As Its Stock Sinks, We Wonder What's Wrong With Nokia

49 Comments

nokia.gifEarlier today Nokia (s NOK), the world’s largest mobile phone maker, said things weren’t going too well. The Finnish company posted a 66 percent plunge in second-quarter earnings and a 25 percent drop in sales, and said it’s no longer expecting its market share this year to increase over 2008. The comments sent shares of Nokia down more than 14 percent, to end at $13.46.

More importantly, look at the longer-term decline in Nokia shares — they’ve lost over half their value in the past 12 months. While a moribund global economy can take much of the blame, Nokia itself can’t be absolved of its sins. The company has failed to respond to threats posed by the likes of Apple (s aapl), RIM (s RIM) and Google’s (s goog) Android.

“Competition is increasing in the smartphone area as many participants rush into one of the few growing markets,” Nokia Chief Executive Officer Olli-Pekka Kallasvuo said in a call with analysts. Is the company just realizing this now?

The way I see it, Nokia is under siege from its own legacy. The company has become so comfortable with its position as the No. 1 handset maker that it’s failed to realize that the ground is shifting under its feet. It reminds me of Dell (s dell), which became the top dog in the computer business by selling a lot of cheap machines even though there’s more money to be made by selling a few higher-end computers than many cheap ones. Dell also failed to realize that people were looking for more than just generic computers — smartphones and music players, for example.

Nokia for the longest time was doing the right thing — selling bazillions of cheap phones and then augmenting them with expensive, high-end superphones. It was a cushy life. But it got too comfortable with its top-dog status.

It’s failed to recognize the threat posed by web-centric platforms developed by U.S. companies. Nokia, despite all its talk about its Ovi service, doesn’t really have web DNA. It’s a handset maker, trying hard to remake itself as a web-centric, software and services-oriented company. Which isn’t quite working. For proof, look no further than the Nokia N97 and the lukewarm response that it received.

As a company, Nokia finds itself in an unfamiliar place — that of reacting, playing defense. It is constantly responding to what others are doing. The irony is that Nokia has always been the one with the grand vision, bold ideas and multibillion-dollar innovation budget. And yet it can’t seem to put all that together to build game-changing products of tomorrow. Instead it keeps making noise about incremental changes to its line-ups. It’s started confusing the trees for the forest.

In my many years of covering Nokia, the company could never satisfactorily tell me why it hadn’t been able to get a strong foothold in the U.S. The typical reply was that carriers were hard to work with. Fair enough — by now we all know that U.S. mobile carriers are the ones that put the MOB in mobile.

I have another explanation: Nokia has never made a handset that U.S. carriers would have no choice but to carry, a handset that was radical enough that a carrier would actually give the company a piece of monthly subscriber revenues. Apple got AT&T (s t) hooked on the iPhone. How? By designing a game-changing product.

While it’s fashionable to focus on Apple’s iPhone, it’s Google’s Android that poses the real threat to Nokia and its long-in-the-tooth Symbian platform. Industry sources tell me that there are many Asian vendors building cheap, Android-based feature phones, and they will become a big threat to Nokia’s low-end phone business in the coming years.

Nokia’s response to the threat posted by the newbies has been reminiscent of Digital Equipment’s when it was faced with a growing tide of competition from PC makers like Compaq — it ignored it. And in the end, Compaq bought Digital. A better model would be Intel’s (s intc) reaction to competition from Japanese memory chip makers: Intel dumped its commodity-DRAM business and put all its chips on microprocessors. The rest, of course, is history. Nokia needs to do something equally drastic and dramatic. Any ideas?

49 Comments

SD

Nokia has no chance in the smartphone game with Apple, Android, et al. And that is going to weigh in on their stock outlook for the next year. But long-term, they can still win/grow the emerging markets game versus the Chinese ODMs if they focus. They have enough market share, brand cache, and marketing know-how (they are brilliant with their emerging market handset marketing by doing simple things like focusing on flashlights, alarm clocks, etc as key selling parts of the phone.) to continue leading this GROWING and PROFITABLE category.

