Is the Time Right for Nokia?

Last year, Nokia (NOK) sold 472 m cell phones and made $7bn of profit on $70bn of sales. Every 13 seconds, a Nokia handset pops off the end of a production line. In countries such as China, India, Russia and Brazil - the emerging economic super powers - Nokia is the number one selling phone brand.

In 1996, Nokia sold the world’s first internet enabled phone and last year, of the 139m smartphones that were sold worldwide, 61m were made by Nokia. By comparison, just 11.4m were iPhones.

For 2009, Cykepartners estimates that 207m smartphones will be sold - which is rather more than most analysts believed at the beginning of the year. Few would now disagree that smartphones are the brightest star in the firmament. Then, if we add in to the mix that Nokia is selling on about 12 times 2010 earnings, it all starts to sound rather enticing. That just goes to prove how misleading numbers can be, if you fail to question them. As Warren Buffett is fond of saying, you buy companies not stocks.

Field Marshall Hague ordered wave after wave of young soldiers to go to their slaughter during the First World War; Nokia’s ‘apparent’ attractions have done the same for wave after wave of young analysts during the last decade, which is when its decline began. In 2002, I was quoted in Forbes Magazine saying that Nokia would become the IBM of the mobile industry, a company that everyone agreed was well run but whose shares would disappoint investors. That, despite skepticism is exactly what has happened. Nokia has the makings of the biggest comeback since, well, Apple (AAPL). The problem is that doesn’t look like happening any time soon.

Strengths and Weaknesses

Nokia’s heartland is low to middle ranking phones. While it can claim to have the leading market share in smartphones, it is blindingly obvious that Nokia is losing ground. In the US, where we are witnessing the most rapid adoption of smartphones - they represent more than 20% of phones sold - compared to around 16% for the rest of the world, Nokia barely registers.

Nokia is strong in Europe but here its grip on the high end of the market is under siege from Apple, RIMM and soon the influx of Android devices from HTC, Motorola (MOT), LG and Samsung (SSNLF.PK) will further undermine the FInnish company's appeal. Nokia's real heartland is those emerging markets where 3G coverage is poor. The bulls will say that as these countries migrate to 3G, Nokia will be the first name they think of when buying a smartphone. The reason, the argument goes, is that their smartphones will sell more cheaply than Apple or RIMM’s because Nokia has greater economies of scale.

Lessons from the past

Similar arguments were made during the 1980s about IBM, which some may have forgotten created the business PC. Just as today there is Apple vs Nokia, in 1981 it was Apple vs IBM. IBM machines, using Intel (INTC) microprocessors and the Microsoft (MSFT) operating system, went on to quickly dominate and Apple’s long decline began.

Then IBM, which had 70% of the mainframe computer market and a scale and reach beyond any other company, began to lose market share to PC newcomers such as Dell (DELL) and Compaq, and much later to HP (HPQ). Analysts who had made their careers following IBM tended to see the world through IBM’s eyes and often repeated the company line: IBM was bigger, it had an unrivaled brand name with corporates and so on. Just as most analysts have had buy recommendations on Nokia during the current decade, most had buys on IBM all the way through the 1980s and 1990s. It is only over the last year that analysts have become more realistic about Nokia’s prospects.

IBM’s problem, and I suspect Nokia’s problem too, is that it does not have the right corporate DNA. IBM’s focus remains big corporate data processing departments, not the chaos and confusion of a new market. Nokia has been playing around with smartphones for over a decade and still has not managed to design a product that excites consumers.

With the entry of the Google (GOOG) Android and the astonishing success of Apple's App store, the pace of innovation in the smartphone market is accelerating. However, the focus of innovation is no longer hardware design it is the development of applications. Nokia still clings to the notion that consumers want lots of choice in terms of hardware design. We believe this is wrong, consumers are hungry for new applications and services rather than a wide portfolio of handset designs to chose from. Certainly, the army of developers whose creativity is expanding the iPhone and Android's ecosystem, have little interest in novel hardware design. Their economic interest is best served by supporting fewer designs that sell in larger numbers.

Nokia World

Why were Apple and RIM able to deconstruct the mobile phone market and begin remaking it in their own image? The answer, unfortunately for Nokia, has nothing to do with scale; scale is the product of a successful strategy not the origin of success. It is extraordinary how often this truth is ignored. Dinosaurs had scale and for tens of millions of years they had success until conditions changed.

A couple of weeks ago Nokia World was held in Stuttgart and was attended by developers and analysts. In case you were wondering why the shares have suddenly burst into life, now you know. Just like Pavlov’s dogs analysts know when to foam at the mouth.

At such events Nokia’s executives like to imagine themselves sitting in front of Oprah confessing their sins and promising to do better next time. Then the gloves come off and they revert to bamboozling the audience with numbers. There are, so the company claims, 1.1bn Nokia users world wide. The message, should you have been on your iPhone and missed it, is that Nokia has more scale than any other company when it comes to delivering music, social networking, email, mobile-payments etc...etc...etc.

