Wednesday, April 11, 2012

We lose money on every sale, but we'll make it up in volume.

I came across this story, of Nokia offering a $100 credit due to a major glitch in Lumia 900 phones. The glitch prevents data access, and is a software issue that "is being fixed". The credit is being offered on phone sales up until April 21, even though Nokia says fixed phones will be in the stores within a couple days. Nokia says the purpose of the credit is to "give you something for your inconvenience".

I call bullshits.

You don't give a $100 credit for the inconvenience of buying a working phone. Assuming that Nokia actually can fix the phones in a timely fashion, new customers are not going to be inconvenienced (at least not by this particular bug). So either Nokia is saying that these phones are going to continue being an inconvenience, or they really need a drop in price to get the phone closer to its actual market value.

With the credit, the price of the phone becomes $0 with a typical expensive contract. Clearly, the phone has no perceived value on its own. But Nokia doesn't want to sell it that way... they're trying to compete with the higher-end smart phones. Or rather, they need to---this is the longshot bet that Elop risked the entire company on (burning Nokia's existing platform in favour of making crappy WP7 phones that nobody wants)---and if they can't sell phones (at any cost) they go the way of the dinosaurs.

This is basically just Nokia dropping the price of the phone to the bargain basement in a desperate attempt to try to get people to buy it. But they don't want the stigma of being a lower-class phone, so instead of admitting that their $99.99 phone is worth $0, they're trying to spin their financial desperation into a story of "We really really really care about our customers!"

There is a problem though. The perceived value of the phone is still $0. Whatever the reason for the price drop, it can be got for $0 (plus expensive contract). Come April 21, a $0 phone will suddenly jump in price by $100. Will anyone want to buy it after that?

My bet is that Nokia will be forced to keep their discount. Perhaps they already know this and have planned for it. Perhaps they will say "Due to demand and our ongoing commitment to our customers, we've decided to extend the $100 credit." This way, they can compete with the cheaper phones without admitting to being a low-value phone, and while they can try to use their "limited time offer!" to scam/entice new customers now, they can also continue to beg for customers in the longer term.

Some remaining questions:
- How much money are Microsoft and Nokia willing to throw at this market to establish a user base that they can start exploiting?
- How much will it take for customers to be tricked into becoming WP7 users? Comments on the cnet story indicate that $100 off of an expensive contract is enough.
- If things continue to go badly for WP7, will MS bleed money until they've choked their way into the market, no matter how long it takes, or will they give up?

Everyone knows that Nokia's not going to survive long enough for WP7 to buy its own success (unless they fire Elop and get off that sinking ship). Sure MS has the cash to survive, but they're not exactly known for making room on the lifeboat for their "partners". No, partners are kicked off their pant-legs and left to drown (sometimes helped by a knife in the back). Everyone expects that Nokia's going down, and that MS will swoop in at the last minute only to buy them up once their value has bottomed out. MS will be in this for the long haul. As far as I can tell, MS's business model is to throw money at a market until it suffocates everyone including themselves, knowing that they can afford to wait it out. This time though I don't think they'll be able to suffocate Apple or Android. This is business as usual in tech. It's not about making the best product and competing on value, it's about driving the competition away, putting pressure on them through marketing or patent litigation, until they're gone. The Lumia series is MS's investment in their dream phone monopoly. Then you won't be seeing $100 credits to buy off customer inconvenience.

Update: May 23, 2012: Prior to breaking this story I was perhaps the most accurate predictor of WP7's road to failure, having never made a wrong prediction about it --- at the very least I was up there with Tomi --- but I have to admit that I did miss the mark on this one.

After April 21st came and went, I did see some ads for a sale price of $49, but generally the price with contract seemed to be back up to $99. Now the price has been dropped to $10 (for existing customers) and $40 (for new customers). It's getting pretty close back down to $0 (with expensive contract).

Nokia wasn't as desperate as I anticipated. Now we will have to wait for the Q2 results to see if they really were desperate and failing but tried to act successful as a marketing strategy (a ruse that can't last forever. MS employees may spend their days writing up glowing Amazon reviews of the Lumia 900, and execs may claim that WP outsells iPhone in China while still refusing to give any of the obviously embarrassing sales numbers, but without some Enron-style fudging of the books, Nokia's balance sheet is going to tell the real story eventually.)

Hilariously, in this writeup of the Lumia 900 price cut, the author says that "seeing that time has passed since its launch, it’s naturally going to see some price drops." This is after one month at "full" price! A bargain basement price after 1 month, while still many months away from a successor product being available, does not make a "natural" price drop and does not bode well.

Even more hilariously, the author claims that "it shows us that Windows Phones can stand equally amongst its peers." I don't think that a price drop to $10 shows that WP can stand equally amongst its peers. I'd say at best it stands at 5% of its peers, based on an iPhone price (with contract) of $200.

Windows phone is a joke. It's too bad that it's all at Nokia's expense. Poor Nokia, you got scammed! When are you going to kick Elop out? Nokia shareholders: Did you make a mistake buying into that rotten potato Elop? Or are you continually being conned by a CEO who is not acting in Nokia's interests? This begs for an official investigation.

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