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Summary:

Nokia today 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, sending its shares to close lower by 14 percent. And they’ve lost more than half their value over the past 12 months. Why? 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.

nokia.gifEarlier today Nokia, 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, RIM and Google’s 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, 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 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 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?

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  1. Friends of Dave (friendsofdave) ‘s status on Thursday, 16-Jul-09 22:28:21 UTC – Identi.ca Thursday, July 16, 2009
  2. “Any ideas?” yes … get working with android and combine ovi with android marketplace. good software is now the game, get in quickly.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. uh and buy Yahoo maybe – is my other suggestion.

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

  9. 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.

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

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