But will Nokia have the courage to focus laser-like on this emerging market, and forget the smartphone market. I doubt it. They will probably muddle along in both watering down both efforts.

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Satish

Nokia is the next Motorola.

The problem is the S60, it’s simply not enough. The interplay between the software/hardware isn’t good at all. It’s old and dated; With S60 and it’s product line up. it’s more competing with cheap Phone makers that you find on sites like solomobi.

Paul

Nokia has been trying to develop great software for its phones for a long time. They have R&D centers everywhere, including one in the Bay Area. They created a venture fund to identify new technologies and make them available to Nokia. They have bought a bunch of companies to add software, sync, web interfaces and other elements to Nokia phones. Some of this has worked in foreign markets, just not in the US.

Nokia’s product development processes were at one time slow and consensus-based. Getting a new phone approved (not designed, not built) could take 8 months of politics between Helsinki, London and US units. As the pace of innovation has picked up, Nokia tried to streamline, but I’ll bet they take twice the development time of their competitors, and have to be more conservative with feature sets in order to slip a new product through the process.

Yuvamani

Buy Palm
Buy Palm
Buy Palm

The problem with Nokia is not the phone. It is software and the dated thinking there. First they thought that people dont need touch screen phones – that was massively wrong. Second they believe overly in the Symbian platform which may have been good before but is massively outdated.

The problem for Nokia is the same which palm faced. There were a LOT of apps for the palm os (substitute symbian here) and thus they had to create a new OS but could not find a way to do so without breaking huge numbers of them.

In the end palm said kill em all to ALL their existing apps and instead shipped an emulator for the old ones. The move had quite an impact. But hey its the right thing to do. Nokia needs a new os to compete with the iPhone / Blackberry / Android juggernaut. You know there is a company which makes good smart phones with a stellar engineering team. Now would be a good chance to buy them and use them for your smart phones. With the tech world as it is. It may be the only chance you have. BTW moto did not buy palm when it could and now it is being relegated to an extinct company.

schiri

No mention of RIM’s role in Nokia’s demise??

A bit of an oversight there me thinks.

Rockstar_Geek

“If they want to focus on handsets use Android but if they want to get in the services business they need to fix Symbian or get Maemo working.”

My thoughts exactly Jon. Nokia’s hardware and phone designs are perfectly fine….where they falter is the OS that comes with their phones. For years I used Nokia phones just for Symbian and the advanced applications that simple Java based phones didn’t offer, however Symbian Series 60 just doesn’t cut it anymore.

For me it has always been about the applications and right now the competition has zoomed passed symbian in respect to innovative and user friendly applications. Either symbian need to get back to the drawing board or nokia needs to get another OS (or revamp maemo) to run all their smartphones.

Jody

Nokia has always been undervalued compared to any of its competitors. This is simply because its profile in the US has been so low and most Nokia shares are traded in the US.

Even last you if you compared its earnings, P/E, etc to any of its competitors, even Apple and you would see that it should have easily been worth 2 to 3 times more than it was. But in the US if it wasn’t invented in California it ain’t worth anything.

That’s not to say they don’t have problems now, but the US centric view of everything is killing their stock price.

Did anyone actually notice that their share of the smartphone market went up this last quarter???!

Jon Martin

I think Nokia has problems but I’m not sure they’re as drastic as what’s being stated here. Nokia has been written off too many times before because it always misses the boat. It missed the popularity of clamshells and it missed the popularity of thin phones like the Razr. It’s not really an innovative company and it never has been. It builds high-quality, well engineered and often stylish phones. That’s it. It doesn’t break new ground. Yet four in ten mobile phones sold globally are Nokias. Of course they’re facing pressure in the smart phone market because as usual they were out innovated but let’s be clear, they were not out engineered. Imagine the tech specs of an N97 with the usability of the iphone and you’ve got the leader in its field. I think it’s far easier to fix the OS than to gain the leadership in tech specs.