On the strength of his performance at Stuttgart, Anssi Vanjoki, executive vice president markets, appears to do contrition like Boris Yeltsin used to do abstinence. At Nokia World he reeled off a list of Nokia's products and initiatives and is obviously proud of the joint venture with Microsoft. It's only a matter of time before the legs drop off.

Vanjoki’s claim that, together, they will vanquish RIM in the corporate market is delusional. One of my fondest memories from my years as a serious analyst within a serious investment house was a private meeting I had with one of Microsoft’s global chiefs. This was back in the days when I was a member of a Microsoft advisory group on the wireless market. The Microsoft executive became strangely animated when the name RIM was mentioned (this was back in 2001 or 2002): we own the corporate email market, he said between gritted teeth. Microsoft might have but it sure doesn’t own it now. This might be news in Redmond and Helsinki but email is fast going out of fashion - Twitter, social networking and soon products such as Google’s Wave are the future of communication, not email. Besides, despite Microsoft's scale, RIM seized control of wireless email. Scale didn't matter one iota, but focusing on what the customer wanted did.

Now to answer my question, why were Apple and RIM so successful, despite the fact that the mobile world was dominated by giants like Nokia?

DNA and Developers

I’m not going to spend much time on this because part of the answer, as I have already suggested, is to do with corporate DNA. At an intuitive level both Apple and RIM understood what the market needed. When it came to smartphones, Microsoft, with its dominance of corporate email didn’t get it and Nokia with its scale in mobile didn’t get it either. They still don't, which is why both companies have jumped into a life boat together. Great design does not arrive from tons of market research or group decisions. Someone somewhere on high has to ’get it’ and in both Nokia and Microsoft that someone does not exist. With the exception of Jorma Ollila, the people running Nokia today are the same that were running the company a decade ago when it first missed the warning signs. There has been little change.

Apple designed a great product and then learnt the lesson it flunked in the 1980s: it rallied the developers behind it this time around. If you are rich like Nokia you can throw lavish developer events but that does not mean you have their support. It certainly does not mean that you will attract the best developers. Nokia is committed to the Symbian operating system for its smartphones and now Windows for its netbooks. Meanwhile, there are over 80,000 applications being written for the iPhone and most worryingly for Nokia, Google’s Android operating environment is also now gathering momentum. The Android tide is rushing in, backed as it is by the most powerful force on the internet, coming free of charge and with bucket loads of applications. Nokia thinks it can resist this tide, just as it once tried resisting Microsoft.

Yet Nokia will eventually have to accept Android or face losing the scale it so cherishes. The best developers do not have the resource or interest in supporting a multitude of platforms. Rather like investors it pays to watch what developers do and not listen to what they say. They might sound interested in Symbian - an operating system that they have struggled to master for more than ten years- but they invest dollars and time in the iPhone, the Android and perhaps the RIM BlackBerry too.

Conclusion

Nokia has not yet suffered the bone shuddering shock that IBM went through in the early 1990s when it clocked up the biggest loss (at the time) in US history. That opened the door for Lou Gerstner to enter and recast the company in a new image. Nokia’s present strategy of multiple handset products looks flawed and dated. The key today is applications and services not hardware design. Developers want fewer platforms and I suspect so do customers. Nokia's management and the essential components of its strategy has barely changed over the last decade. It is time for a change.

Comments

[davidrdesign:]

You had me all the way until this: "Nokia’s present strategy of multiple handset products looks flawed and dated. The key today is applications and services not hardware design. Developers want fewer platforms and I suspect so do customers. Nokia's management and the essential components of its strategy has barely changed over the last decade. It is time for a change."

The inference here is that Nokia doesn't know this or is ignoring it. There aren't. They're just too big to make it happen fast enough. But I know they know. They're working on it and sweating bullets about it.

Sep 20 05:51 PM

[Roger Knights:]

"Field Marshall Hague"

Err ... Haig.

Sep 20 07:37 PM

[Timeline St...:]

I agree with the conclusions of this article.

Nokia's problems are only too clear. Those 'economies of scale' that will make them so profitable in the future? Good luck with them, because they come shackled to a corporate bureaucracy that calls press conferences and makes PR announcements instead of executing anything.

Apple makes innovation look so simple and straightforward that it's easy to think that any company can just do it. Nokia spends $6 billion for R&D annually. For what? Apple spends $1 billion and is eating Nokia's lunch. On the basis of that metric alone, Nokia may still be overvalued, at a P/E of 18.

Europe is the next battleground that Nokia will lose. iPhone is penetrating heavily into this market (6-8 week wait times for iPhone in the Netherlands, for example), and Nokia's fallback will be the developing world. Guess what? They will lose that too, it's just a matter of time.

I also completely agree with the concept of too many products for Nokia. That mattered less when the devices were not part of a platform. Now that they are, too many configurations make their strategy a complete liability.

Want proof of that? Go on gazelle.com, and check the resale value for a used 3G iPhone in fair or good condition. That's right - a cell phone that you can resell after your contract is up. iPhone is so well made, so desirable, and has such a rapidly growing platform that they sell them used.

Now compare that with any Nokia and see what you find. The proof of that pudding is right there in the eating.

