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Most vocal current Nokia critics insist that it was doing pretty well before Feb. 11th announcement, and that “Burning platform” Elop killed the resurging Symbian sales. As a key evidence – they point us to Nokia Q4 2010 results. Especially to the Symbian^3 device sales in that quarter, and the jump in average smartphone selling price, caused by them.

Tomi Ahonen gives the best summation of this line of reasoning in his blog post today:

Then came the new Symbian S^3 on several phones, led by the new flagship phone N8 which set a Nokia record for fastest sales in a quarter. All declining trends were turned into growth – this tells us the market loved Nokia’s new smartphones on the new Symbian S^3 operating system and this is absolute proof that Nokia was on a come-back. Whatever you may have thought of Symbian prior to Q4 of 2010, became obsolete. Nokia had indeed on its hands, a true hit series of phones and a hit operating system with the N8 setting internal Nokia records for new phone sales. Look at the facts.
In Q4 of 2010, Nokia grew smartphone sales to 28.3 million units (7% growth). You cannot claim that Nokia’s Symbian sales were “declining” or in any way “suffering.” Nokia Symbian based smartphone sales were growing. That is a fact. And in size, Nokia at Q4 of last year was quite literally as big as all smartphones made by Apple and Samsung added together (these would both individually pass Nokia by Q2). That is a fact. Nokia ASP grew to 155 Euros (200 US dollars) which reflected a jump of 14% from just one quarter before. That is a fact. If we add in the trend line, that the ASP had been in continuous decline of about 7%, the actual jump in Nokia ASP was a breathtaking 21% !!!! Don’t tell me Nokia was not back. The phones were jumping off the shelves. And how did this impact Nokia revenues? In Q4 Nokia smartphone unit geneated 4.4 Billion Euros of revenues (5.7 Billion USD). That was a growth of 22% – in just one quarter! That is a fact. And what of profits. Nokia’s profit margin jumped —— 34% !!!!!! —- to 12.5%. That is a fact. And total profits of the smartphone unit powered by the new Symbian S^3 phones rocketed up by ——- 64% —– !!!!! ——- Sixty Four Percent —— in one quarter ! —— to 548 million Euros (712 million USD). That is a fact. See Nokia official Quarterly Results Q3, and Q4 to verify all those numbers, as well as the new official Nokia accounting reports for profitability of Nokia units in the 4 quarters of 2010.

It’s hard for me to believe that a respected analyst would consider a single quarter data to be enough to declare it to be an “absolute proof” of anything. But I digress. It sounds oh so reasonable, when all facts are presented in isolation, without any context. But let’s try and look at that wider context.

When Nokia N8 was shipped, On Sept. 30 2010, it was the first new Nokia flagship in 16 months. With previous one –NokiaN97 – being a huge disappointment and embarrassment for Nokia. Nokia N8 was announced 6 months before, and marketed as having the next generation of Symbian OS, which finally can do real touch. According to Nokia – “over 100 key operators around the world are ranging the Nokia N8 in over 40 countries” – that’s an enormous footprint and sales channel for the new device. And Nokia also said that “the N8 has received the highest amount of consumer pre-orders” in its history.” While they did not give the actual numbers – the preorders should have been in at least 1 million range to make that announcement, probably somewhere between 1 and 2 million. Nokia also had more mass market Nokia C7 Symbian^3 phones shipping that quarter, and even cheaper C6-01 shipped by the end of 2010 in limited quantities.

But Nokia N8 was the flagship. It was positioned to compete with Android flagships of the time – Samsung Galaxy S, HTC Desire and the likes. And it had a key advantage over them. While Android flagships retailed somewhere around 600 Euro, Nokia N8 cost around EUR450 (I’m using the actual retail prices in Europe, including VAT, for comparison). And Nokia N8 was positioned (by price) way above most popular/best selling mid-to-low end Nokia Symbian^1 devices like 5230, C5 or QWERTY E5, so there should be very low overlap and cannibalization of sales there. Most of Nokia N8 sales should be additive to the existing Symbian^1 device sales.

And Q4 was a Christmas quarter – the biggest quarter of the year for Nokia, and every other mobile vendor. A quarter, when Nokia usually sells 30% of it’s smartphones for that year (way more then in previous quarters). In Q4 2009 – when Symbian was still doing pretty OK, when overall smartphone market grew by measly 5.4 million units from Q3 2009, Nokia was able to grow it’s sales by 4.4 million million units (81% of the total smartphone market growth between Q3 and Q4 2009 could be accounted by new Nokia smartphones). That’s what a healthy Nokia Symbian growth looked like.

