Nokia invented the smartphone. It then went and re-invented the smartphone, rightfully insisting the enterprise/corporate oriented business phone should be replaced with a bigger, consumer smartphone market. Nokia introduced a gaming oriented app store, bypassing the carriers – something that was the prototype for Apple’s App Store. They offered a touch screen smartphone two years before the iPhone. Nokia offered the world’s first phone to do the real internet, and they offered the first phone outside of Japan to offer Wi-Fi. They brought cameras to enterprise-oriented business phones. And Nokia was the first smartphone maker to boldly claim that a smartphone was a ‘real’ computer. Today, that is now held as mantra by all of the six big PC makers, starting with HP and Dell.
Nokia results for fourth quarter 2010 are as follows: For the first half of the year 2010, Nokia grew roughly as fast as the industry. It ended 2009 with a 39% market share in smartphones. At the end of second quarter it had a 39% market share. Then in second half of 2010, catastrophically – Nokia growth slowed to a crawl. Nokia’s quarterly growth was the slowest of any of the biggest six smartphone makers, and far slower than the industry. Nokia’s market share crashed to 33% after third quarter and down to only 28% after fourth quarter. In six months, Nokia destroyed 11 points of market share – abandoned one quarter of its total market – in just half a year! This reminds me of the disastrous suicide-ride that Motorola embarked upon, but even in its worst period, never did Motorola lose a quarter of its market share in any six month period. I don’t mean this is the end for Nokia, but the signs are very dangerous, if two quarters have already gone like this, the cause is no freak accounting error or component shortage, it is a major systematic problem that has to be corrected immediately before Nokia finds itself ranked 3rd or 5th or – like Motorola which went from 2nd to 9th in all mobile phones in only four years. Right now the Nokia market share is not in decline, it is in a dive.
In order to see what went wrong, let’s go back a little. In 2006, Nokia produced more than half of all smartphones sold on the planet, was by far the biggest total handset maker in the world and was making tons of profits along the way. It had astronomical customer satisfaction and loyalty, and Nokia’s phones were all known for great usability. Nokia also was known for incredibly reliable phones [a dog ate it, it emerged 'through' the dog later, and was fully functional, if perhaps a bit smelly]. And in spite of this, Nokia also sold some of the ultra-cheapest phones on the planet. Then a funny thing happened when a computer maker called Apple decided to release their first-ever mobile phone. A phone I called the first truly transformational phone, that we would measure time in "Before iPhone" and "After iPhone". The world for Nokia changed – it was the end of the good old days.
FAST AND GOOD OR CHEAP
I am often reminded of my boss early in my career, when I was selling computer networks for a PC networking company on Manhattan called OCSNY. Our CEO would often use the phrase when talking to customers who were trying to bargain with him – "you can have it done fast, done right, or done cheap – but only two of those three, which do you want." I thought it was a very good lesson for me in understanding the real world impacts of the typical positioning triangle.
Let’s put the triangle into handset thinking. When we say ‘fast’ it’s not highest speed internet, I mean ‘fastest’ to deploy something new – most innovative. SonyEricsson is known for this, they are often the first to deploy something new to phones. Cheap is easy, ZTE is currently among the cheapest phones in the world. And good means reliable, having all bugs fixed. These three are always in ‘inherent conflict’ i.e. you cannot have simultaneously lots of new features, and also the most reliable phone. Also if you make the phone very feature-rich, it will not be the cheapest, and to make a relatively new phone very reliable, it and good to use, it will not be the cheapest.
WAR ON EVERY FRONT
Let’s take a look at second World War. Hitler started the war fighting in Europe against several armies each of which was bigger than his – France, England and the Soviet Union. Those armies even had better equipment - French tanks were stronger than German tanks, etc. But Hitler’s Nazi Germany was able to win the early years for a great part because he took care of his enemies one-by-one using infamous Blitzkrieg strategy; Poland first, then splitting England and France – forcing England to retreat across the channel. When he need not fear England to attack him, he went against the Soviet Union. If Hitler had faced all four nations in 1939, the Second World War would have been over in weeks, not years.
