Nokia faces software dilemma

Nokia's dilemma, Repurchases Behavior of smartphones, ZokemOur view of the Nokia-Microsoft match is that it makes for a good fit on the basis of leveraging a two awkward, slow industry giants that now find themselves out of step with the meteoric rise of the web device environment.

There is a basic miscue. What is changing rapidly is the mode of the business environment that coincides with the structural differences of distributed internet and applications. The “right formulation” for doing business is not just about putting together the right pieces, but about being structured to be flat and responsive.

The large amounts of capital, huge armies of developers, valuable technologies or manufacturing muscle have a degree of importance. However, as recent history has taught, these can be upset by new technology, market evolution and device connectivity reforming modes of business to the flatter, web-centric, simplified open OS environment.

We had thought that Nokia’s best choice was to embrace the level of innovation needed by embracing both the Google and Microsoft OS.  The company found itself in the difficult spot of needing to leverage expensive assets including mapping while leveraging still large numbers of handset sales. The agreement does provide Nokia with billions of dollars in return for mapping and other assets, however, these can only be leveraged to the extent that MS Windows Phone 7 is successful.

Nokia and Microsoft will likely have a degree of success in enterprise markets where Microsoft’s office suite reigns supreme.  The problem is their speed of delivering innovations. We think that the merging of the two slow giants is unlikely to result in a restructuring of the basic problems.

The Google and Apple OS platforms are such juggernauts because they precipitate innovations at a pace that thwarts competition. This is made possible by their flatter, less top-down and faster-paced structure. The control of apps stores and subscribed content can come only after capturing the volume and momentum of the open environments.  While Microsoft and Nokia retain market share, these are about to be pressed by that rapid convergence of markets. 

Tying it together

The iPhone launch changed the focus of handsets from device design with tightly controlled, walled applications to the choice of open applications and related services environments. The problem for all other handset suppliers, including Nokia, Motorola and Samsung, has been paring the phone, tablet or other mobile device with a competitive software environment that provides the needed benefits of rapid innovation, low barriers and cost and an even playing field for competition.

The lead that companies once had in not-so-smart smartphones has proven inadequate to compete with Apple. The development of software environments has moved beyond efforts that can be undertaken by Nokia-Intel (Meego), Samsung or Motorola; market momentum has been overtaken and the acceleration in developments has become a ramping juggernaut.

The software environment is highly leveraged by the multitude of hardware and software developers that compete in the space. While committed to their own efforts to develop programs and devices, they contribute to open development, market awareness and sales momentum that no single company is capable of developing.

This is also a problem for Microsoft Windows Phone 7. Many reviews say the software has several strong points, with user surveys showing a 44% favorable rate of satisfaction by MS Phone 7 users. The integration with MS Office and server software that is still widely used pleases many in government and corporate settings. But for Nokia, the question is how big a slice of the handset OS market can WP7 gain?

The choice is often not whether handset suppliers will use Android, but if they will use it exclusively.

Recent surveys reflect Android’s gains in market share that stem partly from previous user satisfaction.

Standing out from surveys of consumer intent for repurchase is the high level of intent by owners of Android - 89% say they will buy Android again.

We believe that Android will experience rapid growth in emerging markets due to the commitments for device development and prospects for reaching lower price points than the iPhone

Meanwhile, 33% of Symbian S60 device users express an interest to shift to iPhone, 25% to Windows Phone  and 25% Android. We are surprised by the showing for Windows Phone and low percentage for Symbian.

Downside to Android

Mohit Agrawal, a senior manager at Nokia and a veteran industry analyst based in New Delhi, pointed to four challenges for handset suppliers adopting Adroid:

  • Commoditization:  “Vendors adopting Android find it very hard to differentiate themselves from other vendors using Android,” said Agrawal. This also can be said for adoption of any open OS, part of the attraction of which is being outside the majority control by a single handset supplier.
  • Shorter life cycle:  Due to waning differentiation, the product life cycle gets shortened for Android based handset vendors. Imagine a situation where HTC launches an Android based phone with certain features and within a month Motorola launches a better looking phone with similar or better features.
  • Low retention: Since all suppliers offer a similar experience due to the use of the same OS environment, there is no barrier for a consumer to shift from one maker to another.
  • Services and applications: Vendors with their own rich service portfolios should not adopt Android because “Google provides and control most of the services like messaging, navigation etc.”    

 More than Android success

The HTC Desire HD was recently introduced into India. A glance at HTC website product information reveals the rapid pace of advances. What stands out noticeably in its promotions is a lack of emphasis on Google Android, which is mentioned as the OS on the specifications page but not nearly as strongly as in the past.

When HTC and Motorola first entered the market with Android devices, emphasis on Google brand names was more directly needed as a wedge to enter the market and establish brand recognition against Apple’s iPhone. HTC still lags in recognition in many markets compared to Nokia, Motorola and Samsung. However, what drives markets has increasingly become what you do with the devices, which hinges on apps, cameras, screens, and not the OS explicitly.  HTC is gaining market share because it is coming out with a rapid succession of improved devices.

We are likely to see similar de-emphasis of the Android brand name as suppliers come fully up to speed in adopting it, and that sets the tone for consideration of alternative OS. Apple is unlikely to let their OS slip into open use. Meego and similar efforts seem unlikely to get a jump-start. The decision to go with Android can be less of a conflict if it plays out as the open source OS that does not lock the market into a branding scheme that undermines device suppliers’ own recognition.

Operators are not left out of the equation, but at this point we do not think they can be decisive in terms of choice of OS environment used in devices. They have expressed a desire to “take back” control of forces driving device developments through operator branded stores, applications and services. However, outside of individual applications and services these have little chance of coalescing into an ability to take back the environment.

Robert Syputa is a partner & strategic analyst at Maravedis

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