Is the Time Right for Nokia?

by: Keith Woolcock

Last year, Nokia (NYSE: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 (NASDAQ: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 (OTC:SSNLF) 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 (NASDAQ:INTC) microprocessors and the Microsoft (NASDAQ: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 (NASDAQ:DELL) and Compaq, and much later to HP (NYSE: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 (NASDAQ: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.


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.