Now let’s go back to Q4 2010, and sum up all the things that Nokia had going for it. Q4 is the best quarter of the year for Nokia and every other gadget maker, usually accounting for 30% of yearly sales. At the very beginning of the quarter Nokia launched it’s biggest update to it’s portfolio in years (Symbian^3). With a flagship, that even before shipping, maybe before the quarter even started – already had somewhere between 1 and two million units in the bag on per-orders. A flagship that is on the way to 100 operators in 40 countries. A flagship that has a huge pent up demand from loyal Nokia fans. A flagship that is priced so above the Nokia’s smartphone portfolio from the previous quarter, that most of it’s sales should be additive to overall Nokia smartphone volume. And a flagship, that is priced 25% below competition it is targeting.

And, to make things potentially even better for Nokia – a quarter where overall smartphone market grew by 29% and added more then 20 million new smartphones compared to Q3 2010.

So how many new Symbian smartphones did Nokia manage to add during Q4 2010? A measly 1.7 million, compared to 2.5 million in Q3 2010. Yes with a Christmas/Holiday sales season, with the biggest OS upgrade in years, with huge pent up demand (counting in millions) for high end Nokia flagship, with a million or more Nokia N8s pre-ordered, many of them before Q4 even started, with most N8 sales adding to existing Nokia smartphone portfolio and with a market growing by 30%, Nokia managed to grow it’s quarterly smartphone sales by 800K units (or 32%) less, then in Q3 2010, when it had none of those things going for it.

And how did it manage even that? By shipping (not actually selling) 5 million Symbian^3 phones, estimated 4 million of them –the most expensive N8. The sales of the older Nokia Symbian portfolio – Symbian^1 and S60 3d ed smartphones – were already crashing in Q4 2010. Nokia sold only 23.3 million older Symbian smartphones in Q4, compared to 26.5 million sold in Q3. That’s a unit decline of 3.2 million (or 12%) in just 3 months. In the best quarter of the year. And don’t tell me – it’s because those 3.2 million lost Nokia S^1 customers switched to buy Symbian^3 smartphones. Some of them may have done that. But can you honestly argue that people buying smartphones for an average of 136 Euro ( Nokia smartphone ASP in Q3 2010), will start switching en masse to a smartphone that is 2 times more expensive (N8)?

And that 14% average selling price jump in Q4 2010? If your cheapest device sales decline by 3.2 million, or 12%, and you add 4 million new devices that are at least 2 times more expensive, of course your average selling price will go up a lot. But does it mean anything? If the trend continues for a while (a quarter or two) – it could be an indication that you are on the right path. If it does not – it’s just a one quarter blip, caused by a confluence of extremely positive, one time factors. Which is exactly what we had in Q4 2010. As Nokia results in Q1 2011 prove.

Ah yes. Q1 2010 and February 2011/burning platforms thing.

When we are talking about Nokia quarterly results, or any other mobile vendor for that matter , we are talking about the number of units shipped to distributors/mobile operators. Not the number of units that consumers actually bought. There’s a lag between those two of about four to six weeks. So 4-6 weeks before then end of the quarter – most of what a company is going to sell during that quarter – is already in the bag. The contracts are signed, phones are in production and/or on the way to distributors/operators.

This 4-6 week delay was actually confirmed by Nokia’s profit warning this May. Public companies must announce things they know, that can materially affect the stock price, as soon as they are sure about the facts/outcomes. There are severe legal consequences if they don’t. Nokia has announced that Q2 2011 sales will be way below expectations on May 31st – 4 weeks and two days before the quarter end. Before May 31st – Nokia could scramble trying to improve it’s sales, offer discounts and various bonuses/incentives to distributors, getting them to buy more Nokia smartphones. Before that day, Nokia could tell anyone, in good faith, that they are not sure how this quarter will end, that they are still working and think they have a good chance to close these other deals that will put Nokia smartphone sales to where Nokia guided they will be in their Q1 report. But 4 weeks and 2 days before the end of Q2 Nokia was absolutely positively sure, that their Q2 projections were crap. All the contracts for Symbian smartphones in Q2, that Nokia was going to sign – were signed, and all the phones that were going to be ordered in Q2 were ordered. So they had to inform us about it.

Now, let’s look at how February 11th could have affected Nokia sales in Q1, taking into account that 4-6 weeks lag. On February 10th 2011, Nokia already had binding contracts/orders for their smartphone deliveries for 4 to 6 weeks in advance. If we take the outer- 6 weeks range – from February 11th, that brings us to March 25th – just 5 working days before the end of the quarter. If we take 4 weeks – that’s a total of 15 workdays for all Nokia distributors to react and start Nokia smartphone boycott. By February 11th Nokia had at least 2/3ds of all Q1 sales in the bag. Knowing what’s coming – they were probably pushing to close all the Q1 affecting deals they could, offering incentives/deals for those who would sign early.