One thing overlooked above too is that Nokia is regarded as having manufacturing processes and networks superior to any other company including Walmart. You won’t make and distribute phones more cheaply. If you think “the Chinese are coming” because they can undercut Nokia by using cheap labour, then you don’t know much about how Nokia manufactures its phones. They’re not all made in Finland you know.

How to fix the problems? Usability. Everyone knows it. Nokia know it. If they want to focus on handsets use Android but if they want to get in the services business they need to fix Symbian or get Maemo working.

El Marko

Nokia’s a terrific hardware manufacturer, but is nowhere near showing competence in software. It needs to develop partnerships to deal with the long-standing shortcomings of its phone’s OS. If only Nokia had been actually reading the chatter going on on it’s own online discussion groups – you know, the forums where veteran users attempt to help Nokia neophytes with their trouble, rather than succumb to Nokia’s business model of buy-your-next-Nokia-in-the-hopes-it-will-resolve-the-software-shortcomings-of-your-current-Nokia.

Today on Twitter, there’s someone who wrote that, if the N97 and iPhone mated, “their offspring might be interesting.” Yes, it might be. Nokia hardware and just about anyone else’s software and web-centered services.

. . . oh, and it would be nice if their smartphones did remotely smart things, such as sync categories from web and PC apps, and a few other things Nokia users have been asking for, for years. But, now I’m talking about those discussion boards, again. If only Nokia were listening to its own customers, rather than just cranking out a phone model for every price point imaginable.

Phil Hendrix

Om’s point that “Google’s Android poses the real threat to Nokia and its long-in-the-tooth Symbian platform” is discussed more fully in the GigaOm Pro Research Note, “Will Google Lead the Way in Mobile App Innovation?”

In the note we argue:

“Apple will continue to gain momentum and widen its lead [over the next 6-9 months] in the competition for developers and mobile app innovation. However, Google’s open platform – along with other capabilities described below – positions it to attract developers, enable innovative new mobile apps, and eventually close Apple’s lead.”

Other key elements of Google’s mobile strategy are also outlined, including:
– Cloud computing
– Persistent mobile apps (using Google Gears)
– “Android inside” – much like the strategy Intel employed, rather than competing directly w/ OEMs

For more info, see:
http://pro.gigaom.com/2009/05/will-google-unleash-the-next-wave-in-mobile-apps-innovation/

Phil Hendrix, PhD
immr

Subrahmanyam

Nice post Om. Nokia’s got atleast one part of the overall story right, the one on low-cost handsets and emerging markets. To me it appears Nokia did not see the arrival of smartphones into the mainstream, even after Apple released the original iPhone. As for as services go, Nokia was one of the earliest to realize that services are the way to go, some of its acquisitions a few years back are proof of that. Where it has faltered is in bringing those services to market rapidly, and trying to build a monetization strategy for them. Like someone mentioned, Navteq is an excellent example of an acquisition that is gathering dust.
What can they do? For starters, cut down on the handset portfolio, cut the flab (radical probably, given that has what has worked for them in the past). Introduce smartphones with UI that have ‘universal’ appeal. People buy Nokia phones coz they are dependable, rarely is it for the features. Change that. Push mid-end feature phones into emerging markets where replacement cycles are kicking in currently. And no, IMHO, Symbian is an established and solid platform. S60, on the other hand, needs a complete revamp! Would really be a shame to see Nokia fail to reinvent itself!

Paul

Nokia *did* see smartphones coming (have had full-keyboard phones for at least 10 years), but they failed to make an Exchange appliance (BlackBerry) or a broadly flexible Internet appliance (iPhone). It didn’t help that their smart phones were huge, though Europeans seemed to like them.

European manufacturers, from automakers to consumer device companies, have had a rough time integrating good software with their hardware products. Not sure why this is, but as software has become a larger component of overall product value some European products have become less competitive. This may explain Nokia’s whole slide. (European cars’ hardware has been good enough to compensate for crap software, but they can’t afford to keep slacking off here either.)

