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Picture shows a Nokia logo at a shop in Warsaw, January 26, 2012. Nokia, the world's largest cellphone maker by volume, reported better-than-expected quarterly core earnings, although they fell 73 percent as its new Windows Phones failed to compensate for diving sales of its legacy smartphones.
Credit: Reuters/Kacper Pempel
By Tarmo Virki
Wed Apr 18, 2012 2:57pm EDT
HELSINKI (Reuters) - When Stephen Elop bet Nokia's future on a deal with Microsoft, he was hit with a barrage of criticism. After a year of respite, the chief executive is again being haunted by a decision that is costing the shrinking mobile phone company sales and favor.
Nokia (NOK1V.HE) switched from developing its own Symbian operating system for the as-yet untried Windows Phone software in February 2011 and is now stuck in a sales gulf between phasing out its old smartphones and ramping up production of the new ones.
Sales of the Lumia range that runs on Windows have fallen short of forecasts. Nokia issued a profit warning last week ahead of first quarter results due on Thursday and its shares fell below 3 euros this week, their lowest in 15 years.
In the meantime, Apple's iPhone and Samsung's Galaxy range, which runs on Google's Android system, continue to steam ahead in the smartphone market, leaving what was once the strongest brand in mobile phones way behind.
"Nokia should have bet on Android. That would have been a powerhouse in terms of mobility, search, etc," said one telecoms industry executive who has done business with Nokia for years.
"Elop had one bet to make and he made the wrong bet."
Elop joined Nokia from Microsoft (MSFT.O) in 2010. The following year, his previous employer said it would pay Nokia billions of dollars in their partnership and pay $250 million a quarter to support the platform.
At first, critics said Nokia should have stayed with Symbian or done a deal with Android, which like Apple now has hundreds of thousands of apps available, against Windows Phone's 80,000.
Nokia also dropped its second operating system Meego which it only used in its full version on one Nokia phone.
Nokia says Windows gives it the best chance to stand out in the crowd of similar smartphone models on the market.
"Windows Phone provides Nokia with an attractive and vital point of differentiation," said Jo Harlow, chief of Nokia's smartphone business. "We are building something exciting. People who try a Lumia device are telling us loud and clear that they love the Windows Phone experience."
Analysts mostly came round to the idea that Microsoft could be the best bet and that business could pick up in 2012 but several European telecoms operators told Reuters this week they were unconvinced by the new Windows models.
"Windows is a great operating system, but it seems that customers aren't buying it," said Juhani Risku, a former innovation chief at Nokia, who left in 2009 and is now a designer and analyst. He is one of Nokia's most vocal critics.
"It is dangerous to go only with one system, even more so when it's not your own."
GIVING UP THE UPSIDE
Not having its own system could also cost Nokia the ability to make money from software development and services.
"They gave up the upside. Now they're a hardware producer," said Harry Jarn, CEO of Finnish virtual operator Cubio, who worked at Nokia for more than 13 years. "Nokia is, without a doubt, a much smaller firm in the future."
Nokia is still using Symbian in some smartphones but will only support it until 2016, which will put off buyers who tend to load their phones with apps and content that they want to keep for several years.
Analysts said any real sign of recovery for Nokia is now likely to come in 2013 at the earliest, rather than this year as previously hoped, and will depend on better products and improvements in the Microsoft software.
A new version of Windows Phone is due later this year. Microsoft also plans to use its phone design - with boxes that automatically update even if the app is shut - on computers, which should improve people's familiarity with the system.
"In the fall there will be new family of products which will put Nokia on the same line with rivals. Currently, there are still gaps in the high-end," said Nordea analyst Sami Sarkamies.
One bright spot is that Nokia's fight for recovery is forcing the Finnish company to move more quickly. While it used to take two years to develop a new model, Elop brought the first two Windows phones to market within a year.
"If Nokia could have demonstrated this speed in the last few years, some of its current problems may have been avoided," said Pete Cunningham at research firm Canalys.
He added that partnering with Android might have caused another problem as other phone makers using the system are struggling to compete with Chinese firms Huawei and ZTE, which are selling smartphones for as little as 100 euros, which leaves very little room to make any profit.
Nokia sells its new Lumia smartphones for an average of 220 euros, which is already lower than analysts expected.
Nokia plans to take on the lower-end Android smartphones with their own advanced feature phones running on an operating system developed on top of Microsoft's rival Linux software later this year.
(Additional reporting by Eero Vassinen in Helsinki, Nicola Leske in New York; Editing by Jane Barrett and Mike Nesbit)
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