G7 · Nokia & BlackBerry (2007–2013)

The hook. In November 2007 Nokia sold almost four in every ten mobile phones in the world. Its handset business earned a 20% operating margin, and the company was worth ≈€110bn. In June 2008 Research In Motion (RIM), the maker of the BlackBerry, was worth ≈$83bn at ≈65× earnings. By 30 June 2011, the date you stand at, both shares were more than 80% below those peaks, and both looked cheap. RIM traded at 4.6× trailing earnings, with a fifth of its market value in cash. Nokia traded at 8.8× earnings, with a 9% trailing dividend yield and net cash equal to 39% of its market value. Both still shipped tens of millions of phones a quarter. Were they bargains, or low multiples of earnings that were about to vanish? This case is about what happens to a moat when the platform under it moves, and why a low P/E on peak earnings is a question, not an answer.

Period	2007–2011 (set-up) · 30-Jun-2011 (decision) · 2011–2016 (outcome)
Decision date	US close on 30 June 2011. You may use only what was public then: Nokia's 2010 Form 20-F (Mar-2011), its 11-Feb-2011 strategy releases, its Q1 2011 report and its 31-May-2011 profit warning; RIM's FY2011 annual filings (Mar-2011) and its 16-Jun-2011 Q1 FY2012 release; Apple's FY2010 10-K; Gartner's Feb-2011 market data
Sector	Mobile handsets and smartphone platforms (technology hardware). Nokia: Finland, IFRS, euros, calendar year. RIM: Canada, US GAAP, US dollars, fiscal year ending around 1 March
Themes	Moat erosion; platform shifts; ecosystems and network effects; value traps (low P/E on peak earnings); reverse DCF on a declining business; sum-of-the-parts floors; capital allocation under threat; guidance tracking
Modules this case reinforces	04.2 Margins · 04.4 Working capital · 03.4 Tracking guidance · 05.2 Industry analysis · 05.3 Moats · 05.5 Capital allocation · 06.5 Multiples · 06.6 Reverse DCF · 06.7 Sum of the parts · 06.8 Margin of safety · 11.5 Monitoring & selling · 11.6 Behavioural finance
Difficulty	Intermediate–advanced. Do it after 06.6
Time	~3 hours (about 1.5 hours on sections 1–3 before you read on)

Conventions in this case

Nokia files a Form 20-F (the US annual report for foreign issuers) and RIM files a Form 40-F (the Canadian equivalent, with the annual information form (AIF), MD&A and audited accounts attached as exhibits). Interim news arrives on Form 6-K. RIM's "FY2011" is the year to 26-Feb-2011. Nokia's US-listed ADR (a depositary receipt traded in New York) represents exactly one share (Nokia 6-K, 10-Feb-2011). Prices are closing prices from Yahoo Finance (35). RIM's prices are adjusted for its 3-for-1 split of August 2007, and the ticker is BB today. Euro prices for Nokia are the ADR price ÷ the Federal Reserve noon rate (1.4523 $/€ on 30-Jun-2011, 36). Totals marked ≈ are rounded or derived. All ratios were recomputed in Python from the cited filings.

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1. The scene (as of 30 June 2011)

The platform shift

On 9-Jan-2007 Apple announced the iPhone: a touchscreen phone at $499–599, launching in the US in June 2007 with Cingular (Apple). On 5-Nov-2007 Google and 33 other firms formed the Open Handset Alliance to build Android, an open software stack for phones (OHA). T-Mobile announced the first Android phone on 23-Sep-2008 (Google). Apple's App Store opened on 10–11 July 2008 with more than 500 applications (Apple). Users downloaded more than 10m apps in its first weekend (Apple).

A platform shift is a change in the layer of technology where value is captured. Here it moved from hardware (radios, battery life, manufacturing cost) to the operating system and its ecosystem. An ecosystem is the OS plus the developers, apps, services and accessories built on it. Ecosystems show network effects: each extra user makes the platform more valuable to developers, and each extra app makes it more valuable to users. Because two sides reinforce each other, the market tends to consolidate on a few winners. Switching costs are the costs a customer pays to leave: lost apps, retraining, IT integration.

flowchart LR
  U["More users"] -->|bigger market for apps| D["More developers"]
  D -->|more and better apps| A["Richer app catalogue"]
  A -->|reason to choose / stay| U
  U -->|volume and data| O["OEMs and carriers<br/>favour the platform"]
  O -->|cheaper devices, more shelf space| U

Gartner's February 2011 release gave the scoreboard (Gartner). All mobile devices sold 1.6bn units in 2010, up 31.8%, and smartphones were 19% of them, up 72.1%. Nokia was still the largest vendor, with a 28.9% unit share, down from 36.4%.

Smartphone OS (sales to end users)	2009 units (m)	2009 share	2010 units (m)	2010 share
Symbian (mostly Nokia)	80.9	46.9%	111.6	37.6%
Android	6.8	3.9%	67.2	22.7%
Research In Motion	34.3	19.9%	47.5	16.0%
iOS (Apple)	24.9	14.4%	46.6	15.7%
Microsoft	15.0	8.7%	12.4	4.2%
Total smartphones	172.4		296.6

Source: Gartner, 9-Feb-2011. Gartner added that Android outsold Nokia's own Symbian devices in Q4 2010, and that RIM's smartphone share fell from 19.5% in Q4 2009 to 13.7% in Q4 2010.

