Apple's iPhone and The Future of Nokia

We have been discussing the impact of Apple's (AAPL) iPhone on the rest of the cellular handset and laptop ecosystem. Frank Levinson wrote an important piece when the iPhone was first announced, which you should read for context.

We have said that Research in Motion's (RIM) target market (Prosumer, SmartPhone with Integrated Messaging) is very different from the iPhone's (Consumer, SmartPhone with Media Player focus). Nokia (NOK), however, has a lot more overlap with the iPhone’s target audience.

iPhone’s Innovations:

1. The use of OSX – this choice empowers the device to be able to run Safari, mail and widgets. It continues to unify the Apple product line, not fragment it.
2. The use of a new consumer user interface [UI] and the deletion of so many buttons and choices (this was what we did about 16 years ago with Windows and 23 years ago with the first Mac and now we are doing it again).
3. The realization that Moore’s law scaling of silicon is continuing and this makes the possibilities of integration infinite.

Nokia’s Strength: Hardware/Silicon Integration.

Nokia knows how to do this well, by itself, and through its partnerships with Semiconductor vendors. The key technology in question so far has been System-in-Package (SiP). More on the semiconductor side later.

Nokia’s Weakness: The Symbian OS.

In 2006, Symbian was estimated to have a 73% share of the smartphone OS market, yet ABI Research forecasts that it will fall to 46% by 2012, due to strong competition coming most notably from Linux, but also from Windows Mobile. At the moment, Microsoft (MSFT), Palm (PALM) and RIM each have very low market share in worldwide Smartphone OS. The MAC OS competition has not even started yet!

According to ABI, Nokia has maintained its leadership position with a 56.4% share of the 70.9 million units shipped in 2006. Nokia sold 40 million smartphones in 2006, compared to 28.5 million in 2005. Motorola also had a strong 2006 and occupied the second position with 8.5% market share, driven by the success of its Linux-based devices in China, most notably the MING. The Prosumer segment of that market should remain largely unaffected by the entry of the iPhone. The Consumer Smartphone, however, WILL get affected, and this is likely to impact Nokia’s market share, especially in the high end of the market.

Unresolved question: Will the market accept the two-hand iPhone user experience, or stay with the one-hand Palm-Blackberry-Nokia interface?

Resolved question: Apple will win the design challenge, still a key determining factor in which product consumers would choose to buy. The others will need to win on other criterion, besides design.

Emerging Markets: Nokia’s Strength

Nokia has many other strengths. Foremost is their absolute dominance of the low-end market. It dominates India, the fastest growing Mobile market in the world, with 79% market share. iPhone is not even an issue in this market because of its astronomical price-point.

Overall, it seems to me that only a very small sliver of Nokia’s business will get impacted by the iPhone in the foreseeable future. However, as Nokia and other handset makers struggle with the atrociously low margin business they’re in, they will all try to move up the value chain and get more of the high-end, higher margin products into their mix. This is where the iPhone is a threat to Nokia’s future, because that small sliver of the market is a rather critical piece of Nokia’s equation.

Comments

[Tom B:]

"In 2006, Symbian was estimated to have a 73% share of the smartphone OS market, yet ABI Research forecasts that it will fall to 46% by 2012, due to strong competition coming most notably from Linux, but also from Windows Mobile. At the moment"

Looks like these figures will have to be revised. They are ALL going down.

"Unresolved question: Will the market accept the two-hand iPhone user experience, or stay with the one-hand Palm-Blackberry-Nokia interface?"

The iPhone shall be a 1.0 product. Who is to say what v.2.0 will look like? Or what people will want.

"Overall, it seems to me that only a very small sliver of Nokia’s business will get impacted by the iPhone in the foreseeable future."

Translation: they get a few more years to live. Probably, on the strength of EU loyalty.

2007 Apr 25 09:16 AM

[Ruski:]

Interesting reading on smartphones and iPhone. I would agree on many parts, but would add the following for consideration

1. “The use of OSX” – is it really such a big thing?
Apple’s market share with the OSX is so marginal in the PC/laptop world, that just running that OS on a mobile device, does not as such make it decisive for its success, I think. And how well the first iPhone is running it, we don’t really know, do we?

Is it a big thing that certain smartphones run a specific OS? – I believe it is important primarily in the enterprise segment and there Windows (Mobile) is naturally the ‘easy OS of choice’ for CIOs.

2. “The use of a new consumer user interface” – what do we really know about its usability?
Admitting that the iPhone ‘looks damn gooood’, as does the demos, I have been amazed that people have so strong views on the usability, the user interface, the feature set, etc. without ever having used the device in real life. Already the simple fact that the wireless data rate is restricted to GSM/EDGE, makes me worried about the browsing experience (when WiFi is not available). I sure hope it lives up to the high hopes and expectations.

3. “Moore’s law” – could not agree more, long live Moore.

“Nokia Strength: Hardware/Silicon integration” – agree, some arguments in support

Price point to become critical for smartphone volumes - It will be interesting to see how low devices based on the other operating systems and different hardware platforms can get in terms of a price point for a “full-feature” smartphone within the next 12-18 months. Besides the question of an efficient OS kernel and applications, also the semi design capability of the devices is naturally critical. And here Nokia has a solid track record of ‘design for low cost’.

