the US at AT&T for a hefty $299.99 USD with a two-year contract. Lumia 1020 preorders begin July 16th, and the phone becomes available online and in stores July 26th. (Image credit: AFP/Getty Images via @daylife)

On July 18th, Nokia announced its June quarter earnings. That followed by a week the dramatically staged press introduction of the new Lumia 1020 in New York City. The 1020 is an incredible device, especially for photographers, journalists who need to submit excellent images online rapidly, and anyone who wants to send excellent images around the internet.. The camera boasts a 41 Megapixel image capture system. They hired gymnasts to perform somersaults so you could to try out the camera's skill at motion capture. The camera also includes an excellent Xenon flash, ball bearings to reduce vibration from hand shake while taking the photo, and many other excellent capacities. For sure, it turns a windows phone into an also ran and maybe Nikon and Canon as well. Why would you tote a 2 or 3 lb. camera around with you when this can slip into your pocket or purse? Yes it only takes algorithmically altered JPEGS but not everyone cares about Camera RAW and its digital purity.

I've been carrying a yellow Lumia 920 for about 8 months now and it is easy to spot in my purse. The battery life is spectacular compared to the phone it replaced. The screen is easy to see and read. Turn it 90 degrees and you can even read it with polarizing sunglasses when outside. Yellow was the theme of the day right down to yellow converse sneakers. Great excitement greeted the demonstration and the jaded journalists there applauded at different features. It was clear the phone was impressive and a hit.

But then we were reminded that ATT has the exclusive rights in North America to sell the 1020 for some period of time. A spokesman for ATT expressed his great enthusiasm for and commitment to the new 1020. However, if we look back over the last 8 months, ATT has been a dreadful partner for NOK. Displays in ATT stores were small, not at all prominent and many of the sales people were not particularly well informed about them. Supposedly that is changing with the new model. NOK can only hope. Yes, it was about six months of exclusivity for the 920 before variations were made available to Verizon (928) and TMobile (925). But, no sooner than they get those models, the 1020 is on the market at ATT.

If there is one thing Nokia knows how to do it is to build a sturdy phone which is far more reliable than iPhones which break easily and fail often according to the ATT tech support group.. Even at the initial $99 price point for such an excellent phone, only about a half a million have been sold so far in N.America. Way to go ATT. That's quite a great report card. Bolstered by NOK's conviction that the camera is such a compelling feature, the 1020 is going out at $299, initially.

Then there is the other Nokia partner and sugar daddy: Microsoft . In recent days, MSFT tumbled sharply when it announced disappointing results and the write off of $900 million worth of its unsuccessful Surface tablets which nobody has wanted to buy. The product, like the Lumia 920, got good reviews from technologists who write about such matters but nobody cared once the iPad rearranged the landscape. Surface had little to offer, not even a lower price point, until very lately, that would lure someone to buy it instead of the iPad.

It is hard to believe that Stephen Elop has now been at NOK for almost three years. He was correct in his initial assessment that the company was standing on the oft quoted " burning platform" and needed to take drastic action. He jettisoned almost all the company had left including its Symbian platform that was incapable of moving Nokia into the evolving future . His options were really to become 1. another "me,too" Android offering or 2. to attempt to build an entirely new ecosystem around the Windows platform. Elop chose the later, tougher path but the only one which offered any chance of winning long term with something unique. Now that Samsung is so dominating the Android universe, by now any attempt at another Android phone would have left no hope for Nokia at all.

Almost immediately after its deal with Nokia, Microsoft licensed others to create product for its platform, even as it agreed to financially subsidize Nokia with payments of about $250 million per quarter. So, Nokia, you don't mind if we slap you around even while we are saying we are helping you. In spite of that, Nokia is selling the vast majority of Windows phones and carving out WIN 8 as almost its own domain. That means now we have both Microsoft and Nokia offering Windows 8 products and both have found it to have been a tough sell to consumers.

When viewed in that context, it is almost astounding Nokia has done as well as it has even as Microsoft was failing so badly on the same WIN 8 platform. The crucial missing link appears to be the lack of availability to convince "app" developers to spend time and money creating apps for the Windows eco-system which hasn't yet reached critical mass. Yes, Nokia has surpassed Blackberry and moved into the third place position in the United States. Even so Android's 67% share followed by the iPhone at 24% both dwarf the low single digit position that Nokia holds now. Apps are the key to this situation and so is aggressive, sexy, compelling advertising, so far quite lacking. It isn't clear what the market share is that provides the tipping point for developers to perk up, pay attention and port their apps to the Windows platform.

It also seems clear that Microsoft could have better spent that $900 million just disbursing it to developers to provide their apps for the Windows ecosystem rather than to have filled warehouses full of millions of Surface tablets that nobody wants. For sure, the money is penny ante for cash rich Microsoft which is why it could have been otherwise spent. Frankly, MSFT could have done both but it didn't.

Everybody, even Steve Ballmer, knows personal computing, the lifeblood of his ecosystem is moving to light, sleek portable devices that weigh ounces, not pounds. Michael Dell couldn't build one and neither has Microsoft. Both saw what was coming but couldn't produce a product that anyone wanted. Early Microsoft efforts for sleek tablets more than a decade ago were unsuccessful because MSFT was years too early to the party before Apple even got there and erected its moat of music and apps. Now, it appears, Ballmer is years too late.

Analysts have a tendency to think that they know things that management just doesn't know. Analysts know devices are experiencing shorter and shorter lifespans. Analysts know that the market is nearing saturation at the high end. Only they know that low priced devices have become commoditized on a global basis. Surely management doesn't know any of that.

Frankly, the quarterly results were pretty grim. Lumia sales were a bit lower than hoped. Yes, NOK has surpassed Blackberry and moved into third place in the United States but that is a dubious honor. Even in its home country, Nokia is no longer the leader; Samsung is. In every geographic area, Nokia sales dropped by 14% in the Middle East and Africa, and plunged by 48% in that ever so lucrative China market.

To me the most important Elop quote in the quarterly call last week referenced the words "sense of urgency." It's good to know that management is keenly aware that they are on a slippery slope and that they must produce results soon.

If you remember that a really fine new mobile device takes three years to bring to market, we are just a bit ahead of that old rule of thumb. Nokia is rolling out a plethora of new phones at many price points during 2013. They are well designed, different and interesting. The question is whether it's simply too late for their three years of effort to still have a chance to pay off. If the Lumia 1020 is a sample of what they have been dreaming up in Helsinki, then they deserve a happy result. Timing is everything in life but execution and marketing count a lot too. Steve Ballmer and Michael Dell can tell you that and so can Motorola, a grand brand that once brought edgy advertising to its RAZR phones to show the way has now been brought to its knees under Google's control.

Joan E. Lappin CFA Gramercy Capital Management Corp.

Of the companies mentioned in this article Mrs. Lappin, Gramercy Capital and its clients own shares in Nokia at this time. For information about our firm: info@gramercycapital.com. To follow Joan: click the button on the top of this article. To follow Joan on Twitter: @joanlappin.