Nokia somehow managed to offer some of the most innovative phones, with the best customer satisfaction, while also offering many of the cheapest phones and be profitable. What we know from applying competition theory – is that it must be, that Nokia was not really facing ‘full competition’ up to 2006. Motorola was a weak rival, they were drastically lost in the transition from 1G to 2G, and they had their brief hurrah moment with the Razr, which they could not carry further and fizzled away. Several of Nokia’s traditional rivals, Siemens, Philips, and Panasonic - quit the handset business. In Smartphones the biggest rivals to Nokia came from North America – where smartphones were still considered only to be business phones – hence RIM, Palm were the main offering. And then there was the little HTC out of Taiwan with the quirky Microsoft Windows Mobile OS. Nokia’s ‘real rivals’ [Samsung, Motorola, LG and SonyEricsson] – all made smartphones primarily on the Symbian operating system where Nokia was biggest co-owner, so Nokia would never be ‘blind-sighted’ by rivals doing something wild and weird – like Apple managed with its bizarre touch-screen phone.
Military strategists advise that you should at all costs try to avoid a multiple-front war. That is what Nokia now faces. In 2006, Nokia was head and shoulders above all rivals in ‘customer satisfaction’; after Apple came out, the highest loyalty today clearly is with the iPhone. The worst part is that its "partners" all abandoned Symbian and went to support Google’s Android – so Nokia smartphones are not even ‘second best’ in that category. While Symbian is getting better, this is a race of catch-up, and Nokia also has to prepare MeeGo, which is the only one that can hope to fight for the future. Nokia is not fighting on even terms for customer love. Last year, we saw that in the UK customer satisfaction survey, even among Nokia owners who stated that they wanted their next phone to be a Nokia – were not willing to recommend Nokia to friends – they were, in effect, ashamed to own Nokias. This is not a recipe for market success in loyalty. Compare that to Apple owners – who will stick their brand new iPhone in front of the noses of anyone, to show how incredibly cool and clever their latest iPhone is. That is the difference. While Apple owners proudly display their iPhones, Nokia owners hide their gadgets in shame… If Nokia managed a come-back, then in fourth quarter 2010 they should have sold Nokia N8 models in comparable numbers to Samsung Galaxies and iPhones and HTCs – they did not. Not even close.
LOSING THE INNOVATION FRONT
Nokia has been promising us wonderful things – but did not deliver. Rather, Nokia has issued apologies and delays. Take the N8. It would have been a hot phone before the iPhone 4, facing off against the iPhone 3GS and very early Android devices. But it got onto store shelves competing against the ‘Retina Display‘ iPhone 4, magnificent Galaxy series of Samsung phones, Motorola Droids, and vastly upgraded Blackberries and HTCs. Nokia was not fast enough, or – its rivals had learned to become faster than Nokia, whichever way you want to see it. Now what of the truly hot new phones? Apple created the phone in 2010 that had the sharpest screen ever produced [not Nokia]. Among the major brands, Hitachi created the world’s first phone with a 3D display [not Nokia]. Samsung’s Galaxy Beam was launched in 2010 as the first phone with built-in Pico Projector [not Nokia]. Between 2005 and 2008 Nokia top end N-Series and E-Series phones astonished the industry with phenomenal technology – remember the N93? It came out with a QR reader, TV-out and the best one – a 3x optical zoom – the ‘real’ zoom that only ‘real’ cameras have. A technology masterpiece, years ahead of rivals. Today, Nokia has lost this lead; N97, N8, N900 or E7 are only ‘me too’ devices, nowhere near the real global leadership. Nokia has lost the battle in the second of the corners.