Nokia’s latest smartphone, the Nokia 6120 is a good example. As this Symbian S60 device starts shipping now in Q2, it has an estimated price point of only some USD 340 without before operator subsidies and taxes. This is at least half or probably closer to one third of the unsubsidised price for the iPhone. At this price the Nokia 6120 will deliver among other things also full 3G HSDPA data at max data speeds of 3.6 Mbps and does that on dual bands (850 Mhz for US and 2100 Mhz for Europe and most parts of Asia). All other features like ‘Web 2.0 ready”, 2Mpix camera, mediaplayer, e-mail, widsets, etc. is naturally built in and the phone is ‘open’ for the user to install any Symbian S60 3rd Ed software out there.

So the critical question, beyond the first few millions of high-net-worth-indiviu... going for the iPhone just for the ‘glamour’ of it, will really be ‘what do you really need to pay for a good smartphone?’ … in the second half of 2007 and beyond. And that, I believe, will be decisive for ‘who is who’ also for the operating systems. And here things do not look that bad for Symbian and Nokia really.

“Nokia’s weakness: The Symbian OS” – Strength or Weakness?

This is a tricky one, but it seems that the consensus view is that it is a weakness for Nokia to be so committed to Symbian. Sure, Symbian’s sky-high market share will decline as Linux, Windows Mobile and Mac OS get to volumes. And sure, I agree on Symbian being an odd choice for smartphones for the Enterprise segment of users (relative to Windows Mobile, which would be the ‘easy choice’). But I think the critical question is at what price point are the big volumes in ‘consumer multimedia smartphones’ going to kick in? And as I argue above, it looks pretty good for Nokia & Symbian, in particular if it happens sooner rather than later. And as 100m Symbian OS devices have now been shipped to date, it can’t be all bad, can it?

“Design question resolved? “– we’ll see about that

Admitting that the iPhone ‘looks damn gooood’, ‘design’ in a pocketable device is so much more than great looks, and as stated above about people having strong (positive) views of the iPhone without using it, I would definitely conclude here that the ruling is still out on this one.

Conclusion

I believe that the iPhone will be a very important device to really kick start the smartphone biz, in particular in the US. At the same time, I believe Nokia just might become the biggest beneficiary of that momentum, especially if they can finally get their act together in the US during the latter half of 2007 and into 2008.

Also note that Nokia derived exactly one third of its group operating profit from its Multimedia smartphone division in the first quarter of this year and that share will grow as their Enterprise smartphone division turns into black numbers later this year. So it is already critically important for them.
Having used the N95 now for two weeks during a trial, Nokia sure seems to at least get the most advanced technical features in place in time for that emerging momentum.

Kind regards,
Lauri Rosendahl

2007 Apr 25 11:12 AM

[Alan Williams:]

The iPhone is new. The iPod is not. 100 million iPod purchasers know that Apple can make an interface that just works. 100 million iPod purchasers know that Apple products are more than just good looking devices.

The significance of using OS X on a phone is very big. Windows Mobile is a cell phone OS with the Windows brand tacked on. OS X on iPhone is OS X on a Mac with the unneeded parts removed. It is a fully capable, unix based computer OS that can run very complex programs. It could and probably will run a photo editing program for the built in camera, for one example. It could and probably will run the complex DRM security programing required for direct downloads from the iTunes Store as well. Full fledged MS Office like programs from Apple for iPhone are not only possible but quite probable. In the near future, an iPhone could end up being all the computer that most people need.

The iPhone shouldn't really be called a smart phone. This first iPhone is really a computer with cell phone capabilities. It will steal customers from the low, medium and high end phone markets.

Apple has also said that it is working on 3G iPhones for Europe and for AT&T's inevitable switch to 3G.

I believe Apple will eventually have a full stable of medium to high end cell phone hardware and become a major player in the cell phone industry. In 5 years all phones will have full fledged OS's. Apple will change the cell phone industry forever just like they changed the PC industry forever with the first commercial GUI interface.

2007 Apr 25 12:07 PM

[john12345:]

Iphone is a fascinating product. It appears to have everything a smartphone user would want in the best design and user friendliness. I want one. Since no one currently owns the software side of cellphones nor has produced anything as cool as the iphone, this is a great opportunity for Apple. I hope they don't blow it. The key for me will be whether or not they permit transfer of data, contacts, schedules, etc in some way easily compatible with Windows. If not, they are likely to come up short with business and customers who can afford this phone. Business customers like standardization and competition; two things Apple has not provided.

2007 Apr 25 04:39 PM

[Alan Williams:]

john,
Apple's iPod works well with Windows and already syncs data, contacts and schedules. Im' sure iPhone will have no trouble following iPod's footsteps. Furthermore iPhone syncs with wirelessly with bluetooth, not USB. I am sure MS Office compatibility will be available at extra cost. Business will love the iPhone.

2007 Apr 25 11:19 PM

[St.Aubyn333:]

I'm sorry, but symbian simply <i>isn't</i&g... a problem. Alan says that OSX for iphone "can run very complex programs. It could and probably will run a photo editing program for the built in camera". Well, so can symbian, not to mention already running 3rd party microsoft word and excel. These are complex programs, and are being run on Symbian operating system, which i might add can multitask. They are <strong> already</strong> operating systems in their own right, with 3rd party software, security, memory allocation, saving, controlling peripherals. those things make up an operating system! Symbian can also web page viewing, ftp, email, and anything they make a program for.
Apple isn't going to change mobile phone technology for ever: it's just come in at the right time with a pretty phone.

2007 May 20 09:29 AM

[St.Aubyn333:]

I would just like to add but nokia no longer calls its "phones" phones. They are multimedia computers, just as Alan said the Apple Iphone is.

2007 May 20 09:33 AM