Nokia Moves Around The Deck Chairs One More Time

By Stephen D. Simpson, CFA | June 16, 2012 AAA

At this point, the agonizing pace of Nokia's (NYSE:NOK) never-ending turnaround is starting to evoke the idea of a band-aid being pulled off incredibly slowly. Once again the company is looking to take charge and fire workers, but nothing in the proposed changes are likely to boost the company's share against Apple (Nasdaq:AAPL) or Samsung. Absent a hardware-software duo that can seriously challenge the top players, Nokia's slide toward irrelevance seems likely to continue.

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Another Restructuring That Won't Really Change the Structure of the Industry
Nokia announced Thursday that not only would the company's quarterly numbers come in lower than management previously indicated, but that the company was going to launch another large restructuring. This time around the company will be firing 10,000 workers (19% of its employees), with the goal of saving 1.6 billion euros by the end of 2013.

SEE: How To Lay Off Staff

As part of this restructuring, the company will be closing two R&D facilities and one manufacturing facility in Finland. Unfortunately, none of these efforts appear aimed at fixing the underlying reality facing Nokia; the company's products are not compelling at the high end of the market, and the company is increasingly uncompetitive on the low end of the market.

Winner Takes Almost All
The mobile phone industry has long been very nearly a winner-takes-all market. If a company is number one or number two in market share, there's an opportunity to make very attractive profits, but once a company slips out of the top two it becomes increasingly difficult to make a go of it.

Nokia and Research In Motion (Nasdaq:RIMM) had their time at the top, but have since been knocked down the charts by Apple and Samsung. It's not just Nokia and RIM either; analysts are increasingly questioning whether companies like LG and HTC can really establish sustainable viable margins as also-rans in higher-end phones.

As time goes on, this may get even worse. Carriers like Verizon (NYSE:VZ) and AT&T (NYSE:T) are trying harder and harder to push for better terms; Apple and Samsung are strong enough to fight back, but the rest of the industry seems to have little choice to go along.

SEE: Analyzing Operating Margins

Lumia Doesn't Shine Brightly Enough
What makes all of this even worse for Nokia is that its much-heralded Lumia product (developed with Microsoft (Nasdaq:MSFT)) has actually been relatively successful. It hasn't been a category-killing blockbuster, but it has been a success. Unfortunately, it's not successful enough to make Nokia a winner in high-end smartphones, and it does nothing to stem the company's eroding competitive position on the lower end.

Perhaps the introduction of phones that address a wider (and lower) range of prices will help. That does seem to have helped Samsung in its bet for share against Apple. Unfortunately, it just looks as though Nokia is running out of time in building a new business that can book real profits from its probable status as a number three player in the most attractive parts of the market.

SEE: 4 Pricing Strategies That Increase Your Spending

The Bottom Line
Nokia is looking like a bigger and bigger long-shot to make a real turnaround in the business. There is simply too much competition coming from China and India for me to believe that the company can continue to make a profitable business from its lower-end phones. At the other end of the market, it's unclear that Nokia has the know-how or ability to unseat Apple or Samsung, particularly as the former seems to have a real lead on anticipating what the customer will want and the latter has inherent manufacturing advantages.

Nokia does trade below book value, but absent proof that the company can earn any sort of economic return on its assets, it seems like a discount to book value is an appropriate valuation. Perhaps this restructuring will be the one that sticks, but it seems like Nokia really needs to think about a total transformation if the company is going to get off this treadmill to nowhere.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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