The economics of the winner were already public. Apple sold 40.0m iPhones for \(25.2bn of revenue in FY2010 (year to Sep-2010), an average selling price (**ASP**) of ≈\)630 (Apple 10-K). RIM's device ASP was ≈$305 and Nokia's smartphone ASP was €147 (section 2).

Nokia

Nokia reported three segments (20-F 2010). Devices & Services (D&S) made the phones, from basic "mobile phones" to Symbian smartphones. NAVTEQ made digital maps and was bought in July 2008 for a total cost of €5,342m (20-F 2008). Nokia Siemens Networks (NSN) was a telecom-equipment joint venture with Siemens, consolidated from April 2007. Nokia's advantages were scale and distribution. It shipped 453m devices in 2010 and sold through operators, distributors and retailers in every region. It claimed about 50% of the entry-level market and strong share in India (20-F 2008). It also held over 10,000 patent families from ≈€43bn of cumulative R&D (20-F 2010).

Its smartphone software was the problem. Nokia bought Symbian Ltd in 2008 and set up the Symbian Foundation. It was also building MeeGo with Intel (20-F 2008, 20-F 2010). On 21-Sep-2010 Stephen Elop, previously president of Microsoft's Business Division, became CEO (20-F 2010). In early February 2011 an internal memo by Elop leaked. It compared Nokia to a man on a "burning platform" and described the industry as a "war of ecosystems" (Engadget). On 11-Feb-2011 Nokia announced that Windows Phone would be its principal smartphone platform (6-K). Symbian became a "franchise platform", with ≈150m more Symbian devices expected, and D&S operating expenses were to fall by €1bn by 2013. Elop called it "now a three-horse race" (6-K). The ADR fell 14.0% that day (35). The definitive agreement was signed on 21-Apr-2011. It promised Nokia payments from Microsoft "measured in the billions of dollars" (6-K).

Q1 2011 looked fine. D&S sales were €7.1bn, the non-IFRS operating margin was 9.8%, and net cash was €6.4bn. (A non-IFRS margin excludes items the company treats as special, such as restructuring charges.) But Nokia guided Q2 D&S sales down to €6.1–6.6bn (Q1 report). On 31-May-2011 it warned. Q2 sales would be "substantially below" that range, the Q2 margin could be "around breakeven", and it withdrew its 2011 targets. It blamed competition in China and Europe, a mix shift to cheaper phones, and pricing. The first Windows Phone device was expected in Q4 2011 (6-K). The ADR fell 14.4% (35).

Research In Motion (BlackBerry)

RIM introduced BlackBerry in 1999 (BlackBerry AIF FY2014). It was run by two co-CEOs, Jim Balsillie and Mike Lazaridis, who were also co-chairs (6-K, 22-Jan-2012). Directors and officers together owned ≈10% of the shares (AIF FY2011). It earned money in three ways (MD&A FY2011). Devices were 80% of revenue. Service revenue, 16%, came from a monthly infrastructure access fee per subscriber, paid by carriers. Software, mainly the BlackBerry Enterprise Server (BES), connected phones to corporate email. The base grew from ≈8m subscribers (FY2007) to more than 41m (FY2010) (MD&A FY2009, AIF FY2011). By FY2011, 54.6% of users were outside North America. RIM called BlackBerry the best-selling smartphone brand of 2010 in the US, Canada, Latin America and the UK (AIF FY2011). One detail is easy to miss: in FY2010, consumer-oriented BlackBerry Internet Service accounts overtook BES accounts as a share of the base for the first time (AIF FY2011).

RIM's answer to the iPhone was a new platform. It bought QNX, a real-time operating system, and put it in the PlayBook tablet, launched on 19-Apr-2011 (AIF FY2011, 6-K). The guidance, however, kept moving:

Date	FY2012 EPS guidance	Source
24-Mar-2011	"in excess of $7.50"	6-K
28-Apr-2011	"approximately $7.50" (Q1 cut to $1.30–1.37 from $1.47–1.55)	6-K
16-Jun-2011	$5.25–6.00; Q2 revenue guided to $4.2–4.8bn, gross margin ≈39%	6-K

On 16-Jun-2011 Q1 FY2012 revenue came in at $4.9bn, down 12% on the quarter, on 13.2m BlackBerry shipments. RIM announced a cost programme with job cuts and a new buyback of up to 5% of its shares. Balsillie said it had "almost $3 billion in cash" (6-K). The stock fell 21.5% the next day (35).

What the market believed

Section 2's Table 2.4 has the prices. In one sentence: the market no longer paid for growth at either company, and priced RIM for a steady decline. The open question on 30-Jun-2011 was whether that decline was priced fast enough.