Sep 21 03:31 AM

[southbeach:]

Sweating bullets won't cut it. No SVP or EVP fires themself, or admits the true extent of the gap between their skills and what a company needs to reinvent itself. Self deception and poised speeches skating over the evidence is far more comforting. Gerstner was an outsider...

Nokia's trend loss in high end is horrific, and they seem to be always 2-3 years too late in responding to market trends (remember the flip phone debacle...).

Thanks Keith for an interesting and thought provoking article.


On Sep 20 05:51 PM davidrdesign wrote:

> You had me all the way until this: "Nokia’s present strategy of multiple
> handset products looks flawed and dated. The key today is applications
> and services not hardware design. Developers want fewer platforms
> and I suspect so do customers. Nokia's management and the essential
> components of its strategy has barely changed over the last decade.
> It is time for a change."
>
> The inference here is that Nokia doesn't know this or is ignoring
> it. There aren't. They're just too big to make it happen fast enough.
> But I know they know. They're working on it and sweating bullets
> about it.

Sep 21 03:34 AM

[Jon T:]

Good article.

Nokia may be 5th in the Businessweek Interbrands list - images.businessweek.co...

But what use is a great brand when it's ratio's look like this: www.reuters.com/financ...

It has to reinvent itself, and fast, because the fat lady is starting to sing.

Sep 21 08:17 AM

[JamesApple:]

Machines that attract customers have hearts, nothing else really matter. Look at all the greatest products ever produced and we will see that they were all made 'with heart', and iPhone is a fine example of a product 'with heart', and customers react to iPhone with their own hearts in unwavering loyalty. The same goes for great applications like the Microsoft Office which are also created 'with heart'.

Applications and services with heart are created by warm and rich development lifecycles like the TSO ISPF, Visual Studio, Eclipse, Xcode, iPhone SDK, etc. If Nokia wants to capture the key resource of designer/developer interests and support which make or break products and services, then Nokia must provide a top notch development lifeycle (not just another IDE or SDK) loaded with excellent APIs and toolkits to make it worthwhile for designers and developers like me who make our living from using these things. We do base our choices of platforms basing on their merits, not just how slick the hardware is, or how lavishing the software conventions are, or how powerful and big the company holding the convention is, especially well established veteran designers/developers like me, we see a platform by the quality of its software architecture and components, the fact that iPhone is such a hardware marvel is a lot less enticing to me than the fact that the iPhone SDK and the OS and APIs are so robust, innovative, comfortable to use, and powerful.

Nokia must provide a much better development lifecycles environment if it wants to succeed anywhere anytime, traditionally, Nokia had failed in this department miserably, it is time Nokia patches this up quickly. As we all know, the whole world is suffering from old outdated applications and services, the problem logs are higher than mountains, so many user and application requests are unfulfilled, even more applications are badly outdated and simply not doing their jobs, yes, departmental boundaries and politics are ruining our economy too. With so many blights in our paths, it is time we take huge effort to right these wrongs, and I am hoping for new platforms that can replace the current platforms which are simply falling apart because they all fail to address the fundamental issues and needs of our changing world in one way or another. Can Nokia help in providing a new platform as I described? Perhaps we should start talking, and make things happen.

Sep 21 10:31 AM

[dtravlos:]

Very good points and conclusion. I really liked this article, and the analogy to IBM.

Consumers buy services, what hardware can provide. Research in Motion had ONE app - mobile email, Nokia ignored them, and now their market caps are very similar. Nokia has held onto Symbian way too long. Its other consortium members, back then thought to be the most powerful association, have backed out.

Consumers also will buy what the hardware can provide, but at an attractive price. Since you have been around, you remember that Nokia had great innovation on the handset side - innovative smart handsets or innovative music handsets - but they did not catch fire with the consumer because, for one, they were really expensive. Nokia has never grasped the concept of the perfect price points for consumer electronics that, yes, Apple, RIMM, and even Palm have.

And, yes, for the same reason that Nokia let RIMM have mobile email, is the same reason why they are losing ground - the Not Invented Here DNA which you identify.

Will Nokia be able to reinvent itself without the IBM-like shock?

Sep 21 05:41 PM

[Hirschd:]

Reseach-in-Motion(RIMM) is now only coming into its Tsunami stage in both development and sales.Nokia has,with all its resources found itself in a serious downward spiral that shortly will show larger cracks in its armor.
Nokia have built a powerful brand and must be hugely concerned about the gigantic sales in both Blackberry and Apples I-Phone.We are all creatures of habit and technology will drive us to use the tools which are most effective and convenient to ourselves.
Look around you and note how many people are using Blackberry(8 500 000/9 000 000)in sales per quarter,growing annually @ 40%!
If I were within Nokia's management team I would be sweating far more than bullets!

Sep 21 05:42 PM

[Senan:]

Nokia still has many many loyal customers. Their moat is narrow though and in the all important next generation smartphone handsets they seem to be perpetually playing catchup. Maybe they are so big now there is the possibility of a breakup into more specilised business units?

Sep 22 05:41 PM