Can anyone honestly say, that operators and major distributors all around the world can move that fast (5 to 15 workdays), redraft all their purchasing plans, decide on what will replace the Nokia phones they had planned to order, get assurances from other vendors that those additional phones will be delivered in time, by the end of March. In an industry, where most successful vendors are at max capacity already, and can’t make enough smartphones as it is? The most obvious answer is – no way. There was no way that Feb. 11th could have had any significant impact on Nokia’s Q1, 2011.

And if it was too late on February 11th to significantly affect Nokia Q1 results, if Nokia already had the binding contracts/orders for almost until the end of Q1, by February 10th, if it was too late for Nokia distributors to redraft all their purchasing plans – how do you explain what happened to Nokia in Q1 2011?

Why did Nokia smartphone sales drop by 4 million units?

I just showed you, that the sales of older Nokia smartphones have been already dropping precipitously (3.2 million drop) in Q4 2010, so it is very likely that they have continued to drop in Q1. And by Feb. 11th, Nokia has booked at least 2/3ds of of all possible Symbian^3 device sales for Q1 -including the expensive N8, and even more expensive new E7. Why then, if Symbian^3 was such raging success, did Nokia’s smartphone ASP drop so much?

The most obvious answer is – Symbian^3 wasn’t such a big success after all. For a company with Nokia’s distributing and marketing power, and the amount of money it poured into promoting N8 – 5 million units shipped in 3 months, during a Christmas quarter, is actually only a rather moderate success. It’s even more moderate, I’d say even disappointing, if you take into account a pent up demand from S^3 delays and all the hype and build-up associated with a new launch of a next generation device. How long did it take Apple to sell 5 million iPhone 4s? How long will it take Samsung to sell 5 million Galaxy S2s? And Samsung doesn’t even have an eager fan base counting in the millions, waiting to replace their aging 16 month or older flagship with a next generation device. I’m sure that most of the original Galaxy S owners are not even thinking about looking for an upgrade just yet. So most of Galaxy S2 buyers have to be new customers to Samsung smartphones.

And as to what happened in Q1? Here’s most likely scenario: Nokia was able to convince operators and distributors to take on those millions of Nokia N8/S^3 devices before holiday shopping season even started. Shipped and booked those devices as sales for Q4. But the actual demand for Symbian^3 – people going into mobile shop/operator store and buying the device- was actually much lower then expected. By the end of 2010, Nokia distributors clearly saw that – all those Nokia phones just lying on their shelves – and started reducing orders for S^3 phones even faster then they were reducing older Nokia smartphone orders. So by February 10th – the time that most of Nokia Q1 sales were already booked, high ASP Nokia S^3 devices made a much smaller part of Nokia portfolio then it did in Q4 2010. Hence the drop in ASP.

So much for S^3 resurgence, or Nokia’s “great” Q4 being absolute proof of something.

And one more thing.

It’s funny how those former Nokia fans, now blinded by Elop hate, and even some respected analysts, used to insist – that market share is the most important thing in current smartphone wars. That anything else – even profits or declining ASPs – do not matter at all, as long as you can keep market share without losing money. And how Nokia is the king of the hill because it is keeping it’s market share, even if a smartphone ASPs and overall profits are declining rapidly. And how they are now all about market share again, pointing how fast Nokia is losing it, because big bad Stephen Elop is either an incompetent psychopath, or Microsoft Trojan Horse. Then, they are confronted with the facts that all current Nokia loses in market share and unit sales can easily be explained by simply extending the market share loss trends from Q3 and Q4 2010. Well before Elop could do any significant damage.

And what do they do? Suddenly they forget about the years of their insistence that market share is THE key metric of success in smartphone market. Turn 180 degrees around, and start insisting that – no, no, no, – just for Q3 and Q4 of 2010, Nokia market share loses do not matter. Yes – they mattered a lot before Q3 2010, and they matter a lot after Q4 2010. Just not in the meantime. What matters  for Nokia Q3 and Q4 2010, and only for Nokia in H2 last year, are:

• anemically growing unit sales volumes (with new major platform upgrade during Christmas quarter bringing in a unit growth smaller, then a quarter before)
• growing ASPs (in just that one quarter)
• profits

Tell me, why would anyone treat just 2 quarters in company and market history so differently, from what one preached for years and continues to preach now? Because those two quarters show an inconvenient truth that can not be reconciled with the new great theory of Elop’s guilt?   The willful ignorance and thought flexibility  involved in this mental exercise just makes my head spin.

Of course – those critics will now try to point out that my arguments above might have made sense before May 31st profit warning, and the actual Nokia Q2 results. But Q2 proves that they were right all along…

Sorry guys, I already covered that and explained why Feb. 11th had very little to do with what happened to Nokia in Q2.