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2. The numbers then

Table 2.1 — Nokia group, 2006–2010 (€m, IFRS)

	2006	2007	2008	2009	2010
Net sales	41,121	51,058	50,710	40,984	42,446
Operating profit	5,488	7,985	4,966	1,197	2,070
Operating margin	13.3%	15.6%	9.8%	2.9%	4.9%
Profit to equity holders (PAT)	4,306	7,205	3,988	891	1,850
Diluted EPS (€)	1.05	1.83	1.05	0.24	0.50
Dividend per share (€)	0.43	0.53	0.40	0.40	0.40
Payout (DPS/EPS)	41%	29%	38%	167%	80%
Cash from operations (CFO)	4,478	7,882	3,197	3,247	4,774
Capex	(650)	(715)	(889)	(531)	(679)
Free cash flow (CFO − capex)	3,828	7,167	2,308	2,716	4,095
CFO / PAT	1.04	1.09	0.80	3.64	2.58
Equity attributable to parent	11,968	14,773	14,208	13,088	14,384
ROE (on average equity)	—	53.9%	27.5%	6.5%	13.5%
Net cash	8,288	10,663	2,368	3,670	6,996

Source: 20-F 2010, selected financial data and cash-flow statement; 20-F 2008 for 2006–07 cash flows. NSN is fully consolidated from 1-Apr-2007, so 2006 and 2007 are not strictly comparable. Nokia bought back €10.4bn of stock in 2006–08 and none after September 2008 (20-F 2010).

Worked example (ROE 2010): average equity = (13,088 + 14,384)/2 = 13,736, so ROE = 1,850/13,736 = 13.5%. CFO/PAT of 2.58 in 2010 is high because working capital released cash while profit was depressed. It is not evidence of quality. Payout above 100% in 2009 means the dividend exceeded earnings.

Table 2.2 — Nokia Devices & Services and market position

	2007	2008	2009	2010
D&S net sales (€m)	37,705	35,099	27,853	29,133
D&S gross margin	36.5%	36.3%	33.3%	30.1%
D&S operating margin	20.1%	16.6%	11.9%	11.3%
Device volumes (m)	437.1	468.4	431.8	452.9
of which smartphones ("converged devices")	60.5	60.6	67.8	100.3
Device ASP (€)	86	74	63 / 64 ‡	64
North America volumes (m)	19.4	15.7	13.5	11.1
Global device share (Nokia estimate)	38%	39%	38% / 34% †	32% †
Smartphone share (Nokia estimate)	52%	38%	39% †	36% †

Sources: 20-F 2008 (2007–08), 20-F 2010 (2009–10). † Nokia redefined the market in 2010 to include more entrants, so 2009 is shown both ways. ‡ €63 was the original 2009 figure and €64 the later one including services. Smartphone ASP fell 21%, to €147, in 2010.

Table 2.3 — Research In Motion, FY2007–FY2011 ($m, US GAAP)

Fiscal year (ends ~1 Mar)	FY2007	FY2008	FY2009	FY2010	FY2011
Revenue	3,037	6,009	11,065	14,953	19,907
Revenue growth	—	97.9%	84.1%	35.1%	33.1%
Gross margin	54.6%	51.3%	46.1%	44.0%	44.3%
Operating margin	26.6%	28.8%	24.6%	21.7%	23.3%
Net income	632	1,294	1,893	2,457	3,411
Diluted EPS ($)	1.10	2.26	3.30	4.31	6.34
CFO	736	1,577	1,452	3,035	4,009
Capex (PP&E)	(254)	(352)	(834)	(1,009)	(1,039)
Intangibles bought (patents, licences)	(60)	(374)	(688)	(421)	(557)
FCF (CFO − capex − intangibles)	421	851	(70)	1,605	2,413
CFO / net income	1.16	1.22	0.77	1.24	1.18
Shareholders' equity	2,484	3,934	5,874	7,603	8,938
ROE (average equity)	28.2%	40.3%	38.6%	36.5%	41.2%
Subscribers, year-end (m)	≈8	>14	≈25	>41	n/d
Devices shipped (m) / device ASP ($)				36.7 / ≈330	52.3 / ≈305
Receivables (year-end) / DSO (days)				2,594 / 63.3	3,955 / 72.5

Sources: FY2009 financial statements and MD&A; FY2011 financial statements and MD&A; AIF FY2011. FY2007 ROE uses opening equity of \(1,995m. Device ASP = device revenue ÷ units (\)12,116m/36.7m; $15,956m/52.3m). DSO (days sales outstanding) = receivables ÷ revenue × 365. RIM bought back $2,852m of stock in FY2010–11 (49.5m shares) (FY2011 FS).

Table 2.4 — Valuation snapshot at the US close, 30 June 2011

	Nokia (NOK ADR)	RIM (RIMM)
Share price	$6.42 ≈ €4.42	$28.85
Shares (m)	3,709 (2010 average basic)	524 (22-Mar-2011)
Market capitalisation	≈€16.4bn	≈$15.1bn
Net cash (latest)	€6.4bn (31-Mar-2011)	$2.9bn (28-May-2011)
Non-controlling interests (Siemens' share of NSN)	€1.8bn	—
Enterprise value (EV)	≈€11.8bn	≈$12.2bn
Trailing P/E	8.8× (2010 EPS €0.50)	4.6× (FY2011 EPS $6.34)
Forward P/E on guidance	withdrawn	5.1× (midpoint $5.625)
Price / book	1.14×	1.69×
Trailing dividend yield	9.0%	none
EV / last-year operating profit	5.7×	2.6×
Last-year FCF yield on market cap	25.0%	16.0%
Peak close (date) and fall to decision date	$41.10 (6-Nov-2007), −84.4%	$147.55 (19-Jun-2008), −80.4%
P/E at peak	≈15× (2007 EPS)	≈65× (FY2008 EPS)

Sources: prices 35, 36; shares 1, 9; cash 5, 14; EPS and equity Tables 2.1 and 2.3. EV (enterprise value) = market cap + non-controlling interests − net cash. Nokia's net cash is for the whole group, including NSN.

