Nokia's Restructuring: Nobody Loves A Value-Chain Hog

Nokia (NOK) made a major announcement today, telling the world that in 27 weeks the company will significantly reorganize itself. Ostensibly, the reorganization is to focus on "future growth opportunities around converging Internet and telephony services."

If that sounds pretty innocuous, you can be assured that this is intentional. Using buzzwords like "convergence" and "Internet," and even aping Apple (AAPL) and Motorola (MOT) by talking about "rich, mobile experiences," Nokia appears to be taking a logical step in its evolution.

I applaud Nokia's efforts to change with the times. But as I read between the lines in the reorganization announcement, I'm disappointed to find that this reorganization merely appears to solidify the Finns' traditional approach to the market, an approach that is, in my opinion, tragically misguided.

CEO Centric
Getting past the obligatory jargon-laden CEO quote and digging into the tell-you-as-little-as-possible details, some interesting points pop up. First, the company is moving to a more vertical structure, an approach that should give CEO Olli-Pekka Kallasvuo more direct control over the company. That could be good thing for Nokia, arguably making them more nimble.

They're also apparently pulling their supply chain, sales channel, and marketing activities into one unit, divorcing them from the product divisions. Whether that's going to work or not depends on the details - me, I'm a big fan for keeping the marketing close to the product and both of those as close to the ultimate customers as possible. But let's wait and see.

The Rise of Services and Software
The real wake-up comes when you look at the structure underneath Nokia's consumer products division, Devices and Services. Devices, okay, that's handsets. We get it. The real juice of this reorganization is in the introduction of a new Services & Software unit. The wording refers to that unit as "reflecting Nokia's strategic emphasis on growing its offering of consumer Internet services".

This is not a small move. Creating an organization inside of Nokia that enjoys a status co-equal to that of the group that actually manufactures the mobile devices means that Nokia sees its future at least as much in the services side of the business as in the devices.

That's an announcement clearly designed to make investors wiggle. The problem is, the investors are not the only people Nokia needs to please.

Competing with Customers
Nokia believes the Services unit will help it "offer its customers complete solutions" that are "coupled" with their devices. Now, when Nokia refers to its customers, it is primarily referring to mobile network operators. So what it is saying here is that it wants its Services team to come up with end-to-end packaged solutions that it can sell to operators as is. One assumes Nokia will sell the software, or perhaps just partner with the operator.

In short, the justification for the services unit is so that Nokia can sell a single integrated solution to the operators - network gear, software, services, and devices. In other words, Nokia still dreams of owning the whole value chain, and selling it all as a package to operators.

The question - particularly in Asia, and especially here in China - is whether the operators are even interested in that proposition.

If anything, operators in Asia have demonstrated that they are willing to make mistakes - sometimes a series of very expensive mistakes - in their quests to develop bouquets of services that users find exciting, relevant, and worth spending money on. Initially these operators have tried to go it on their own, but most of them have come to the realization that they are better off working with a dependable group of service providers.

In the case of operators like SKT in South Korea and DoCoMo in Japan, the most successful mobile operators have created their own branded platforms that they have used to make their brands mean more than pipe providers. China Mobile (CHL) and Unicom (CHU) are studying them - and operators like Orange and Verizon (VZ) - with great care, and are conducting their own experiments. And they seem to be getting closer to the right mix.

The question is - what does Nokia have to offer to mobile operators that the mobile operators cannot - or do not - want to create or acquire through partnerships with dedicated service providers? And why would they want prepackaged "complete" solutions over bouquets they assembled for markets and customers they understand far better?

Nobody Loves a Value-Chain Hog
As Nokia publicly preens itself for being different than what it derisively calls "point solution vendors," it risks alienating the entire mobile industry. It makes operators uneasy about letting them too close, service and software providers leery of working with them, and it hands their competitors all of the ammunition they need to sow fear, uncertainty, and doubt about Nokia's ulterior motives with everyone else.

Nokia may not care. Their scope of their vision is now clear. They are not satisfied with being the market leader. They want more. They want to own the ecosystem - or as much of it as they can get - and either lock out other players or force them to play on Nokia's rules.

In other words, Nokia wants to be Apple. Nokia hardware, Nokia software, Nokia back-end, Nokia services, all on Nokia's terms.