And what of the last of the three fronts, the low cost corner? ZTE, Huawei and G’Five and other Chinese and Indian manufacturers are carving up the low-cost markets. Nokia is there, but is losing the low price war. Part of it is Nokia’s brand, trying to do ‘world phones’ but these markets need their own peculiarities, like dual SIM slots. Samsung was there a year before Nokia doing dual SIM slots for its low-cost phones. Low cost smartphones? The ‘marketing spin story’ sounds good, "Symbian was designed to run on phones with modest technical requirements," i.e. weak CPUs and low memory; but Moore’s Law moves on, we now have faster CPUs at low cost, as well as more memory at low cost. Samsung introduced its Bada OS to target low cost phones – and had the most successful new OS launch ever selling over five million Bada devices in its first half-year. In meanwhile Android being free – is being used by the low cost manufacturers like ZTE, Lenovo, G’Five etc. to sell cheap smartphones in the Emerging World markets. Nokia is fighting a three-front war, and is losing at all three, much like Germany in 1944, when it faced the Americans, British and free Polish coming from the South in Italy, the British, Americans, Canadians and French attacking from the West after D-Day, while the Soviet Union was pushing in from the East. A three-front war, where each of the countries alone could afford to match an army the size of Germany’s… An unwinnable war.
Nokia Bochum Plant – Alongside Finland, this was the place from where the best premium phones came from. Nokia shafted this facility for the likes of Hungary, Bulgaria and China
Along the way, Nokia has made many notorious choices. Nokia once stood for exceptional quality. Even the simplest cheapest Nokia phones were durable, were robust, were reliable, and were operationally sound. Nokia also started to cut corners. Phones were built in Finland, Germany etc. But in the past few years they moved production to the East, causing a lot of ruckus – and losing valuable governmental contracts in the process. Time and again, this resulted in delays, problems, dissatisfaction. The N97 was not an isolated case of a bad product. It’s a bit like what happened with Mercedes-Benz cars some years ago. What once stood for ultimate excellence, suddenly had production problems, quality problems, time and again.
What phone has an infinite battery life? What phone even in normal use has ‘too good’ battery life? Not a single one. Nokia knows this, they knew that their devices will be used for all kinds of consumer entertainment, and if you start to watch some videos on the phone, its battery drains rapidly. And Nokia used to be the phone you wanted wherever electricity supply is not reliable (or available) – why, because every tiny village with a gadget store will stock some spare Nokia batteries and chargers. But suddenly some pinhead in Nokia HQ decided that ‘we need to be more like the iPhone’ even though iPhone users themselves were begging Apple to give them user-changeable batteries – but no, Nokia got the i-madness, and released phones where the battery is no longer changeable by the user. This also marked the death of Nokia’s universal charger. Such moves alienated heavy phone users – I would not even consider buying one for which I can’t get a spare battery – I always walk around with a spare battery for each of my phones that I use. An utterly stupid decision. Even if that was only 5% of Nokia users, it is customers who otherwise would have been loyal to Nokia, who were driven away – I am sure HTC, RIM and Samsung took a disproportionate share of those customers.
Example of this madness is also departure from the microSD standard. First – Nokia is so clever and innovative, that they offer us the hot-swappable microSD slot like on the E90 Communicator – a godsend for swapping media data, whether your favorite music or the movie you want to see or you need more capacity for pictures etc. And so loyal Nokia customers buy expensive high-capacity microSD cards. What does Nokia do? Makes themselves incompatible with previous Nokia phones! Previous PREMIUM Nokia phones. Utter madness! No problem, these customers will notice that if they like their QWERTY phones, the Blackberry will support microSD very happily. And for nice touch-screen phones, Samsung Galaxy phones support microSD.
Nokia has systematically been adopting idiotic ideas from the iPhone, which are not industry-conforming, and in particular, which will infuriate loyal Nokia owners. Like that silly slider keypad on the N97 and the N900 – who was the genius that cut one whole line of keys to make a weird keyboard. It’s like a QWERTY but it’s not a real QWERTY – like the worst of all worlds! Thus, after a couple of weeks of struggling with it, many loyal Nokia owners returned the N97s in massive numbers and told friends: don’t buy it.