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3. You are the analyst

Answer these before reading section 4, using only sections 1–2. Show your arithmetic.

1. (Numerical: rebuild the snapshot.) Recompute Table 2.4. What share of each market cap is net cash? Strip the cash out and compute an "ex-cash P/E" for RIM (use a 1% post-tax yield on cash).
2. (Numerical: reverse DCF.) Treat RIM's FY2011 FCF of \(2.41bn as a perpetuity growing at *g* and discount at 10%. What *g* does the EV of ≈\)12.2bn imply? Repeat at 9% and 12%. Then read the same EV another way: for how many years of flat FCF, with nothing after, is the market paying?
3. (Numerical: what does a low P/E imply?) With full payout, the justified P/E is \((1+g)/(r-g)\) (06.5). At \(r = 10\%\), what perpetual earnings growth do RIM's 4.6× and Nokia's 8.8× imply? Which company is the market more pessimistic about, and is that what you would expect from sections 1–2?
4. (Numerical: sum of the parts.) For Nokia, assume NSN's equity is worth zero and NAVTEQ is worth half of its €5.34bn cost. What value is the market placing on D&S? Express it as a multiple of D&S 2010 operating profit (≈11.3% × €29.1bn). List three reasons this "floor" may be overstated.
5. (Numerical: moat-erosion tests.) Compute: (a) RIM's gross-margin change FY2007→FY2011 in percentage points, its device ASP change FY2010→FY2011, and DSO and receivables growth vs revenue growth; (b) Nokia D&S's gross- and operating-margin changes 2007→2010, its ASP change, and its North American volume change. Which numbers point to eroding pricing power, and which to eroding relevance?
6. (Numerical: capital allocation.) Compute the average price RIM paid for its FY2010–11 buybacks, and Nokia for 2006–08 (€3,412m for 212.34m shares, €3,884m for 180.59m, €3,123m for 157.39m). What are those shares worth at the decision-date price? What does that say about buybacks by a company whose moat is in question?
7. (Judgement: which moat, which shift?) Sort each advantage into a moat type (05.3): Nokia's manufacturing scale, its distribution, its brand and its patents; RIM's BES integration, BlackBerry Messenger, carrier relationships and the physical keyboard. Which does a shift to app ecosystems neutralise, and which survive?
8. (Judgement: Nokia's fork in the road.) In February 2011 Nokia could stay with Symbian/MeeGo, adopt Android, or adopt Windows Phone. Sketch the payoff distribution of each, as an options trader would. What did announcing the switch eight months before the first Windows Phone shipped risk for 2011–12 revenue?
9. (Decision.) Own, avoid or short each stock on 30-Jun-2011, and at what size? Write the strongest bull case, and three KPIs with thresholds that would prove you wrong. (Educational framing; see 11.7 if you would use options.)

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4. What happened

Date	Event	Source
Sep-2011	Nokia outsources Symbian development and support to Accenture	20-F 2011
Oct-2011	BlackBerry service interruption; ≈$54m of penalties and lost service revenue in Q3 FY2012; class actions follow	AIF FY2012
Oct-2011	Nokia launches its first Windows Phones, the Lumia 800 (≈€420 before taxes and subsidies) and Lumia 710	20-F 2011
2-Dec-2011	RIM books a ≈$485m pre-tax provision on PlayBook inventory; stock −9.7%	6-K; 35
22-Jan-2012	Thorsten Heins replaces the co-CEOs; Barbara Stymiest becomes independent chair	6-K
FY2011 / FY2012	Nokia 2011: operating loss €1,073m, EPS −€0.31, dividend halved to €0.20. It also says Symbian volumes fell faster than expected and books excess-component provisions. RIM FY2012 (to 3-Mar-2012): revenue $18.4bn, net income $1.16bn, subscribers ≈77m	20-F 2012; 20-F 2011; MD&A FY2014; AIF FY2012
28-Jun-2012	RIM Q1 FY2013: revenue $2.8bn (−43% y/y), net loss $518m. BlackBerry 10 is delayed to Q1 2013 and ≈5,000 jobs go. Stock −19.1%	6-K; 35
17-Jul-2012	Nokia ADR closes at $1.69, −73.7% from the decision date	35
2012	Nokia: operating loss €2,303m, EPS −€0.84, no dividend; device share 21% (Strategy Analytics)	20-F 2012
30-Jan-2013	BlackBerry 10 launches (Z10, Q10); RIM renames itself BlackBerry; stock −12.0%	AIF FY2014; 35
7-Aug-2013	Nokia buys Siemens' 50% of NSN for €1.7bn	20-F 2013
3-Sep-2013	Microsoft agrees to buy D&S for €3.79bn plus €1.65bn for a 10-year patent licence (total €5.44bn); ≈32,000 staff to transfer; ADR +31.3%	Microsoft; 20-F 2013; 35
20-Sep-2013	BlackBerry pre-announces Q2 FY2014: revenue ≈$1.6bn, $930–960m Z10 inventory charge, ≈4,500 job cuts (≈40% of staff); stock −17.0%	6-K; 35
23-Sep / 4-Nov-2013	Fairfax-led offer at **\(9/share** (≈\)4.7bn) under a letter of intent; replaced by a $1bn convertible debenture. John Chen replaces Heins	AIF/MD&A FY2014
FY2014 (to 1-Mar-2014)	BlackBerry: revenue $6.8bn, net loss $5.9bn (incl. $2.7bn asset impairment and $2.5bn of inventory charges); devices recognised 13.7m vs 52.3m in FY2011	MD&A FY2014
25-Apr-2014	Microsoft closes the deal. The Chennai (India) factory stays with Nokia because Indian tax authorities have frozen its assets	Microsoft; 20-F 2013
2014	Nokia pays €0.37/share for 2013, incl. a €0.26 special dividend	20-F 2013
FY2015 (to Jun-2015)	Microsoft records $7.5bn of goodwill and asset impairments on Phone Hardware	Microsoft 10-K
28-Sep-2016	BlackBerry says it will end all internal hardware development	6-K

