The 20-F provides a breakdown of 2011's overall financial results, information on the structure of the company, and an outline of company operations. Almost all of this information is already available in previously published Nokia quarterly reports and related financial documents, but the standardised language of the 20-F can offer greater clarity.
Section 3D of the 20-F generally attracts the most interest from industry commentators; it asks companies to provide an assessment of the risk factors it faces. Compared to most company statements, this section can be very forthright about what might go wrong, but it is important to note that these are what can happen, not what is likely to happen (i.e. worst case scenarios). Nonetheless, they can provide valuable insight into what a company perceives to be its major challenges. A well written and comprehensive section 3D will reassure investors because awareness of potential issues is regarded as being a sign of good management.
Nokia's 2011 20-F risk factors section open with the following comment about its smartphone business:
Our success in the smartphone market depends on our ability to introduce and bring to market quantities of attractive, competitively priced Nokia products with Windows Phone that are positively differentiated from our competitors' products, both outside and within the Windows Phone ecosystem, and receive broad market acceptance.
The components of this are broken into greater detail:
- The Windows Phone platform is a more recent addition to the market focused on high-end smartphones. While adoption is increasing and consumer awareness growing, it is still much less widely used than the Android and iOS platforms. As with any new platform, we may not succeed in developing it into a sufficiently attractive and competitive smartphone platform.
- The Windows Phone ecosystem may not attract developers who will contribute content and applications, thus making our Nokia products with Windows Phone less appealing to consumers.
- The Microsoft Windows Phone platform may not support the hardware configurations required to succeed in becoming a sufficiently price competitive platform and may limit our ability to develop a price competitive smartphone portfolio of products.
- We may not be able to introduce a compelling portfolio of Nokia products with Windows Phone that include new hardware and design innovations. Additionally, we may not be able to introduce functionalities such as location-based services and entertainment or otherwise customize our Nokia products with Windows Phone in order to positively differentiate our products from competitors' products, both outside and within the Windows Phone ecosystem.
- We may face delays in bringing our Nokia products with Windows Phone to various markets due to, for instance, manufacturing difficulties, delays in software and/or hardware development or product or sales package customization to accommodate various markets or operator requests.
- We may face issues in selecting, engaging or securing support from leading operators and retailers for the initial launches and sales ramp-up of our Nokia products with Windows Phone due to, for instance, inadequate sales incentives, training of sales personnel, marketing support and experience in generating interest for a new and relatively unfamiliar Windows Phone platform in an otherwise highly competitive market. Delayed or non-optimal initial launches and sales ramp-up could result in diminished support from leading operators and retailers and low consumer interest for subsequent launches of our Nokia products with Windows Phone and may also adversely affect our Nokia brand generally and sales of our other Nokia mobile products.
- Consumers may not prefer the Windows Phone user experience, interface or software functionality.
- We may not succeed in creating a high level of consumer interest for our Nokia products with Windows Phone, in converting interest for our Nokia products with Windows Phone to purchase decisions or in making the Nokia brand more desirable than brands of our competitors in smartphones.
- Microsoft may not be able to provide the software innovations and features we rely on for the Windows Phone operating system in a timely manner, if at all.
- Our competitors may provide incentives to operators, retailers or developers that may make it unattractive for them to support Nokia products with Windows Phone, or our competitors may use various technical and commercial means to make it unattractive for consumers that currently use another product to purchase Nokia products with Windows Phone.
- Our ongoing transition to the Windows Phone platform may prove to be too long to compete effectively in the smartphone market longer-term given the ongoing developments of other competing smartphone platforms.
- Our strategy for Nokia products with Windows Phone may erode our brand identity in markets where we are traditionally strong and may not enhance our brand identity in markets where we are weak. For example, our association with the Microsoft brand may not accelerate our access to a broader market in the United States.
- In choosing to adopt Windows Phone as our primary smartphone platform, we may forgo more competitive alternatives achieving greater and faster acceptance in the smartphone market. If the benefits of the Microsoft partnership do not materialize as expected, more competitive alternatives may not be available to us in a timely manner, or at all.
- We manufacture mobile devices, but currently no other adjacent products, such as tablets, computers and other connected devices. As a result, Nokia products with Windows Phone may be a less compelling choice for consumers who wish to purchase multiple mobile products from the same manufacturer or with the same or compatible operating system in order to facilitate a smooth interaction among mobile products and electronic products of different types and screen sizes, such as mobile devices, tablets, computers and televisions.
The report also mentions a number of other potential risks. The importance of the ecosystem factor is underlined by its entry as a separate item:
We may not be able to make Nokia products with Windows Phone a competitive choice for consumers unless, together with Microsoft, we successfully encourage and support a competitive and profitable global ecosystem for Windows Phone smartphones that achieves sufficient scale, value and attractiveness to all market participants.
The potential issues of maintaining and extracting the economic value of Symbian are also highlighted:
We may experience further difficulties in having a competitive offering of Symbian devices and maintaining the economic viability of the Symbian smartphone platform during the transition to Windows Phone as our primary smartphone platform.
As is the threat to Nokia's feature phone business from Android:
We may not be able to produce attractive and competitive feature phones, including devices with more smartphone-like features, in a timely and cost efficient manner with differentiated hardware, software, localized services and applications.
And the increasing competition and price pressure on Nokia's digital map / location data business:
We face intense competition in mobile products and in the digital map data and related location-based content and services markets.
Our strategy for our Location & Commerce business may not succeed if we are unable to maintain current sources of revenue, provide support for our Devices & Services business and create new sources of revenue from our location-based services and commerce assets.
There are also entries much the same as previous years, about issues relating to the need to maintain product innovation and research and development, the need to defend intellectual property, retain skilled staff, maintain the loyalty of customers, reliance on key supply chain partners, managing the manufacturing process, potential cyber security issues, potential quality issues (and the arising impact on brand), the volatility of currency fluctuations, potential regulatory or political changes, changes in technical standard, changes in tax environments, and the impact of litigation and other legal issues.
What is perhaps most notable about Nokia's 2011 20-F is the additional detail on the risk factors facing its smartphone business. By contrast, Nokia's 2009 20-F essentially had just a single direct entry relating to high end devices, one that was rather generic:
We need to have a competitive portfolio of high quality products and services and their combinations that are preferred, purchased and used by our current and potential customers and consumers. If we fail to achieve or maintain a competitive portfolio, our business, sales and results of operations may be materially adversely affected.
The 2010 20-F did improve on this, but the Microsoft-Nokia partnership had only just been announced, so potential issues specific to Nokia's use of Windows Phone were somewhat lacking.
It is clear that Nokia's goal of creating a third ecosystem with Microsoft, via Windows Phone, remains an enormous challenge. The scale of the task is neatly outlined by the number of risk factors that must be overcome. However, an awareness of these factors is an essential part of plotting a course. This kind of strategic clarity is something that Nokia has been missing in recent years. It also explains why the company's Windows Phone journey is attracting so much interest and optimism from within the industry. The challenge for Nokia now is to execute on its vision.