There are only a couple of problems with that. First, Nokia is not Apple. Despite pretensions to the contrary, it lack's Apple's cachet, design leadership, superior user experience, and history of delivering and selling a closed system.

Second, despite some resemblances, the mobile business is neither the computer industry nor the consumer electronics business. Apple has created an entire closed value chain because it has never had to work through a major intermediary. Nokia cannot realize its vision of service leadership without running afoul of its major customers - the operators.

Get Back To Where You Once Belonged
Nokia's market share leadership in mobile devices has served to obscure some fundamental problems in the business. The integration of Siemens (SI) on the networks is still unfinished, and the hollow-eyed looks among the lunch crowd at Pacific Century Plaza in Beijing underscores that layoffs are ongoing. In the mobile business, the design effort is still two years behind Motorola and a year behind Samsung. Nokia runs third in mobile entertainment behind Sony Ericsson and Motorola, and its leadership in entry level phones will be challenged by a resurgent Motorola and a Samsung that is now determined to take its fair share of that market. And, of course, Nokia is still recovering from its failures in mobile games and its perennial weakness in the US market.

Sure, none of these problems is insurmountable. But they are considerable, and collectively they argue for the company to focus on its fundamental business rather than undertake a major reorganization and shift focus to services and software.

Can Nokia do it all at once?
As I close this piece, Nokia's NYSE shares are less than one half of one percent. That's far from a resounding endorsement, and Motorola is up by the same amount. It's clear the Street is as skeptical as the Hutong.

NOK 1-yr chart:

Comments

[xuefan_zheng:]

David Wolf:

Your opinion on NOK is something like a naive school boys with so many unwarranted assumptions and facts.

"n the mobile business, the design effort is still two years behind Motorola and a year behind Samsung. "
>>&g... What a ostensible assertion. Who tell you NOK is 2 yrs behind MOTO or Samsung in design? Design what? Its 5mega camera is behind MOTO, or its HSDPA technology slower than Samsung? Or its Symbian OS is not so cute as MOTO's linux?
Do not make assertion just based on your Verizon handset. Yes, NOK is lag in US market, but dont you sense that this is due to a legal war against QCOM? Do not assume US market is the banner in mobile industry. That's deadily wrong, thisi is not nuclear bombes, space shuttle industry.


"Nokia runs third in mobile entertainment behind Sony Ericsson and Motorola, and its leadership in entry level phones will be challenged by a resurgent Motorola and a Samsung"
---- Nearly 100% illogical. Who told you its play-phone is behind Motoroal? NOK get a 20 kinds of N series, all smartphone, >2mega camera, some with A-GPS. MP3? Its innate capability. Tell me, what is your MOTO gadgets? Just give us a list? My god, could you be careful about the digits and numbers?
As for the cheap phone, do you know the mechnazim in this industry? The cell phone's cost is majorly consist of sourcing cost, production cost. NOK's volume to MOT in cheap phone is nearly 2:1 or 3:1. So if TI provide MOT the baseband chips at 15$ each, then what price they give to NOK? Have you ever been a sales or marketing folks before?
NOK's factory is in Beijing, MOTO is in TianJIng. Both are in china, what the difference in production cost?


"it lack's Apple's cachet, design leadership, superior user experience, and history of delivering and selling a closed system."
>>&g... Your evidence? iPhone is a 2.5G handset with a no one use but cheap Infineon chipsets, with an ordinary 802.11g, with an just so so 16mega LCD and less than so so 2mega, no auto focus camera. What is its OS? Can it be so good as win mobile or symbian? Can you download 20k kinds of java game from website like Nokia N95 phones? Can you find your way in A-GPS?
Tell me, where is your so called design leadership? Does Apple own a private company which can make the world 1st LCD, 1st camera, 1st chipset, 1st OS software, while NOK can not access?
About the cost of Apple, I woundnt say anything, just look at its volume: 10 million iphone predicted in 2008. Nok is 400 million a year. Do you know the word "leverage"?

I know what is the origin of your so silly reviews, it is all because your narrow eyeshot. You just use a Verizion 1 mega camera Samsung phone and one ipod. You never go outside US to say how European, Chinese, India, Japaness are living. That's your problem. Remember twice, cellular industry's Vatican is not US.