ABANDON ICONIC PRODUCTS
Imagine if you are General Motors and you manufacture the Chevrolet Corvette, an iconic sports car, sold at a very high price above the price of an average car. The ‘Vette’ has a fiercely loyal user base in the USA and cult status in most other car markets. The Corvette has been consistently a profit-generating model and also it is used as a showcase car and high-priced aspirational car, to promote Chevrolet and GM as sporting brands – i.e. used as the pace car at the legendary Indy 500 race, etc. Now, we know that Toyota introduced the Prius in a totally different form factor. There would be nothing crazy for GM to ‘copy’ a Prius and release its own hybrid car [Volt]. But for as long as the Corvette is still selling profitably – it would be utterly crazy for GM to ‘discontinue’ the Vette in favor of the Prius.
This is exactly what Nokia has done. Nokia had two truly iconic premium phones, so explicitly known ‘Nokia’ phones, that almost any ‘clone’ that tried that form factor would be assumed to be a Nokia. I am talking of the Communicator i.e. ‘palmtop’ clamshell body style with full QWERTY and massive screen; and the N92/N93/N93i Series i.e. ‘contortionist’ body style which folds many ways, including the way that typical videocams now look – camera shooting in one direction, with the screen flipped and turned so we can see from the screen what we are shooting in video mode. Both of these form factors, in their last models – the E90 Communicator in 2007 and the N93i in 2006 were award-winners and widely celebrated by the industry. The beauty of the N93i was, that it allowed exceptional optics – something you cannot do in a slim ‘iPhone clone’ phone. And the beauty in the Communicator was obviously the widest most comfortable QWERTY screen as well as allowing the fitting of the biggest screen conceivable.
So what does the Nokia management do after the iPhone comes along? They first release touch screen phones like the N97 and the N8, which ‘are not iPhone clones’ and ‘are not iPhone killers’ while clearly attempting to create phones that copy the iPhone look and feel – like GM trying to do a Toyota Prius – but the sheer madness – Nokia announce that they won’t release more phones on the N93 form factor and while not expressly saying so, seem to suggest there will never be any more Communicators either. This is madness.
If it was actually possible to ‘out-do the iPhone’ and Nokia’s N8 would now be selling better than the iPhone, I would be ok with the above. But Nokia was winning, then they panicked, and decided to snatch defeat from the jaws of victory! Nobody is going to match Apple in user friendliness; that cannot be done. Hundreds of PC makers tried for 27 years to defeat the Mac and they never ever managed to do it. No, let Apple have its ‘customer satisfaction’ corner – for pure touch screen phones – and don’t try to fight that battle. Go for those areas that Apple is not pursuing i.e. QWERTY+touch hybrids and pure QWERTYs. And there - don’t cut the corners! You have another rival for QWERTY now, and that’s the Blackberry – far better at ‘narrow QWERTY’ – where you do have to fight RIM. The only part that Nokia has ‘to itself’ more-or-less is the wide QWERTY; mighty Communicator. Don’t abandon that! Apple refuses to meet you in that battle and RIM probably knows better that it would be a costly battle to try. You own that, Nokia! If you are known for the best QWERTY wide keyboards then make darn sure that every one of your QWERTY keyboards is indeed the best on the planet. This is the corner you cannot cut! Else you lose your loyal customer – a hard lesson that needed to be learned with the N97.
Cameras? Nokia’s partner is Carl Zeiss. Why not release every single year one new superphone that is the best camera/video phone – on the other ‘iconic’ Nokia form factor, yes N93. And raise that camera to 12 megapixels and beyond – with 3x (more more) real optical zoom and with Xenon flash etc. Yes, make it a touch screen phone too, obviously, but this is a form factor and type of phone, that Apple refuses to do. It’s your market. After the premium super camera+smartphone, then offer cheaper models, like BMW does its 7 series and then 5-series and 3-series – using the same folder form factor, offer a smaller touch screen and lesser optical resolution, like an 8 megapixel camera for a mid-price point, etc. This is how money is made.
