Nokia's Last Hope: Lumia

Mobile phone manufacturer Nokia ADR (NYSE: NOK) is no longer Finland's most valuable company as measured by market capitalization. The latest fall in Nokia's share value came after the company announced a surprise profit warning and technical glitches associated with its new Lumia phones.

Lumia is the first Windows-based phone that came as a result of the collaboration between Nokia and Microsoft (Nasdaq: MSFT). It was jointly launched in the US by Nokia, Microsoft and AT&T (NYSE: T). The problem – it it had difficulty connecting to the internet on AT&T's LTE 4G network – came to light soon after the Lumia 900 phone went on sale in the US.

Even more surprising than the technical problems with its new phone was the surprise profit warning. Nokia warned that its low-end phone division – which had always enjoyed great success in the emerging markets – was losing market share much faster than expected. Sales in this division sank 35 percent in the first quarter to about $3 billion.

Low-end phones, which make up 30 percent of Nokia's sales, lost market share to both Chinese manufacturers and devices using the Android operating system from Google (Nasdaq: GOOG). The loss of market share, particularly to Samsung's Android devices, is in large part due to the fact that Nokia is dumping its current operating system, Symbian, rendering those phones obsolete in a few short years.

These recent events just continue to emphasize the fact that Nokia has been left behind in the smartphone race in the last few years. Nokia's decline has left its shareholders smarting. Its stock sank by a fifth just last week after the bad news, leaving it down 90 percent from its peak since the iPhone from Apple (Nasdaq: AAPL) was launched in 2007.

Perhaps the last hope for the company lies in its tie-up Microsoft and the resulting Lumia phones. It has not been an auspicious start for Lumia, however. Even ignoring the technical glitches, initial sales (launched in November globally) of the Lumia range of phones have been disappointing. In the first quarter of 2012, only 2 million Lumia phones were sold. In comparison, Apple sold 37 million iPhones during the same period.

It remains to be seen whether the Lumia 900, with its very reasonable $99 price tag here in the US, will sell. Nokia has even been forced to offer a $100 credit on phone bills to anyone who buys it before April 21 in an effort to stimulate dull US sales so far. Of course, both Microsoft and AT&T are hoping Lumia succeeds too.

The lack of success so far for Lumia certainly calls into question whether consumers really want a Windows-based smartphone. If it turns out they do not want Windows-based phones, the tie-up with Microsoft has sealed Nokia's fate as it now has no future options except producing Windows phones.

Some investors already think the company is doomed as the cost of insuring the company's debt soared to a record high, implying that Nokia's debt was already considered to be “junk” status. The company is not dead yet though and still has net cash of 4.9 billion euros. However, it did burn through 700 million euros in the first quarter and has stated that it must continue spending heavily on marketing the new Lumia phones. So Nokia shareholders should not be surprised to see the dividend eliminated soon.

If the company burns through its cash pile, it may resort to selling assets in an effort to keep afloat. These assets could include mapping technology company Navteq or perhaps even some of its intellectual property rights. But if Lumia phone sales don't pick up some time this year, Nokia itself may be up for sale to Microsoft or other bidders. That would be a sad end for a company that once dominated the mobile phone industry.

This article originally was written for the Motley Fool Blog Network. Please make sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/