2007 Jun 20 11:22 PM

[xuefan_zheng:]

Besides, I give you one thesis for your later argue:

"What is the advantage in music playing perspective, for iPhone, against NOK, SonyEricsson's smartphone or music focused smartphone"?

Nearly all Apple zealots are missing consideration on this point.

2007 Jun 20 11:32 PM

[David Wolf:]

Mr. Zheng,

Thank you for your comment. You are obviously quite passionate about this.

To begin, I'd like to point out that whatever the faults of my line of argument, you are mistaken in your assumptions about who I am.

You said:

"I know what is the origin of your so silly reviews, it is all because your narrow eyeshot. You just use a Verizion 1 mega camera Samsung phone and one ipod. You never go outside US to say how European, Chinese, India, Japaness are living. That's your problem. Remember twice, cellular industry's Vatican is not US."

If you had taken the time to learn a little bit about me before launching a personal attack (which, you should know, detracts seriously from your credibility), or indeed if you had even read the article carefully, you would see that I actually live in Beijing and have lived here for twelve years. I actively use two iPods, a Motorola ROKR E6, regularly try the handsets of other manufacturers, and I've spent more time in Japan than the United States in the past three years. So I actually agree with you on one point - the heart of the cellular industry lies outside the US, and indeed Asia leads the world.

I am not an Apple zealot. I love and use their computers and their iPods, but I see the iPhone as a niche product and not a threat to the core industry. If you had read some of my previous posts on the subject, you will find I am extremely skeptical about the iPhone's near-term prospects in Asia generally and China specifically.

Since Nokia is the subject of our discussion here, let us return to it:

When I speak of design, I am not referring to technical specs. Outside of Nokia, people use the term "design" to describe the overall shape, form, and fit of a device. I don't think there is any question that Samsung, LG, and Motorola are far ahead of Nokia in delivering devices that are appealing to the senses, and therefore appeal to the growing number of users who see their handsets increasingly as a fashion accessory, not a computer. A recent survey I saw noted that after price, the most important attribute of a handset is how it looks. Now, you and I, being more technical, may not fall into that category, but we are most assuredly the exception, not the rule.

When I refer to mobile entertainment, this includes primarily handsets designed for music and video playback. These are an important category, because in Asia we like to use our mobile phones as entertainment devices. Nokia may well have 20 devices that can play music, but the numbers out of independent research houses like SinoMR make it clear that the sheer number of devices does not mean leadership in the segment. Sony-Ericcson still leads that pack with only a handful of devices, and 70% of Motorola handsets sold in China are either music enabled or optimized. Nokia's problem in entertainment is the experience, and part of the reason you will probably see them migrate off of Symbian in the next 18 months to the "cute" Linux-Java platform is that they have stretched Symbian just about as far as it can go in this area. Since you asked for a list, Motorola has the ROKR Z6, E6, E2, E780x, E680x, SLVR L6g, and MING that all play games. Is the list as long as Nokia? No. But sometimes a wider choice is a substitute for a quality experience. That's a merchandising tactic that is as old as retail.

As to mobile gaming, the category is languishing generally in China, a very small and specialized niche. I expect to see some major announcements from Nokia on games in China in the second half of this year, but they are still recovering from their N-Gage faux pas globally. Me, I've got six games on my ROKR E6 that I play occasionally to regularly, but as I said, I am not representative of the broader population in this regard.

As to Nokia's performance in the US market, Nokia's loyalists may believe the company's weak showing there is because of Qualcomm, but the reality is Nokia's original and continuing failures in the US can be attributed directly to product decisions made at Nokia.

My evidence about Apple's leadership in design and user experience, I think you may have been confused. I was referring to their leadership in design and user experience generally. I'm not ready to judge the iPhone until I - and a few million other people - have had a chance to use it. You also continue to confuse "features" with "design" and "user experience. That's okay - Nokia has, too. The rest of the industry and the vast majority of users, on the other hand, do not. Apple's leadership in design and experience in the computer and consumer electronics industries is a matter of record, and if you want to compare Apple and Nokia on innovations, we can do that separately. I think you might be surprised at the results.

As far as "leverage" is concerned, frankly that's all Nokia has, and as a company it is starting to understand that sheer volume is not going to be enough if it wishes to continue as a healthy business. This is why it is undertaking its foray into services, software, and the like in first place. After all, it's much easier to launch into a "blue ocean" strategy than it is to fix core problems.