THE NEED TO FOCUS
The reality is that Nokia had been fighting in all three fronts, against very ‘weak’ rivals – many of which really ‘threw in the towel’ – Siemens, Philips, Panasonic – and others who were pretty clueless for long – Sony and Ericsson took years to get their act together – and Motorola got drunk on the Razr. Nokia HQ got to believe that they were somehow so smart, that they could fight a three-front war and win all three. That is not possible, not when you get real rivals in all three. Today clearly Apple and Google/Android are far ahead of Nokia in customer satisfaction; Samsung, Sharp, Apple etc are more innovative than Nokia in the speed corner; and ZTE, Huawei, G’Five and even Samsung are beating Nokia in the price leadership corner. Nokia is not leading in ANY corner. It has to now make clear strategic choices, pick one corner and fight for that – and/or [taking ideas from the car industry] to split the company into very clear divisions with a lot of internal autonomy, to have one unit to fight for each corner – the luxury satisfaction brand, the tech innovation brand, and the cheap brand.
CONCLUSION: (NOKIA) IS NOT LOST…YET
Nokia is still by far the biggest phone maker. They are still by far the biggest smartphone maker and dumbphone maker. They own the biggest smartphone OS platform, Symbian, and they have a credible migration path to MeeGo via Qt and Ovi. The Q3 results were alarming but that could have been a temporary blip and Nokia could have recovered. Now the Q4 results tell us that the current product portfolio, and the strategy, is not working. Nokia grew the least of all major makers, and lost market share in all price segments. The current trends suggest that Google’s Android may pass Nokia’s Symbian OS during this year 2011. This is a ship which is seriously taking in water and will sink if management doesn’t turn it around very rapidly.
I think the biggest critical mistakes are that Nokia is almost willfully annoying its loyal customers. Customer loyalty is a fickle thing and if you lose it, you may not get a chance to try to recover it. Think about it, in terms of market share, out of all those customers who bought Nokia branded smartphones in 2006, for every three customers Nokia has managed to keep - it has lost another two! Only three out of every 5 loyal Nokia smartphone users five years ago, still support Nokia today. What is worse, Nokia’s loyalty is strongest in markets and segments of low-cost smartphones – India, Africa, China etc. - but Nokia has all but lost the top end of the market. In 2006 Nokia’s top N-Series phone cost literally 1,200 dollars [the N93i]. Today Nokia has no phones even offered in that price range, the last superphone Nokia was selling was the E90 Communicator which ran for about 1,000 dollars in 2008. The N8 sells for about 500 dollars and the upcoming E7 will sell for about 700 dollars [no-subsidy iPhone 4 costs about 600 dollars]. Imagine if you were BMW and you bought the rights to sell Rolls Royce, and then you just stop selling it – even as the car was profitable and there was a big global market for it. But because Audi sells a popular mid-priced car - which BMW also matches – they would abandon their top product. That would be crazy!
And the very little things like suddenly no longer hot-swappable microSD cards [i.e. deliberately making your phone incompatible with all older models!] or not letting users swap batteries, etc.
Yes, there also are big issues with Symbian – at least those are being worked on. Yes, the Ovi store is not anywhere near perfect but again, Nokia is working on it. Most smartphones are not bought for the app store [said several surveys last year]. Those are yes, important things too, but they will not fix the problems that are already deep inside Nokia. Nokia used to be the must-have phone. Now it’s a phone its owners dare not recommend to friends. That is the core of Nokia’s problem. At one point you bought Nokia and you knew you got ultimate value and you would not be disappointed. Now even the most loyal Nokia fans, whenever they write about their newest Nokia phones – write about one disappointment after another. This is the problem the new CEO needs to address. Else it will continue to lose customers – and unfortunately, the phone replacement cycle is far faster than that for cars, the demise of Nokia could happen before Mr. Elop gets a chance to retire?
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