Stock outcome from the decision date (30-Jun-2011)

Horizon	Nokia ADR close ($)	Price	Total return ≈	BlackBerry close ($)	Price = total return	Apple TR ≈	S&P 500 TR
Start	6.42			28.85
+1 year (29-Jun-2012)	2.07	−67.8%	−65.3%	7.39	−74.4%	+74.0%	+5.4%
+3 years (30-Jun-2014)	7.56	+17.8%	+35.1%	10.24	−64.5%	+102.8%	+58.5%
+5 years (30-Jun-2016)	5.69	−11.4%	+10.1%	6.71	−76.7%	+116.6%	+77.0%
+7 years (29-Jun-2018)	5.75	−10.4%	+19.1%	9.65	−66.6%	+334.0%	+138.7%

Source: Yahoo Finance closes and dividend-adjusted closes (35); S&P 500 total-return index (^SP500TR). Nokia's total return uses gross ADR dividends. BlackBerry paid none. From their 2007–08 peaks, both fell ≈96% to their lows: Nokia to $1.69 (Jul-2012) and BlackBerry to $5.75 (Dec-2013).

The two outcomes diverge, and that is the most important fact in the case. Both handset businesses failed. RIM's revenue fell at ≈30% a year from FY2011 to FY2014. Nokia's group sales fell at ≈16% a year from 2010 to 2012. BlackBerry shareholders had nothing else to fall back on. Nokia shareholders did: net cash, networks, maps and patents, plus a buyer for the phone business. After a −68% first year, the Nokia holder was ahead after three years, though still well behind the index.

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5. Signals: knowable then vs hindsight

Knowable on 30-Jun-2011	Only in hindsight
The platform shift was in the numbers: Android went from 3.9% to 22.7% of smartphones in one year; Microsoft's share fell from 8.7% to 4.2% (Gartner)	How fast the installed bases would leave. RIM's devices fell 74% in three fiscal years; Nokia's Symbian decline outran its own plan
Pricing power was going. RIM's gross margin fell ≈10pp over four years; Nokia's D&S margin fell 6.4pp (gross) and 8.8pp (operating), and its ASP fell 26%	That Windows Phone would never reach critical mass, and that BB10 would slip to 2013 and then flop
Relevance was going: Nokia's North American volumes fell 43% in three years; RIM's Q4 smartphone share fell from 19.5% to 13.7%	The October 2011 outage and the PlayBook write-down, both of which damaged trust in RIM
Guidance credibility: RIM's EPS guide fell 25% in 12 weeks; Nokia withdrew its targets a month after setting them	That Microsoft would pay €5.44bn in 2013, rescuing Nokia's equity, then write off $7.5bn two years later
The RIM moat had shifted from enterprise (BES, high switching costs) to consumers (BIS), who choose phones on apps and user experience	That Nokia's networks business, loss-making in Q1 2011, would become the core of the surviving company
The market priced RIM's FCF to shrink ≈8% a year forever (Q2). Section 1 gave no evidence of how fast the decline would really be	That the realised decline would be ≈30% a year, making even the "pessimistic" price far too high

The strongest bull case that existed at the time

RIM: 4.6× earnings, no debt, $2.9bn of cash, unit shipments up 43% in FY2011, and a fast-growing base outside North America (54.6% of users) where BlackBerry Messenger was popular. It had high-margin recurring service revenue of $3.2bn, entrenched enterprise security, and a modern OS (QNX) already in a shipping product. Insiders owned ≈10%. Even at a 10% annual decline in earnings, the stock was roughly fairly priced; anything better was upside. Nokia: the world's largest phone maker, with unmatched emerging-market distribution. Net cash covered 39% of the market cap, and the dividend yield was 9%. Microsoft was paying "billions" to make Nokia its lead partner, NSN and NAVTEQ were free options, and a patent portfolio was built from €43bn of R&D.

Why it failed for RIM: every number in that case was a stock (installed base, cash, patents) or a trailing flow. None was a leading indicator of new-customer choice. The leading indicators (share of new smartphone sales, ASP, developer attention) were all falling. Why it half-worked for Nokia: its "free options" were real assets outside the dying business, and one of them (a sale of D&S) got exercised.