Look at the market performance in New York overnight, and you will see that investors are as unconvinced as I am that Nokia is doing the right thing.

And to your final question: I'd bet on NOK, SNE, MOT, and Samsung for music phones against the iPhone any day. That may change, but for now, that's where my money is.

Thanks again for your comment.

2007 Jun 21 02:25 AM

[xuefan_zheng:]

Dave,

I am sorry to hasty describe you as a Verizon users, America living guys. Wish you do not mind.

But your facts are really doubtful, or even, say, nearly on the opposite of the trueth.

"he heart of the cellular industry lies outside the US, and indeed Asia leads the world."
>>&g... Not exactly. The most stylish phone are not only in Asia, but also Europe.

"I don't think there is any question that Samsung, LG, and Motorola are far ahead of Nokia in delivering devices that are appealing to the senses"
>>&g... Your biggest wrong is here. Yes, return to year of 2000, MOT got clamshell phone, NOK did not. 2003-04, Samsung built a lot of clamshell, good looking phone. Yes, you are right, for that period of time. But do you have sensed the 3G revolution in NOK's lineup recent 4 years?
Go to NOK's website, Euro site, have a look at the N series website, the flash, movie. Tell me how ya feeling, compared to your ROKR E6. To be frank, your problem, is so far, these 2 years, I often saw in some US folks, friends ----- they just did not see the N series, simply because Cingular do not launch, Verizon of CDMA.
But like Bob Dylan said, the world, they are changing!!!
If you doubt about the N series's market sucsees, I suggest you google it, or have a look at last Quater's NOK CEO transcript in this seeking alpha.
N series means what? It meas profit, margin, look at NOK's and look at MOT's.


", Motorola has the ROKR Z6, E6, E2, E780x, E680x, SLVR L6g, and MING that all play games."
>>&g... You hit a good point as my support. I use E680 now! What a smartphone, so smart that I nearly could not download any games. Guess what? The jave-linux!!
You are in Beijing? Good, go to ZhongGuanCun, or a University, ask every passing boy and girl, how about their feeling of the symbian and linux, which one support more games, calenders, clocks, xxxxx.
I forgot to tell you, to see this mobile.163.com, to have a look at how many illegal N70, N73, N95 are in the best seller position in Beijing market.
ROKR E6? ever on any list of the best seller? please give me a link.

"As to Nokia's performance in the US market, Nokia's loyalists may believe the company's weak showing there is because of Qualcomm, but the reality is Nokia's original and continuing failures in the US can be attributed directly to product decisions made at Nokia."
>>&g... You hit the part of the reason, but not in-depth. I wont argue with you on this, but look the NOKIA CEO's speech on US market, he always avoid the questin why it is so weak in US but so strong in every country outside US!!
Heard the ITC, BRCM, QCOM story? NOK now refuse to give IP fee to QCOM, then, how every N75, 76, sold in US is in danger! Do you have strong objection on this? Ofcoz, this is a potential risk, not happend yet, but QCOM is staring at!


Apple's design,""leverage""
>>&g... I wont argue if you misundestand me or me misunderstand you. To cut to the chase, I am saying, that, AAPL is a titan in MP3 industry, but still a pigmy in cellular. You might feel my words too adamant, but if you look at the details, I guess you will have fewer words to rebuttal.
(1). Do AAPL have GSM, WCDMA, C2K IP?
How many NOK have? If negative of AAPL, then if it is possible that NOK gain some cost advantage on AAPL?
(2). Production cost
NOK, 1-200 million units in China per year, also they leverage Foxcoon, if you heard of. OK, I tell you, AAPL use Foxconn. (both of them are my customers!), can you believe that Foxcoon give a low price for production that AAPL? How come? Remember, cellular industry, volumn is the god!
(3). Sourcing, tech advantage, relationship.
I amnot sure if you know that TXN is the dog of NOK, a famous saying in celluar industry for 10 years. Where is AAPL's parterner? Marvel? Infineon? What a loser partener! How can you believe that TXN's chipset design is inferior to InfineoN? How can? How come?
Ok, if both NOK and AAPL use Infineon EDGE chipset, how about each's price? Need you tell you what does the word "volumn" mean in semi industry?

