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Monday, February 21, 2011

The Second Coming Of Nokia

Being an ardent Nokia fan since the late 90's, I am disappointed with where Nokia currently finds itself. Nokia's were (and still are) considered to be beautiful and supremely user friendly - a heady mix of form and function; the ultimate “cool” device. But today they are seen in many circles as an 'also ran', a leftover from the feature phone era. And the bad news keeps coming. For example, multiple attempts at a US launch have gone badly as evidenced by the recent failures of the X7 and the Nuron 2, the highly publicized Ovi Music Unlimited service has been shut down in most markets, etc. And these failures are beginning to show up in Nokia's financial and market performance. Nokia's net profit for the Q42010 was EUR745 million, down from EUR948 million a year earlier. In the same time period, its handset market share slipped to 31% from 35%. Given the hole in which Nokia finds itself, the question is - can it reverse the slide? 

While answering that question is going to take a much more detailed analysis, the one factor that clearly stands out in my mind as the primary reason for Nokia's current state. Nokia was never prepared for the explosive growth in smartphones. Let’s go back a few years. Nokia did really well when the hardware itself was the biggest factor driving handset sales, and it even did fairly well during the early years of the smartphone era when the focus was on on-device user experience. But then two monumental changes occurred. First, the iPhone came along and changed the industry in one quick sweep by shifting the focus to apps and services. Nokia, like other device manufacturers, was caught completely unawares. As the industry was figuring out this newfangled app thing, the second tidal wave hit. Google released its Android OS and suddenly, second rung handset makers like Samsung, HTC and LG were able to churn out truly world-class devices with relative ease. These two forces changed the industry dynamics forever. But in its ivory towers, Nokia refused – or was simply unable - to adapt and compete. Of course, there were weak attempts like committing to MeeGo, open-sourcing Symbian, etc. But these steps weren’t enough to stop the bleeding and Nokia went into a tailspin. Today, Nokia’s market share is being consumed by competitors at a record rate – by cheap Chinese made devices on the low end and by the Android and iOS powered devices in the high end smartphone category.

Stephen Elop, who took over as CEO in September 2010, unveiled his revamp to Nokia’s strategy few days ago. Prior to the announcement he had said "We must build, catalyze or join a competitive ecosystem," which many folks assumed to mean that Nokia would introduce new smartphones using the Android platform. But as we now know, Nokia is going the WP7 route – and has made comments like 'Our first priority is beating Android’. While the jury is still out on the WP7 announcement, Nokia’s decision to ditch Symbian hasn’t gone down too well with the Nokia staff.

So the question is – will Nokia claw its way back into relevance by betting the farm on WP7? I for one don’t think so. Just like Windows 7, Microsoft is bound to license WP7 to any device manufacturer out there who is willing to pony up the licensing fee. Companies like HTC and Samsung have already released WP7 phones, or are in the process of doing so. From a hardware manufacturing excellence standpoint, the Koreans and Chinese have caught up with Nokia. So the bottom-line is that in a few months, Nokia will be able to push world class WP7 phones - into a market that will already have world class WP7 phones. Therefore, Nokia will have no real differentiator in the marketplace. [As a side note, I think Microsoft has more to gain in this relationship simply because Nokia’s commitment to WP7 finally makes WP7 relevant in the OS wars]

What is the alternative? As I said earlier, there are no easy answers. But as a starting point I think that to get back on the road to growth, Nokia needs to do play to its strengths. Here is my take on a few of Nokia’s strengths and how Nokia could play it to its advantage:

Strong brand
Focus on Nokia, not on WP7. Also, I believe that Nokia needs to go multi-platform. In my opinion, Nokia branded Android phones will be hot sellers.
Strong presence in developing countries
Develop cheaper, feature-rich devices without sacrificing Nokia’s legendary user-friendliness
Robust distribution presence
Get devices out to market as quickly as possible. In the US, devices are primarily sold through carriers. However, in developing countries, subscribers buy their own devices without subsidies. Nokia’s well established distribution presence is likely to be a significant competitive advantage in these countries.
World class manufacturing
Manufacturers like Samsung, LG and HTC have more or less caught up with Nokia’s manufacturing prowess. But as the recent component shortages have shown, not everyone has a great grasp on the supply chain. Nokia’s years of experience in this area and manufacturing abilities should give it a lead over the Koreans and the Chinese.
Services experience
This in my opinion, is the area with the greatest potential for Nokia. Of course, Nokia has to first determine that its mission is not just to make and sell world class hardware, but also to develop a great suite of world class services. If so, then the question Nokia needs to be asking is – what services can we develop that can be layered on to WP7 (and hopefully, Android) that can help differentiate Nokia? It could be as simple as an interface (like HTC Sense) layered on to the OS, or something deeper. Lessons learned in Nokia’s Ovi experience should give it a head start.

So are these all the strengths Nokia has? Are these solutions the only ones Nokia can develop? Absolutely not. But it’s a start. And Nokia needs to get moving. ASAP! If Motorola could come back from the brink, so can Nokia. And I look forward to the day Nokia is “cool” again.