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Nokia’s handset business is nearly dead – but Microsoft would be crazy to give it up

Microsoft Nokia Layoffs Analysis

The new Microsoft layoff wave will axe thousands of employees from Nokia’s old handset unit and will close down the once crucially important Oulu R&D center that used to be the source of global phone innovation, from internal antennas to 3G tech. Many now view the handset industry as an unprofitable sunset business that has little relevance outside Apple and Samsung.

What does it matter if Nokia is now a pure infrastructure company or if BlackBerry stops manufacturing handsets? In reality, there are strong reasons to hold onto a loss-making, shrinking, marginal consumer electronics business. That’s because even a sinking platform can be a launchpad for lucrative new businesses while creating a consumer electronics business out of nothing is fiendishly difficult.

Apple was in dire straits at the turn of the millennium. Its computer business suffered from tiny market share and awful margins. Many advocated that Apple should ditch the mass market personal computer business entirely.

Yet the loss-making Apple computer division was the launchpad for iPod and iTunes, which in turn were the foundation for Apple’s massively successful entry into handset business in 2007 and then the creation of the modern tablet industry a few years later. These triumphs probably would have been impossible without the small — but extremely loyal — core user base Apple’s uncompetitive computer line possessed 14 years ago.

BlackBerry came very close to launching a hugely successful messaging app business. One of its employees left to create Kik, which now has more than 140 million active users and competes strongly against WhatsApp in the U.S. messaging app wars and actually dominates it in the teen demographic. Even the massively delayed BBM app launch has yielded 100 million users and could turn into a viable business. The dying BlackBerry hardware platform might yet spin off something even better.

The value of a consumer electronics business itself waxes and wanes in grand cycles. I’m old enough to remember how many analysts dismissed Nokia’s handset business in 1992, arguing that phones are like fridges — they cannot ever yield profit margins higher than 3%. A decade later, Nokia’s handset margins soared to well over 20%. Now margins of nearly all phone vendors outside of Apple and Samsung seem headed to that fridge territory again — and that’s in a best-case scenario.

We don’t know what the next wave of hugely lucrative consumer electronics products is going to be. But those vendors that tough it out are in an immensely better position to enter it successfully than those that pull out of the currently dismal phone business. They will maintain vitally important beach heads in distribution, production, R&D and marketing.

Creating a consumer electronics business out of nothing is almost impossible. Motorola built its phone empire on pagers, Apple on music players, Ericsson on its 100-year expertise in landline phones and Samsung on a wide variety of consumer goods.

Only Nokia was able to enter the mobile phone industry through an implausible non-consumer electronics route that led from a rubber factory to cable manufacturing operations to professional radio phones to mobile handsets. After the consumer electronics unit of Nokia was sold to Microsoft, launching a new consumer business would require a similar lottery win.

After launching mobile game company SpringToys tragically early in 2000, Tero Kuittinen spent eight years doing equity research at firms including Alliance Capital and Opstock. He is currently an analyst and VP of North American sales at mobile diagnostics and expense management Alekstra, and has contributed to, Forbes and Business 2.0 Magazine in addition to BGR.