Guard against hindsight bias

In June 2011 platforms looked more contestable than they do today. Windows Phone was backed by the world's largest software company and the largest phone maker. BlackBerry had just been the US's top-selling smartphone brand for 2010. Skilled investors owned both. What you could know was the direction of the leading indicators and the size of the decline the price assumed. You could not know the speed. A good 2011 analysis sizes the position for a wide distribution of outcomes. It does not claim to have predicted BB10's failure (11.6).

Trader's lens — implied decay vs realised decay

A low P/E is not "cheap"; it is an implied growth rate, just as an option price is an implied vol. RIM at 4.6× implied ≈−10% a year for ever (Q3). The market was right on direction, but realised decay was ≈−30% a year, as if the market had sold vol at 10 on an underlying that realised 30. Nokia's price implied roughly flat earnings on a group whose core was shrinking. But part of its value sat in assets whose "delta" to the handset war was near zero.

India notes

• Nokia was big in India. Its 2008 20-F said its global share benefited from strength in India and entry-level phones (20-F 2008). The Chennai factory was left out of the Microsoft sale because Indian tax proceedings had frozen its assets (20-F 2013, Microsoft).
• The same test at home. When a dominant Indian franchise looks cheap after a de-rating, ask Q5's two questions. Is pricing power eroding (gross margin, ASP)? Is relevance eroding (share of new customers, where developers, distributors and partners are moving)? Then compare the decline the price implies (Q2–Q3) with the one you can evidence. Compare I12 ITC (a low multiple that was not a terminal decline) and I10 Vodafone Idea (a capital cycle).

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6. Lessons

1. A moat protects a profit pool only while the pool stays where it is. Nokia's scale and distribution, and RIM's enterprise switching costs, were real. The platform shift moved value to the OS and app ecosystem, where neither had network effects. Ask which layer of the value chain captures the profit, and whether that layer is moving. → 05.2 Industry analysis · 05.3 Moats
2. A low P/E on peak earnings is a forecast of decline. Test the forecast. Convert the multiple into implied growth (Q2–Q3). Then look for evidence of the realised decline rate in leading indicators, not trailing profits. → 06.6 Reverse DCF · 06.5 Multiples
3. Watch leading indicators, not stocks of past success. Share of new sales, ASP, gross margin, developer attention and the mix of new customers (BIS vs BES) turned years before profits did. Installed bases, cash and trailing EPS lag. → 04.2 Margins · 11.5 Monitoring & selling
4. Serial guidance cuts are information. Three RIM updates in 12 weeks and Nokia's withdrawal of targets a month after setting them showed that management could not see its own demand. Track "said vs did" every quarter. → 03.4 Quarterly results & concalls · 05.5 Management
5. Buybacks at peak multiples by a threatened franchise destroy value twice. RIM spent \(2.85bn at ≈\)58/share and Nokia €10.4bn at ≈€19/share. By June 2011 half and three-quarters of that money, respectively, was gone, and the cash was not there when the transition needed funding. → 05.5 Capital allocation
6. In a value trap, the floor is what sits outside the dying business. Nokia's net cash, networks, maps and patents turned a failed handset bet into a +35% three-year total return. RIM's "floor" was mostly the dying business itself. Do the sum of the parts, and ask which parts are uncorrelated with the core. → 06.7 Sum of the parts · 06.8 Margin of safety
7. Platform transitions are high-variance bets; size them like options. Nokia's Windows Phone choice and RIM's QNX/BB10 rebuild were binary-ish, and the old platform's revenue fell while the new one was not ready. Keep positions small enough to survive the bad branch. → 11.4 Position sizing · 11.6 Behavioural finance

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7. Model answers

Q1 — The snapshot

RIM. Market cap = \(28.85 × 524m = **\)15.12bn. EV = 15.12 − 2.90 = $12.22bn. Trailing P/E = 28.85/6.34 = 4.55×. Forward P/E is 28.85/5.625 = 5.13× at the midpoint (4.81× at $6.00, 5.50× at $5.25). Cash is 2.90/15.12 = 19.2% of market cap. FCF yield = 2,413/15,117 = 16.0%, and EV/FCF = 5.06×**.

Ex-cash P/E: cash per share = 2,900/524 = \(5.53, and its after-tax income at 1% is ≈\)0.06 a share. So (28.85 − 5.53)/(6.34 − 0.06) ≈ 3.7×.

Nokia. Price in euros = 6.42/1.4523 = €4.42. Market cap = 4.42 × 3,709m = €16.4bn. EV = 16.4 + 1.85 − 6.4 = €11.8bn. P/E = 4.42/0.50 = 8.8×, dividend yield = 0.40/4.42 = 9.0%, P/B = 16.4/14.38 = 1.14×, and EV/EBIT = 11.8/2.07 = 5.7×. Net cash is 6.4/16.4 = 39% of market cap, ≈€1.73 a share. Caveat: part of that cash sits in NSN, which Siemens half-owns.

Both look cheap on every trailing metric. That is the point: trailing metrics cannot separate a bargain from a trap.

Q2 — Reverse DCF for RIM

A growing perpetuity gives \(EV = FCF\,(1+g)/(r-g)\). Solving for \(g\):

\[g = \frac{EV\cdot r - FCF}{EV + FCF} = \frac{12.217 \times 0.10 - 2.413}{12.217 + 2.413} = \frac{-1.191}{14.630} = -8.1\%\]

At 9%, −9.0%; at 12%, −6.5%. The market was pricing FCF to shrink by roughly 7–9% a year forever.