(4). Core competitiveness lack.
I raise this question before, but not only you but lots of US folks can not answer me directly. The question is, as a mp3 player, what is the core competitiveness of iPhone, compared to NOk phone?
You also danced out of my question. Dont tell me the design, the looking, the GUI. You actually admitted that, mp3 is not space shuttle, it is a blockbuster tech. That's the truth doom of AAPL.
But 3G, Radio Freq tech, CPU design, DSP design, jave game, camera, email, push mail, MSN, QQ, all of these are not AAPL's traditional strength, right? Can AAPL surpass NOK merely on a mp3, which, NOK phone all have it right now, with at least 2G SD card support and in the future 4G, 8G SD card.
Forgot to tell you, in Beijing 2G SD is only

2007 Jun 22 12:43 AM

[Ruski:]

Hello David,
A few comments to you story

Two of your arguments seem very shortsighted => "Nobody Loves a Value-Chain Hog" and "Nokia cannot realize its vision of service leadership without running afoul of its major customers - the operators."

- Walled garden services on the mobile side of the Internet are not going to cut it. Why? Because it is simply the same Internet (as on the fixed side) and it will not take long for consumers to understand that. And they will go for the best available services they are used to - and are those provided by the operators? NO way. And Japan and South Korea are likely to be the countries being the exceptions to the rule.

Is Google or Microsoft a "value-chain hog" on operators offering broadband access? No. And neither will Nokia be as Internet access to services and software expands to the mobile space.

The fixed line Internet with its small dynamic companies building "community based" free or almost-free services like Flickr, YouTube, Google, Skype etc. at a pace the operators can only dream about, shows that there is no way the mobile "broadband access" business could be different. Mobile operators will be pushed also on the mobile side to become bit pipe providers. It is only a question of how long it will take - 1 year, 3 years ...?

In this kind of a business environment Nokia can and should be there to offer navigation services, music downloads, e-mail solutions, games, etc. Like any other company should do if they have the know-how, the technology, the brand, the distribution and the opportunity to bundle services and software through links, pre-installations, try-and-buys, etc. on the hundreds of millions of handsets they sell every year.

And sure here and now, it may seem like Nokia is set to challenge some of their important operator clients that sell Nokia handsets. Therefore, here and now, it is a balancing act. But long term, I think we all know what the role of the operator will be. And Nokia needs to prepare for that.

reg,
Lauri

2007 Jun 21 03:29 AM

[David Wolf:]

Hi Lauri,

Thanks for your comment.

Your point, if I am reading you correctly, is that carriers cannot hope to offer walled-garden services. If you believe that, however, you must grant my point, which is simply that Nokia cannot either. Now, as an analyst who has covered Nokia in Finland for a very long time, you may know something about their plans on the services side beyond what was disclosed yesterday, but from here in Beijing it sounds like they want to create a proprietary, walled garden.

There are two great questions that hover over the future of mobile services. The first is "will mobile services be more like the Internet, with thousands of services freely available and accessible, or will it be like cable television, with operators assembling bouquets of standard and premium services?" With respect, as certain as you appear to be that the former will be the case, I think it is too early to call this one either way.

Personally, I believe that in some markets we will continue to have a walled garden for the foreseeable future. In other markets we will see an Internet-like free-for-all within 1-3 years. And in most markets, we will see some form of interesting hybrid twixt the two. Either way, each market will go its own way.

Now we come to the second great question that hovers over the future of mobile services: "who will create the services that will turn the world into compulsive users of the mobile device as an all-purpose information, entertainment and services terminal?"

That one is a lot easier to answer: everybody. The reason for that answer is that no single entity - no operator, no online search giant, no software monopolist, and indeed, no mobile hardware manufacturer - has a clear enough grasp on the market to create more than a few of the services people around the world will want. Even the mobile operators who successfully maintain a walled garden will have to build their bouquets from a large variety of service providers.

My issue with Nokia leaping into that fray is not whether or not they belong there - certainly they do. My issue is with the apparent scale of their ambition. Setting up some small entrepreneurial units to create or invest in services that build heavily on the features Nokia builds into their devices is a natural. Creating what appears to be a massive corporate bureaucracy ostensibly to offer carriers "complete solutions" sounds a bit different, like they want to displace carriers' walled gardens with their own. That sounds, well, unrealistic. Inappropriate. Ominous. Perhaps even megalomaniacal.

