There was once a famous French car advert, where a beautiful woman said "size matters." For French men and cars it might, but it doesn’t for tech companies. Size simply means that you are a bigger target for true innovators. Put another way: big battalions can be destroyed by sharp shooters. Nokia (NYSE:NOK) provides the latest example of this rule.
Nokia often draws attention to its size but the independent software developers who are pivotal for the success of any smartphone are more interested in momentum. As rational economic units focused on profit, their survival depends upon picking winners. The developer has a finite amount of resource, at the most he will write applications for two, perhaps three devices. Ideally, he would like to make it one because that is how he boosts margins. Ask yourself, as a developer, who would you chose: Apple (NASDAQ:AAPL), Google's (NASDAQ:GOOG) Android, RIM's (RIMM) BlackBerry, Microsoft (NASDAQ:MSFT) or Nokia? It’s not hard, is it?
Nokia is the company that launched the first Internet phone in 1996 and once controlled 40% of the entire mobile market. When it comes to smartphones, Nokia has had more practice at failing than any other company. Now, as a cosmologist might say, Nokia is approaching an event horizon. We encounter event horizons on the rims of Black Holes. From time to time Nokia’s share will rally, because superficially they look cheap, but its prospects are dire.
Investors are conditioned to look at valuations and to pay homage to size, but this is to look through the wrong end of the telescope. Size is the result of a successful business model, not its originator. Nokia was last a truly successful company in the 1990s, for the last ten years it has been dying, just as IBM spent the 1980s and much of the 1990s dying. Like IBM after the launch of the PC, Nokia is a coelacanth, an evolutionary artifact.
There is speculation that Olli-Pekka Kallasvuo is to be replaced as the CEO. Mr Kallasvuo is an easy target, he is a fine, upstanding man, unfortunately he has all the charisma and vision of a snow shoe. If he is to go we would urge that he is followed by Anssi Vanjoki, the head of mobile solutions who has been on Nokia’s management board since 1998. Mr Vanjoki is a forceful character and that unfortunately is the problem - when you are forceful, yet have no strategic grasp of the industry you are in, you are dangerous and possibly even toxic as far as the interest of shareholders is concerned.
We live in an age of super abundance, there is too much stuff to chose from. At the same time, the consumers of the world are being brought closer together through social networks, like Facebook. In an age of superabundance, the products and companies with the clearest message win through because electronic gadgets, such as phones, are no longer productivity tools, they are expressions of the collective self. What is Nokia’s message, does anyone know? More to the point, does anyone care?
Yet, it cannot be denied that Nokia has some attractions. It is currently selling on an Enterprise Value to trailing sales, of 0.6 times and it does still have market share, particularly in emerging markets where Apples, Androids and Blackberries have yet to make an impression.
IBM (NYSE:IBM) might provide an interesting model. In the early 1990s, it notched up the biggest loss in US corporate history. Finally, in 1993, the board turned outside for help and picked Lou Gerstner. He saved the company.The task of saving Nokia will, in the 5th Column’s view, present more of a challenge. IBM’s core business, selling mainframe computers to large companies and government departments, acted as a safe harbor during the PC storm. This business provided cash-flow and enabled IBM to reposition itself as a service company, which is what it is today. There is no such hiding place for Nokia. Ironically, the example of Apple is the rescue story that investors ought to focus on.
Like Nokia, Apple was on Death Row when, in 1996, it re-appointed Steve Jobs as CEO. Remember, that date, it’s important. By 2001, Michael Dell remarked that Apple had no right to exist, it served no useful function. Ironically, in the same year, Apple launched the iPod. Yet, it was not until 2003/4 that the shares slowly began to outperform.
It took Steve Jobs five years to find the product that saved Apple; it took seven years after he joined the company before shareholders enjoyed the fruits of his labor. What saved Apple was that it created a unique product category, it stopped trying to compete with Microsoft. This is the task facing Nokia, it needs a genius and it needs to create a new market. On my reading, Nokia will eventually lose the mobile phone business just as IBM lost in PCs even though it launched the world’s most popular model. What makes things so bleak for Nokia is that unlike IBM Nokia has no service business that it can retreat to.
IBM saved itself through cutting costs, selling off non core operations and improving business processes. There was also a fair degree of financial engineering too. If you look at IBM’s top line, sales growth has been lackluster for a considerable time.
Nokia can improve by cutting back on R&D and abandoning its idiotic strategy of having so many different phone models. This puts developers off because it fragments their market and it confuses consumers. Remember, in a age of super abundance, consumers respect companies that are prepared to risk all for simplicity. A brilliant single product has more chance of creating the right image that the global herd can embrace. From Nokia’s point of view, however, putting all your eggs in one basket is rather like diving into the Amazon in pitch darkness; it is frightening.
Long ago Nokia lost the ability to make intelligent decisions: it is acting punch drunk. The recent decision to buy Motorola’s networking business is a case in point. Hit by oncoming cars in the handset business, Nokia has staggered into the next lane of the motorway where it will be hit by an oncoming truck with Huawei plastered on the bonnet. Mobile operators have told me that they would not buy equipment from either Nokia or Ericsson these days because Huawei can make the same kit for up to 30% less. Shareholders need clarity of vision, which they are not getting from Nokia.
All this might seem unfair, but Nokia’s fate has been clear to some of us since 2002. As far back as then it was obvious that the smartphone would be the final battle ground. To survive Nokia was told that it needed to capture the backing of developers and reposition itself so that it was centered on the internet. Executives like Mr Vanjoki refused to listen. Instead, they blustered on about how big Nokia was and that it owned the mobile phone market. In 2002 one analyst was quoted in Forbes Magazine and the New York Times saying that Nokia would become the IBM of its generation. That statement now looks wrong. IBM recovered, I am not sure that Nokia can.
Disclosure: Long APPL