Annuity view: \(EV/FCF = 5.06 = (1 - 1.1^{-n})/0.1\), so \(1.1^{-n} = 0.494\) and \(n \approx\) 7.4 years of flat FCF, then nothing.

Was that pessimistic enough? What happened: FCF after PP&E and intangibles was −\(207m in FY2012, +\)880m in FY2013 and −\(1,522m in FY2014. That sums to **−\)849m** over three years, or ≈−$70m excluding the $779m Nortel patent purchase (MD&A FY2014, AIF FY2012). The price was right about direction and wrong about speed. A "pessimistic" reverse DCF can still be far too optimistic when the decline is non-linear.

Q3 — The P/E as an implied growth rate

Solve \((1+g)/(0.10-g) = P/E\), which gives \(g = (0.10\cdot P/E - 1)/(1 + P/E)\).

• RIM: (0.455 − 1)/5.55 = −9.8% a year.
• Nokia: (0.884 − 1)/9.84 = −1.2% a year (+0.9% if you assume the 80% payout Nokia actually paid).

So the market treated RIM as a steady decliner and Nokia as roughly flat. Given sections 1–2, both looked generous. Nokia had just said its Q2 handset margin could be around breakeven, and RIM had cut guidance twice. What happened: Nokia's EPS went to −€0.31 (2011) and −€0.84 (2012). RIM's continuing EPS went \(2.23 (FY2012), then −\)1.20 and −$11.18 (MD&A FY2014). Sanity table (full payout, r = 10%): g = −5% → 6.3×, −10% → 4.5×, −15% → 3.4×, −20% → 2.7×. Single-digit multiples are fair value for businesses that shrink quickly.

Q4 — Nokia sum of the parts

Implied D&S = market cap − net cash − 50% × NAVTEQ cost = 16.40 − 6.40 − 2.67 = ≈€7.3bn. That is 7.3/(0.113 × 29.13) = 7.3/3.29 = ≈2.2× 2010 D&S operating profit. The market valued the handset business as if its profits would last only a couple of years.

Why the floor may be overstated: (1) part of the group net cash sits in NSN, and Siemens owns half of NSN's equity. (2) NSN earned a ≈0% margin in Q1 2011 and could consume cash. (3) Restructuring the D&S transition costs cash (the €1bn opex cut needs severance). (4) NAVTEQ's value depends on handset volumes and Microsoft's use of the maps. (5) The dividend (€1.5bn a year at €0.40) drains the cash if D&S stops earning.

What happened: Microsoft paid €3.79bn for D&S in 2013, about half of the implied €7.3bn, after two years of group operating losses. But the parts outside D&S turned out better than zero. Continuing operations (networks, maps, technologies) swung from an operating loss of €821m in 2012 to a profit of €519m in 2013 (20-F 2013). The €1.65bn patent licence came on top. The SOTP did not need a D&S miracle; it needed the non-D&S parts to be worth more than nothing.

Q5 — Moat-erosion tests

RIM. Gross margin 54.6% → 44.3%, −10.3pp (FY2007→FY2011). Device ASP ≈\(330 → ≈\)305, −7.6%. DSO 63.3 → 72.5 days: receivables rose 52.5% while revenue rose 33.1%. The ASP cut and cheaper mix point to eroding pricing power. The DSO rise is a yellow flag: it may reflect a shift to international carriers or a late-quarter shipment push. Check the receivables-ageing and allowance notes before calling it aggressive (04.4). Relevance shows in the Gartner Q4 share (19.5% → 13.7%) and in BIS overtaking BES. RIM was growing in segments where its switching costs were weakest.

Nokia. D&S gross margin 36.5% → 30.1% (−6.4pp); operating margin 20.1% → 11.3% (−8.8pp); ASP €86 → €64 (−25.6%); North American volumes 19.4m → 11.1m (−43%); smartphone share 52% → 36%. Total units were flat (437m → 453m), so Nokia held volume by moving down-market while losing value at the top. That is the classic pattern when an incumbent's product loses relevance in the profitable segment. Payout of 167% (2009) and 80% (2010) shows the dividend was set for a business that no longer existed.

Q6 — Buybacks

RIM: $775m + $2,077m = \(2,852m for 12.3m + 37.2m = 49.5m shares, an average of **≈\)57.6. At $28.85 those shares are worth \(1.43bn: **−50%**, a ≈\)1.42bn loss. Separately, the 2010 programme averaged ≈\(65.9 and the 2011 one ≈\)54.3. Nokia: €10,419m for 550.3m shares, an average of ≈€18.93 (€16.07, €21.51 and €19.84 in 2006, 2007 and 2008). At €4.42 they are worth ≈€2.43bn: −77%**.

A buyback creates value only if price < value. When the moat is in question, cash has option value: it funds the transition, or it can be returned later at a lower price. The June 2011 RIM board authorised another 5% buyback at ≈4.6× earnings. That was more defensible on price, but it was still a bet that the earnings were durable.

