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Monday, 14 March 2011 09:23

Nokia spells out potential pitfalls for Microsoft alliance

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Annual reports that US stock market listed companies are required to lodged with the SEC (aka Form 20-F) are of necessity pessimistic documents. They are required to list under 'risk factors' almost every conceivable eventuality that could befall a company.

Many such risk factors are common to any entity, but what is worrying about those listed by Nokia in its latest annual report lodged with the SEC last week is the number of risk factors related to its recently announced decision to hitch its smartphone fortunes to those of Microsoft and to take Symbian and MeeGo along for the ride. Not only are these risk factors unique to Nokia there is, to my mind, a relatively high chance of them becoming reality.

For example Nokia lists, among other 'generic' risk factors: "Our failure to increase our speed of innovation, product development and execution will impair our ability to bring new competitive smartphones and mobile phones to the market in a timely manner," and "We may be unable to retain, motivate, develop and recruit appropriately skilled employees, which may hamper our ability to implement our strategies, particularly our new mobile product strategy."

Nothing to worry about unduly there: these are pretty much statements of the obvious and you would find similar in the filings of all Nokia's competitors.

But the Microsoft-specific risk factors are an entirely different matter and they paint a picture very different from the bullish pronouncements of CEO Steven Elop when he announced the alliance last month. For example: "The Windows Phone platform is a very recent, largely unproven addition to the market focused solely on high-end smartphones with currently very low adoption and consumer awareness relative to the Android and Apple platforms, and the proposed Microsoft partnership may not succeed in developing it into a sufficiently broad competitive smartphone platform."

And given the speed of innovation in the smartphone market these statements taken together are worrying. "We expect the transition to Windows Phone as our primary smartphone platform to take about two years. We and Microsoft have entered into a non-binding term sheet, and the proposed Microsoft partnership remains subject to the negotiation and execution of definitive agreements'¦Definitive agreements with Microsoft for the proposed partnership may not be entered into in a timely manner, or at all, or on terms beneficial to us'¦[and] the Microsoft partnership may not achieve in a timely manner the necessary scale, product breadth, geographical reach and localisation to be sufficiently competitive in the smartphone market."

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If that were not enough: "We may not succeed in creating a profitable business model when we transition from our royalty-free smartphone platform to the royalty-based Windows Phone platform due to, among other things, our inability to offset our higher cost of sales resulting from our royalty payments to Microsoft with new revenue sources and a reduction of our operating expenses, particularly our research and development expenses."

And as for these risk factors, they are to some extent inevitable; it's just a question of degree. "We may not be able to change our mode of working or culture to enable us to work effectively and efficiently with Microsoft in order to realise the stated benefits of the proposed partnership in a timely manner'¦

"The negotiation and implementation of the proposed Microsoft partnership will require significant time, attention and resources of our senior management and others within the organisation potentially diverting their attention from other aspects of our business'¦

"The implementation of the proposed Microsoft partnership may cause disruption and dissatisfaction among employees reducing their motivation, energy, focus and productivity, causing inefficiencies and other problems across the organization and leading to the loss of key personnel and the related costs in dealing with such matters."

There's much more. I have not even touched on the risk factors around Nokia's strategy of casting adrift but continuing to rely on Symbian. You can read the full list in Nokia's SEC filing here. The list of risk factors around the Microsoft alliance makes for depressing reading. Nokia must have been pretty desperate.

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