If Nokia's ambitions are simply to be a player, it should walk before it tries to run. If its ambitions are to be a dominant force in the global online services industry, it should know that it faces a battle royal, and from where I sit, its likelihood of failure is high.

You've made your call Laurie. I've made mine. Let's sit back and watch the game.

Thanks again,

David

2007 Jun 21 10:10 AM

[samij:]

David,

I think you read way too much in between the lines. If anything, Nokia has been supporting pretty much any technology providing that there is a user base large enough and that they are able to license the technology, including everything from multimedia formats to clients for proprietery messaging systems. I think the company is very well aware that walled garden approach will not work as a general approach. However, there is need for walled garden within Internet as well, eg, in corporate environments. Why do you feel like providing support for the latter prevents Nokia from supporting the open Internet?

I really don't understand the comment of Nokias design being two years behind Motorola at all. Exactly what successful new designs Motorola has introduced since RAZR? I haven't seen any. For me the problem with Nokias desing lately has been that when they introduce a new phone I like I don't get a change to buy it before they announce another one I want even more!

BR
sam

2007 Jun 21 12:18 PM

[devilsrejec...:]

I too have to disagree with you David. Now as a consumer my view of the market is probably more skewed than the operator centric approach you are taking, but Nokia has always enabled me to share my content on popular websites like Flickr for at least a year or two. They embrace the web and more of their marketing material indicates Web 2.0 is where the action is and where they want to be.

I'm just as eager as you are to see what this new Software and Services division can come up with, but I'm more excited that the hardware divisions have fused together into one entity. The competition between Enterprise and Multimedia was fierce and my regular conversations with Nokia employees seem to indicate that there was little, if any, interaction between the two departments.

I've been waiting for an article like yours to tackle the reorganization announcement, I found your blog so I'll definitely email you my thoughts on the situation.

One more thing, design is very user subjective. I personally don't like Motorola's designs and Samsung products appear too feminine for my taste. I own a Nokia E61i and I also find Sony Ericsson to produce fantastic products as well.

2007 Jun 22 12:29 AM

[justice:]

I hope to meet you someday in that Starbucks at the PCP and explain why your vision of Nokia may be a little alarmist and a lot off....

2007 Jul 04 06:25 AM

[kelvin.kuan:]

hi David,

I appreciated your article. I did a search on google regarding the Nokia restructuring and I came across your article. I am glad i had an opportunity to read it because I have been having the same intuitive perception about Nokia for quite some time now... to me, Nokia in the mobile world is akin to Microsoft in the computer world. Although i am not an Apple fanatic, (i don't even use an iPod), I have to say that Apple understands the Consumer Experience. i have high hopes for future versions of the Apple iPhone. Tracking the development progress of the iPod to what it is today, I have confidence that the future of the iPhone will only get brighter.

I can't put my finger on it, but Nokia made certain decisions along the way that just lost me as a fan.
My first mobile phone was a Nokia right up to my third or fourth. But somewhere along the line about a year or two ago, they just lost their appeal. And i think it most likely had to do with Nokia's past decade of flooding the market with varieties of what was essentially the same experience (kinda like the phone-cover swapping fad that they instigated many years ago). For some reason, the actual user-experience never improved. Functionality may have increased over the years, but the quality of experience (which is ultimately a more nebulous yet essential ingredient) has stayed the same. I hate to give Apple as an example but comparing Apple to apples, it is now a legitimate comparison because Apple has ventured into the mobile market, and with their very first product, their design philosophy already shines through: elevating the consumer experience. It's ironic that Nokia talks about this, advertises about this, and yet when you use their phones, the experience hasn't changed over these few years.

I remember reading that the software is largely responsible for the overall consumer experience and i think Apple will eventually become a standard-bearer in the mobile industry (as it has been for the consumer electronics industry) simply because it is a software-driven company. The closed ecosystem you talked about has worked for Apple because they had the software to make it all work smoothly and stunningly for the end-consumer. Most people "put up" with what they have because they don't have something better (or have not experienced something better).

If Nokia doesn't improve it's operating platform (Symbian) or abandon it for something else soon, they will struggle to keep the lead in the years ahead. They are already guilty of recycling the same consumer experience to mobile phone users around the world.

Best regards,

Kevin

2007 Jul 11 11:57 PM