Mallinson: How should Stephen Elop Rebuild Nokia?

Keith mallinsonNokia's new CEO, Stephen Elop, certainly has a major challenge on his hands. Such was Nokia's success over a decade or two until 2007 and its major fall from grace in a dramatically changing competitive landscape thereafter, what can he realistically be expected to achieve and how?

A strong intellectual property position and advantageous cross-licensing provided Nokia and a few others significant competitive advantage that helped propel Nokia to mobile phone market leadership by a substantial margin with global products in GSM,  UMTS and market shares in the 35 - 45 per cent range.  Its Symbian smartphone operating system is still the world leader despite a fall in the last few years from in excess of 60 per cent to the mid-forties percent market share.  Elop can take little comfort, however, because the smartphone category has been revolutionized and elevated in the last few years by Apple's iPhone and Google's Android usurping Nokia as its spiritual leaders.

Bar the occasional mainstream glitch and some longer running problems such as North America and its network infrastructure division, Nokia's rise only paused temporarily until the 2007 debut of Apple's iPhone. I can recall a senior executive from Symbian criticizing North America for its underdeveloped smartphone market in a trade show conversation with me around that time. Oh, how times have changed. North America is now the leading market, Nokia's market share at the top end has been significantly sliced in all geographies and its hitherto lucrative profit margins there have been pummeled. 

Although Apple is the most overt and successful challenger, the company and its slick ecosystem is in fact just one of several new competitive forces in recent years.  Android is now well entrenched as the software platform of choice for several smartphone manufacturers including Motorola, Samsung and HTC. LG and Sony Ericsson are also using this OS. In addition, RIM has advanced significantly and still has the second largest smartphone market share.

Wheel reinvention avoidance

The last thing the world needs is yet another new high-level OS, and yet operators might conspire to create another due to threats from Apple and Google. Herein sits an opportunity for Nokia to preempt such a move by offering its wares including Symbian and its Ovi services on a non-threatening basis.  The iPhone and Android ecosystems are contrived to bypass mobile operators who so desperately wish to avoid disintermediation.  In response, European operators are contemplating creation of a common mobile software platform. Orange, Deutsche Telekom, Telefonica and Vodafone are contemplating development of a common mobile platform to fend off mounting threats from Apple's iOS and Google's Android. French newspaper Le Figaro reports France Telecom-Orange CEO Stephane Richard has invited the heads of the three competing operators to explore the creation of their own common OS--the report states the talks are motivated by a belief that iOS and Android are "Trojan horses" enabling Apple and Google to establish their own relationships with consumers, effectively minimizing the carrier's role in the mobile services value chain. Le Figaro notes the operators are still determining what form an alliance might take, with options including the formation of a joint venture or the construction of a common application development platform. Orange, Deutsche Telekom, Telefonica and Vodafone boast a combined subscriber base totaling around 1 billion.

Operators, including these four, have lashed together various other collaboration schemes such as the Wholesale Applications Community, a GSM Association-organized industry initiative created to simplify mobile software development and distribution.  Notwithstanding the difficulties in coordination and management among competitors, such actions might also attract the scrutiny and intervention from competition authorities. There are also independent operator initiatives such as Vodafone's 360 mobile internet services platform and many others. But carrier-led initiatives are typically humdrum or worse in crucial areas where hardware, underlying software platforms, storefronts and the user experience must be most effectively integrated.   

In order to placate and be embraced by the operators Nokia must clearly pursue different business models to Apple and Google.  Nokia learned how very hostile operators can be to the threat of disintermediation when it introduced its Club Nokia portal and then had to backtrack on plans a decade ago.  With a narrower business model and structures that ensure it cannot end-run its operator customers--for example, with operator billing only rather than direct credit card billing--it could reemerge as the operators' preferred hardware and software platform of choice.

Nokia does not need as all-encompassing a business model as Apple to be very successful and profitable. Apple comes up trumps by dominating the entire value chain including hardware sales, its own software platform, storefront and its iTunes payments system.  Google, however, has withdrawn from online hardware sales, but benefits from having a variety of phone manufacturers using Android and its OS market share is growing rapidly. Whereas the mobile sector is entirely growth for newcomers Google and Apple, for Nokia this is a defensive battleground for unit share, revenues and margins.  It is painful to sit and watch Apple succeed in its highly profitable niche, but that does not mean that its formula can or should be replicated by Nokia. Apple remains a high-end Model-T Ford that only fits with a minority. It's a costly one-size-fits-all that's also still only available in black. Nokia has 13 times more sales volume and market reach than Apple.  Many of the world's networks, pockets, user tastes and abilities are not up to the requirements of iPhone or Android. Nokia's products come with a variety of form factors and differing demands on networks and users. This base is also ripe for development with services beyond voice and text.

Phones are no longer sufficient

With the global count for subscribers, or at least for SIMs, now approaching 5 billion we are not far from handset saturation. In face of falling costs and prices for technology, growth must be achieved by cramming more goodies into phones and by diversification into new device categories. As described in one of my recent columns, the mobile phone market will continue to grow in value as the average phone sold becomes smarter, but this golden age will probably only last about another five years.

Thereafter, device vendors will be dependent on new types of non-phone devices for growth. These will be complements to rather than replacements for phones. Consumer electronics companies such as TV manufacturers have been highly dependent on diversification into new categories such as VCRs, DVDs and home theatre systems, as well as accelerating replacement cycles for TV sets with new technologies such as LCD and the fashion for bigger screens at lower prices. Apple has already tapped the opportunity to diversify from phones with its iPad tablet and other handset vendors including Samsung with its Galaxy Tab are following suit. In fact, Apple is a master of product category diversification--because it has been most successful in creating new product categories or at least leading the generation of mass-market awareness and demand for them--from its beginnings in computers to include iPod music players. It is now expanding more generally within the connected home with its TV box.  Nokia will also be dependent on diversifications into new device types, as its MeeGo software platform will facilitate. Nokia's tablet creations have been very disappointing so far. However, even Apple has launched a few lemons over the years, including its Newton PDA in the 1990s.

Sweet spot

It is essential that the developer community, including many leading developers stateside, is motivated to write applications for or port them to Nokia's platforms including Series 40 at the low end, upcoming MeeGo for mobile computing devices as well as Symbian. Nokia's common Qt development environment will help take these in many directions including to far-flung geographies and into embedded device markets but the starting point has to be apps such as games.  Nokia currently suffers at least cosmetically by having only 13,000 applications versus 80,000 for android and 225,000 for iPhone.

It is also crucial that Nokia finds the right spot with carriers. For now and until MeeGo is ready, its foothold must be in the lower end of the smartphone market and below, where it will not be in direct conflict with high-end offerings such iPhone with its entrenched ecosystem and with Android phones incorporating 1.2 GHz or faster "overclocked" devices such as Samsung's Galaxy and Motorola's Droid.  Nokia's latest clutch of new smartphones has only 680 MHz clocks.  Even though hardware acceleration can make such comparisons misleading, these figures can sway some tech-orientated purchasers.  Nokia needs to focus on the other numerous carrier and end-user customers who fit best with what Nokia has to offer - and that's still one whole heck of a lot.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor has recently published its Extended Mobile Broadband Device Forecast to 2020. Further details are available at: http://www.wiseharbor.com/forecast.html

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