Even the Japanese, who have done great work in software (consoles, auto nav systems) have done less well than North American companies at building the Internet into worldwide products (NTT DoCoMo phones stand as a brilliant early mobile Internet effort, possibly spoiling Japan’s ROW approach with NTT’s dominance and its walled garden approach).

Subrahmanyam

Yea, Nokia was one of the earliest to come up with MIDs/Smartphones. My point was around Nokia failing to see smartphones coming into the consumer market. Nokia’s earlier communicator series and other ‘bricks’ were primarily targeted at the enterprise market. Apple shook the market when they proved that consumers are game for high-priced (overall cost of ownership) smartphones that can deliver a compelling user-experience.

eyeoftiger

nice article Om, I agree with your comments that Nokia has become too comfortable with the no.1 position, and there is no explanation why they have not been able to crack US market.

@Phil-great insight thanks. I only hope Nokia has its past to look up to, which spans over 100 years, and draw comfort that they have been able to reinvent themselves many times over in the past, and they can do so now.

cheers.

loupgarou

a) poor customer support in singapore. if a phone is defective, just replace it, especially its two weeks out of the box, don’t make your customer run around.

b) touchscreens

c) solid slick builds.


my current phone is an omnia, at the same time when the only “good” phone from nokia was a n93/91, too slow too late. my previous 5 phones were nokias, I decided that NO MORE after stupid poor support from them.

Romin Irani

The shift is clearly now on innovative applications. Individual Developers are getting more powerful by the day ever since Mobile Marketplaces arrived on the scene. Nokia will need to do whatever it is to get developer mindshare. That is a key thing in my opinion. They can do all the buying, creating what it thinks are the right products but unless it can get developers behind them, it will not count for much.

Phil Hendrix

Om, excellent post, and very timely.

Several years ago (before the iPhone) we studied the mobile handset market on behalf of a prominent OEM – the analysis identified 7 key dimensions along which competition was (i) intensifying, and (ii) shifting away from incumbents.

Two of the factors identified have since proven to be an Achille’s heel – not just for incumbent OEMs, but for new challengers such as Dell:
1. Game-changing Innovation – in particular, devices that redefine Users’ Experience
2. Integrated Solutions – e.g., delivering solutions (devices + apps +…), not merely devices

Apple has excelled on both of these dimensions, first with the iPod and iTunes, and subsequently with the iTouch, iPhone, and of course the App Store.

We also noted the importance of “Iconic Branding” (beyond features and functionality).
User-centered Innovation + Complete Solutions + Compelling Brand have proven to be a powerful combination (seen the crowds at Apple’s stores?).

Over the last 3-5 years, incumbent OEMs – notably Nokia, but Motorola and others – have failed to master these competencies. Disruptive, game-changing innovation often comes from companies outside of an industry. Incumbents talk a lot about design, usability, and user experience, but the skills to uncover latent customer needs, innovate in new ways, and realign capabilities to deliver complete solutions are clearly difficult to master.

Even though some analysts are suggesting that Nokia, “thanks to its massive scale, is resisting the slump much better than [other OEMs],” I suspect the Chinese will outperform Nokia and other incumbents with innovations on the cost dimension as well (for examples, see Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition, 2007).

Lastly, on a personal note, I paid list price ($600+) for Nokia’s flagship handset (the N95) a couple of years ago, only to find it virtually unusable. I’m not optimistic about Nokia’s prospects unless the company recognizes its vulnerability and fundamentally relearns how to innovate (which, we should acknowledge, they’ve done at several critical junctures in their history). This is often a very difficult admission – much less change – for a historically successful company to make.

Phil Hendrix, PhD
immr

Tom

My recent research on purchasing different phones here in Australia:
Phone AUD
iPhone 8G (3G) 710
iPhone 3GS 16G 820
iPhone 3GS 32G 980
Nokia N96 940

As a consumer why would you purchase the N96?