Q7 — Moat types

Advantage	Moat type	Survives the app-ecosystem shift?
Nokia manufacturing and procurement scale	Scale economies (cost)	Partly: it lowers cost, but consumers now choose on software
Nokia distribution and emerging-market reach	Distribution / cornered channel	Partly: strong at the low end, eroding as Android OEMs use the same channels
Nokia brand	Brand	Weakens once the brand stands for the old experience
Nokia patents	Cornered resource (IP)	Yes: royalties do not depend on who wins, and Nokia kept them in 2013
RIM BES / IT integration, security	Switching costs (enterprise)	Only while enterprises choose devices; weakens as employees bring their own
BlackBerry Messenger	Network effect, but a closed one	Only while the network is exclusive. Once rivals' users are unreachable it pushes people away
Carrier relationships, data efficiency	Process / relationship	Weak: carriers follow consumer demand
Physical keyboard	Product feature	Not a moat

The ecosystem shift attacks all the "device-era" advantages at once, because the purchase decision moves to the software and app layer. There, network effects compound for the leaders (the flywheel in section 1).

Q8 — Nokia's options in February 2011

• Stay (Symbian/MeeGo): full control and no licence fee, but a lagging developer ecosystem. Elop's memo said the MeeGo pace might yield only one product by end-2011 (Engadget). Payoff: a high probability of slow erosion and a small chance of a comeback.
• Android: instant access to the fastest-growing ecosystem, but as one of many OEMs selling similar hardware, so margins get competed down. Payoff: a narrow distribution around "a large but low-margin OEM".
• Windows Phone: differentiation, Microsoft's money ("billions") and a say in the roadmap. But it meant joining a platform with a 4.2% and falling share (Gartner). Payoff: bimodal, either a strong #3 ecosystem or irrelevance, like a long out-of-the-money call.

The timing risk was knowable. Nokia downgraded Symbian publicly in February, but the first Windows Phone was expected in Q4 2011 (6-K). Buyers, carriers and developers had reason to hold back from Symbian before its successor existed. Nokia later said Symbian volumes fell faster than anticipated (20-F 2011). None of this proves another option would have worked. It shows why the distribution of outcomes for Nokia's equity was very wide.

Q9 — Decision (rubric)

A strong answer: (1) states the implied decline (≈−8 to −10% for RIM, ≈flat for Nokia). (2) Brings evidence that the realised decline could be faster: falling gross margins and ASPs, share of new sales, guidance cuts, BIS > BES. (3) Separates Nokia's non-handset floor (net cash, NSN, NAVTEQ, patents) from the handset option. (4) Sizes small or avoids. The strongest structure is "avoid RIM; small Nokia position justified only by the SOTP floor". A short in RIM at 4.6× carried squeeze and takeover risk (the $9 Fairfax offer arrived in 2013). KPIs: RIM's shipments vs guidance, gross margin vs the 39% Q2 guide, subscriber growth outside North America, and the BB10/QNX phone date. Nokia's Q2–Q3 D&S margin vs breakeven, Symbian volumes vs the 150m plan, Windows Phone launch on time and early sell-through, net cash above ≈€5bn, and NSN margin. Thesis-breakers could include a second guidance cut, a platform slip beyond one quarter, or a dividend cut. A weak answer says "cheap on P/E, strong brand, buy".

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8. Discussion questions & extensions

1. What would you monitor today? Pick any incumbent whose product may be bypassed by a new software layer (for study, not recommendation). Define its "Q5 dashboard": share of new customers, ASP, gross margin, developer or partner attention, and the mix of new vs legacy users. Which metric turned first for RIM and for Nokia?
2. Was selling D&S good capital allocation? Microsoft paid €5.44bn and later impaired $7.5bn. Argue for Nokia's shareholders and for Microsoft's. What does this say about the value of a strategic buyer as a "floor" in a value trap?
3. Could BlackBerry have kept a smaller, profitable niche? Using the FY2011 revenue mix (80% devices, 16% service, 2% software), model a "software and services only" RIM. What subscriber decay and service fee per user would have supported the June 2011 EV? (BlackBerry itself pivoted to software in 2016.)
4. Dividends as a signal. Nokia paid more than it earned in 2009 and 80% in 2010, then cut to €0.20 and zero. Build a rule for when a trailing dividend yield should be ignored in valuation.
5. Base rates. How often do former category leaders with over 30% share regain leadership after a platform shift? Design a study (handsets, PCs, cameras, search, retail). How should the base rate change your probability on each bull case (11.6)?

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Sources

All accessed 21-Sep-2026. SEC documents were retrieved from EDGAR. Share prices came from Yahoo Finance via yfinance. Every derived ratio was recomputed in Python.

1. Nokia, Form 20-F for 2010 (filed 11-Mar-2011): selected financial data 2006–10, D&S results, volumes, ASP, market share, cash flow, buybacks, dividends, Elop biography, R&D and patents. https://www.sec.gov/Archives/edgar/data/924613/000095012311024458/u10545e20vf.htm
2. Nokia, Form 20-F for 2008 (filed 5-Mar-2009): D&S 2006–08, gross margins, volumes, share, smartphone share, ASP, India and entry-level position, NAVTEQ cost, Symbian Foundation, 2006–08 cash flows. https://www.sec.gov/Archives/edgar/data/924613/000115697309000127/u06062e20vf.htm
3. Nokia, Form 6-K (11-Feb-2011): Microsoft partnership, new strategy, Symbian "franchise platform", financial targets. https://www.sec.gov/Archives/edgar/data/924613/000110465911006542/a11-5782_16k.htm
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