Moody's Investors Service announced Wednesday that it has downgraded mobile phone maker Nokia's debt rating by two steps, or halfway to junk status.
The Finnish company's senior debt rating was bumped down from A3 -- the fifth-lowest of 10 investment-grade ratings -- to Baa2, the third-lowest.
In its announcement, Moody's senior vice president Wolfgang Draack said:
"The rating downgrade reflects a severe weakening of Nokia's business position from one of clear leadership previously. This deterioration has been caused by a loss of competitiveness of Nokia's Symbian-based smartphone portfolio and the transition of its operating systems to [Microsoft's] Windows Phone platform which we expect to take until the second half 2012 to fully complete, combined with increasing price pressure and gaps in the company's mobile phone portfolio that are now being filled."
Translation: Nokia is on the sidelines while competitors flood the market with cheaper, better smartphones, locking up customers through either contract or satisfaction-based loyalty.
It's hard to jump back into that game -- unless you ultimately deliver something vastly superior to the competition, a game-changer.
But does anyone really think Nokia and Microsoft -- whose partnership announced in February included a built-in product delay of almost a year -- can rise to the formidable task of making a better or more attractive device than the iPhone or any of the higher-quality Droids? Or even a comparable, but much cheaper, smartphone?
In releasing the company's disastrous second-quarter earnings last Thursday -- device sales were down 20% from a year ago and 23% from Q1, while smartphone sales plummeted 33 percent from Q1 -- Nokia chief executive Stephen Elop said, "In retrospect, maybe that burning platform wasn't so bad."
Kidding! Here's what Elop really said: "[W]hile our Q2 results were clearly disappointing, we are executing well on the initiatives that are most important to our longer-term competitiveness."
For Nokia's sake, we better find out sooner than later if that's true. Not having a competitive smartphone ready for the holiday season could put the company beyond the point of no return. It may already be now, but every day Nokia's products are off the consumer radar screen is revenue (both current and future) the company will never see.
And I'm not just talking about the U.S.-Canada market, which actually comprises only a small percentage of Nokia's total sales (1.5 million devices, or 1.7% of 88.5 million devices in the second quarter). In Nokia's largest market -- Asia-Pacific -- Q2 device sales dropped 20% year-over-year to 24.5 million units, while sales in Greater China nosedived 41% to 11.3 million units.
Shares of Nokia (NYSE: NOK) were down as much as 14 cents, or 2.4 percent, to 5.75. Nine days ago Nokia shares hit a 13-year low of 5.31.