I remember many years ago speaking to a Nokia Engineer while at a standards event. He questioned the rest of us Engineers as whether we thought adding a calculator to a mobile phone would make sense. Wow!! A calculator.

Lets hope Nokia can do something magical as they make solid reliable phones.

Jody

Price in UK for unlocked phones (expansys.com)

iPhone 3GS (32GB) – £920
Nokia N97 (32GB) – £500
Nokia N96 (16GB) – £380

What were you saying again??

I think your prices are wrong or you are getting ripped off.

Dennis

Nokia missed the Flip phone market – but caught up more or less, and clearly missed the slim phone market, and essentially missed the mid-market ‘smartphone – web platform’ as referenced here — is there a pattern?

Kontra

Shut down the company and give the money back to Apple, err, shareholders?

Mo Kilma

I have ideas – one for short-term and another long-term:

Short-term: liquidation
Long-term : Bankruptcy

As an investor, I prefer the short-term approach.

rohit

uh and buy Yahoo maybe – is my other suggestion.

(I really want “edit” on these comments) gaaaaaah.

rohit

that image up there looks like an iPhone screen dump… nice :-)

maybe if all Nokia senior execs got iPhones for a month, they will understand where the market is moving. I mean, dont just spend 30 minutes playing with it – LIVE with it for a month. OR your favorite Android device/G2 etc. If not, they will continue designing bricks like n97. I hope they cannibalize their young (sorry mckendrick-von foerster fans) and design a game changing device backed by game changing, friction free software apps. Nothing short of leapfrogging Apple/touch, Android,…. is what it would take. And that is a lot to ask even of this wonderfully innovative company that defined the mobile-phone for so many users worldwide.

Brian Kirk

5 years ago it meant something to say you make a great mobile handset. Today, almost any company can make a nice mobile handset…they need something that differentiates them & adds value for the consumer beyond a handset that works well.

Anonymous

I agree with your comment that it got very comfortable and as a result it started feeling that it can’t go wrong. Because of its sheer size and its location (Europe) it got in to fights with some US companies and took eye off the handset designs. It was trying to play the game of GSM being far superior and completely ignored CDMA market.

Nokia started putting its fingers in to too many areas without proper vision and execution skills. Kept buying companies paying too much such as Navteq for US $8.1 billions. I hardly see any monetization from this expensive purchase. I believe it is run by too many engineers with only technical skills / too technology focused. It has pissed off many European carriers too by its insistence on providing the services.

Nokia is probably doing well in India and other very price sensitive markets and perhaps has the lowest average selling price of any established cell phone makers. May be Nokia can succeed in concentrating on these price sensitive markets selling not only its instruments but also services where there is less competition.

Derek

Partner with Nintendo to build a social/game-based mobile platform. Offer built-in voice translation. Buy Palm. Invent a new way to share info. Build netbooks. Pick a market that doesn’t have cell phones yet or create an agnostic cellular technology that is so ubiquitous and low cost, every mobile anything will have one (cars, strollers, pets, purses, etc. a la Spider-man’s Spidey Tracers).

Honestly, I doubt there is anything they can do. My understanding is that the entire company functions by disfunction and back biting. Maybe that’s true for most big companies, but it makes innovation difficult and frowned upon because you can knock down a perfectly good crazy idea that will later make someone else tons of cash.

mj

Very well said. I see NOK in the same place MOT was a few years ago. I think they are on the wrong side of the smart phone market. And I agree with you that the game has changed in low end as asia is coming on with commodity parts and software. I think it’s too late for NOK. I believe they need to offer products that people want. They can start by making an Android phone. And offer them until they can their act together with their own next gen system whether it’s with Intel or whoever. Like you, I don’t see any urgency there. Thanks for the post.

kasa

“Any ideas?” yes … get working with android and combine ovi with android marketplace. good software is now the game, get in quickly.

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