Can Nokia survive the jump into icy waters? Reprise

Citation

Curwen, P. (2014), "Can Nokia survive the jump into icy waters? Reprise", info, Vol. 16 No. 2. https://doi.org/10.1108/info-11-2013-0057

Can Nokia survive the jump into icy waters? Reprise

Article Type: Rearview From: Info, Volume 16, Issue 2

A regular column on the information industries

In June 2012, some analysts took the view that with WP8 soon to come on stream, Nokia had reached rock bottom and would start to show signs of real recovery as forecast by its CEO (albeit with the proviso that the new strategy would take quite a long time to pay dividends). But were they right?

Certainly, many believed that Nokia had made a major error in opting for Windows over the much better established Android, particularly as both the range and quality of its apps simply failed to measure up. In principle, this appeared to have resolved a major quandry for Microsoft since without Nokia its mobile ambitions would have been in tatters, but then again it was less a case of wanting a partner and more of needing a manufacturing arm, in which case BlackBerry might arguably have fitted the bill. But once Nokia had committed to WP7, there was little prospect either of Nokia opting for a dual OS or of Microsoft opting for an alternative handset vendor.

But if Nokia was not intent upon deserting Windows – having abandoned Symbian, a second strategy reversal would probably have resulted in shareholders running for the exits – it was not altogether obvious why, in September 2013, Microsoft offered $7.2 billion for Nokia’s handset business (Devices and Services division) and certain patent licences, subject to regulatory approval. It was rumoured that Nokia’s CEO, Stephen Elop, would take over as CEO of Microsoft – curiously, perhaps, given his lack of success in turning Nokia around – but it also suggested that Microsoft had no real strategy for hardware as against software. Now Nokia certainly appeared to have some much improved hardware in the form of the Lumia and Asha ranges, but would it prove sufficient just to invest the $1.5 billion in financing that formed part of the takeover deal? Ultimately, if the intention was to overcome Nokia’s deficiencies on the software side – and Microsoft could hardly justify the expected $600 million in synergies unless that was indeed the intention – then with Samsung and its Android OS disappearing over the horizon the immediate objective for Nokia would be to turn itself into a direct rival to Apple. But that would imply a rivalry based upon the OS and the user experience, and how could Nokia hope to rival Apple in those areas?

Interestingly, Google also appeared to be thinking along the same lines only in relation to Motorola Mobility – an acquisition in May 2012 that has achieved little so far other than to create financial problems, disputes with other Android licensees and a messy range of devices. However, it has had the effect of further isolating Research in Motion (RIM) which no longer has virtual control over the instant-messaging market with its BlackBerry Messenger brand and can no longer expect either Microsoft or Google to ride to the rescue.

By mid-2013 it had become brutally clear that the smartphone market was the only key to future success for device vendors. In 2013Q3, the overall market rose to 418 million handsets of which 60 per cent comprised smartphones. By this point, Samsung had raced ahead of all of its competitors, achieving a record 28.7 per cent overall market share. Meanwhile, Nokia had collapsed further, recording a share of 15.5 per cent, down six percentage points in one year and actually selling fewer units in a rapidly growing worldwide market – up by nearly 50 per cent in respect of smartphones.

If one accepts that Samsung is uncatchable for the time being – but see below – then the most interesting issue would appear to be how the battle for runner-up status between Nokia and Apple will play out. In 2013Q3, their respective overall market shares were 15.5 per cent and 8.1 per cent, but for smartphones the respective shipments were 8.8 million compared to 33.8 million with the iPhone 5 about to hit the pre-Xmas market – so, in essence, contest over. Clearly, there is a vicious circle of sorts in operation here: if handsets are not selling well than app developers don’t make new apps for them, and if new apps are not forthcoming then the handsets will continue to be shunned.

But as the above indicates, the smartphone market is heading the way of the featurephone market – that is, it is becoming commoditised with commensurately thin operating margins, as Nokia already knows only too well. If one wants to know where the real money is to be made one needs to look elsewhere. Microsoft makes billions of dollars from its "Business Division" and "Server and Tools’ while Nokia can now look forward to making profits from NSN (having bought out its partner Siemens and renamed it Nokia Solutions and Networks) by rolling out 3G and LTE networks and from the purchase of Navteq’s mapping business. But these are hardly "cool" activities and of absolutely no interest to the customer in the Apple shop or to handset-noting celebrity watchers.

Ultimately, Microsoft’s evident attempt to become "cool" will fail, although with $70 billion in reserves outside the USA it probably won’t worry too much about the cost. Indeed, bearing in mind that Google paid $12.5 billion for Motorola Mobility, Microsoft might appear to have got a bargain. However, with activist shareholders attempting to gain board representation so that they can table a demand that Microsoft desist from competing in the mobile devices and services markets, Microsoft may come to wonder retrospectively why it did not just carry on being "uncool" and pocketing the enormous profits from so doing.

But it may be argued that the underlying issue – the fact that if you take your eye off the ball where modern technology is concerned, as both Microsoft and Nokia did in failing to understand that entirely new interfaces and chip architectures would render largely irrelevant their attempts to upgrade what previously existed – is not going to disappear. Furthermore, it is not going to remain fixed in a geographical sense. The future is increasingly about mobile, even in the home, and numbers count. So it does not take much imagination to work out that China will sooner or later play a dominant role as the largest market for smartphones – one with increasing influence over its heavily-populated neighbours such as India and Indonesia – and that domestic companies such as Huawei and Baidu will come to challenge those companies like Samsung that are currently in vogue.

The idea of creative destruction is hardly new, but it appears to be proceeding apace in the mobile handset sector. Of course, Nokia is in good company when one considers what has happened to Motorola and BlackBerry, but it does seem a little hard to swallow that Nokia is no longer a brand with much appeal in the smartphone sector and cannot afford to keep making losses. Microsoft has agreed to use Nokia as its brand over a ten-year period, but what then? Will it continue to throw good money after bad?

Ultimately, the point is that despite its travails in the smartphone sector Nokia will survive the jump into icy waters, falling back on NSN, its mapping services operation and its Advanced Technologies division, but it will no longer be the Nokia that so many customers and business analysts grew to love a decade or more ago. Microsoft might even decide that the Nokia brand is no longer attractive in the smartphone market and dispense with it, or it may now simply be hoping that the FCC will not approve the purchase.

About the author

Peter Curwen is Visiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK. Peter Curwen can be contacted at: mailto:pjcurwen@hotmail.com