Nokia In Trouble, Future Uncertain

A great article on All Things D: covers Nokia’s current situation. Things are dire. They have announced more layoffs, on top of those already planned. They are shutting down ancillary research groups, as well as some factories. Their bet on Windows Phone has not worked out, and the Lumia (thought to be the catalyst to jump Windows Phone to the top of the heap) has proven to have made limited impact. Could we be seeing the demise of one of the stalwarts of the mobile industry?

Was The Biggest Name In Mobile Phones

There was a time where Nokia was the king of mobile telephony. They sold (and still do sell) an enormous number of phones, albeit what we now call “feature phones”. Their Symbian-based smartphones owned the global smartphone market, although they had virtually no presence in North America. They had one of the most recognized brands in mobile phones, and had a reputation for solid, dependable and easy-to-use devices.

Their dominance in feature phones didn’t translate into smartphones when that market started to grow. While it is true that Symbian was the most dominant smartphone operating system, you have to keep in mind that it was a big fish in a very tiny pond. Smartphones made up a tiny fraction of all mobile communications devices. Further, the smartphone market was largely confined to the enterprise and business space. Very few consumers initially wanted smartphones, in part because the data plans needed to make them useful were rather expensive. It also didn’t help that most smartphones weren’t exactly paragons of industrial design or usability. They were mainly useful for a small number of tasks: phone calls, email, address books and appointments. Yes, you could get apps for these devices, but they weren’t easy to find, and given that most devices were paid for by an employer, few people wanted to spend their own money on software for their employer’s machine.

Rise of the Consumer Smartphone

The iPhone changed that dynamic. It was aimed squarely at consumers. It was about being a small, portable computer. The phone component was just a small part of what the device could do. The introduction of apps allowed people to expand what a smartphone could be and do, making it for more than about basic communications and the tasks around that function. Android was a similar take on the same idea: put a portable computer in someone’s pocket. These weren’t phones that were smart (like Blackberries, Treos, Windows Mobile devices and Symbian machines). These were little computers that could make phone calls.

The result was a market that exploded. By the end of 2009, about 2 years after the iPhone was announced, smartphones went from comprising only a few percent of the mobile phone space to representing 20% of all devices sold. By the end of 2011, nearly 1/2 of all mobile phone owners in the US had a smartphone. The market went from interesting, specialized niche to mainstream in only a few short years.

An Ill-fated Partnership?

Nokia (like RIM) wasn’t able to ride that wave. First, they attempted to stay in the game with Symbian. But consumers made it clear what they wanted: iOS and Android. In early 2011, Nokia decided to make a bet on Windows Phone, entering into a strategic partnership with Microsoft. The market looked new enough and dynamic enough that there might be room for more than a couple of operating systems. Windows Mobile was the dominant platform in North America at one point, having supplanted PalmOS, before it was pushed aside by Blackberry. Microsoft had considerable brand recognition, and the thinking was that it could use that to become a major player, if not the major platform, for mobile computing. Coupling two strong brands, Microsoft and Nokia, seemed to be sure way to take top spot. The resulting would be a combination of one of the biggest brands in computing and the biggest names in mobile phones. On paper, it was expected to be a recipe for massive success.

It didn’t happen. Windows Phone basically took over the paltry share of mobile computing that Windows Mobile had, rising as high as 6% of the market at the end of 2010, when the platform first came out. They never got past that, and have declined to about 2-3% of the smartphone market. Back in 2011, followers of Windows Phone kept saying “wait until Nokia’s products come out”. There was a lot riding on the forthcoming Lumia phones. The first arrived in late 2011. They faired well in reviews. But their sales did nothing to increase Windows Phone marketshare. The more advanced, higher-end Lumias arrived in early 2012, and again had virtually no impact. Both iOS and Android continued to grow, while Blackberry, Windows Phone and a bunch of marginal players all continued to decline.

Too Late To Right The Ship?

The question now: is it too late to try to right the ship? The reality is that you can’t cut your way to business success. Layoffs, downsizing and cutting back on manufacturing facilities can buy time, but it isn’t the formula for future growth. Nokia needs to sell more product, and sell it with a higher profit margin. It will do no good to cut costs if Nokia can’t increase revenue.

Nokia and RIM are in the same boat: they both have products fewer people want, and little prospect of that changing. Both are facing declining sales, and less profit (or no profit) from each device they do sell. This is not a sustainable situation. RIM at least has some elements of the business (enterprise integration and infrastructure, a strong security capability) that are absent with Nokia. Nokia has some value in their patent portfolio, and they do have smart people that work there. But their business lives and dies by the handset, and the handset alone.

Could Nokia shift gears, and either add Android, or move to it exclusively? This is certainly one option, but one with no guarantee of success. Android is dominated by Samsung and HTC, and Motorola (now part of Google) is a wildcard in the picture. They would be facing a market with 2, possibly 3, strong competitors, all with a head start. Any Android phone from Nokia would likely be a year away, possibly more. They would have to hang on with whatever they have now until then, and again, there is no guarantee that an Android phone from Nokia would save them.

There is also the Microsoft relationship to consider. Nokia abandoning Windows Phone is not a ringing endorsement of the platform. I would expect that Nokia’s agreement with Microsoft precludes Nokia from exploring other platforms for some set period of time, and that expiry date has not likely been reached. Even without a contractual restriction, I would also expect Microsoft would take steps to prevent Nokia from abandoning the Windows Phone platform, at the very least offering them some kind of cash injection while they try to valiantly to improve Windows Phone marketshare. The question is what can be done to bring Windows Phone up in the standings? It will take more than just a clever ad campaign or slick marketing. A new coat of paint won’t mask an underlying problem: people don’t want the platform.

Next Steps Unclear

There really isn’t a clear path forward for Nokia. Any platform change means that salvation is still in the future, and still not guaranteed. It isn’t clear what can be done to improve Windows Phone’s fortunes in the mobile computing marketplace, and Windows 8 isn’t going to help that. If anything, it makes it harder, because it means people focus even more on the “phone” part of Windows Phone, and it is competing against mobile operating systems with a broader appear and a broader base of devices. If Windows 8 is able to make a dent in the tablet market, and actually prove a competitor to iPad, Nokia could find themselves missing out on that, because they are viewed as “phone manufacturer” not a “mobile computing manufacturer”. How successful Microsoft will be in the tablet market is still a huge unknown right now, and Nokia may not be in a position to take advantage of that success, should it occur.

Barring a miracle for Windows Phone, or some odd resurgence of feature phones, there appears to be little in the way of a future for Nokia. Sadly, the most likely path is one that see them bought by someone else, in part for their brand and in part for their IP portfolio. Who that buyer could be isn’t clear. Microsoft has indicated they don’t really want to get into the smartphone hardware business. Samsung or HTC’s only interest would be their IP. For someone like HP, buying RIM would make more sense, given that RIM has value for enterprise integration and services, something Nokia is lacking. If all HP wanted to do was build their own smartphones, they don’t need Nokia to do that. IBM has demonstrated zero interest in building mobile devices. Off-the-wall possibilities like Oracle or Facebook are unlikely. Facebook is spreading its bet, starting with deeper integration with iOS. I fully expect similar levels of integration with Android. A Facebook phone makes zero sense as a product, but Facebook-enabled phones on multiple platforms means they win, no matter which moves to the top of the heap.

While fortunes can always change, at this point, it appears that Nokia is on a path to eventual non-existence. In some ways it would be sad to see them go, but it is the way of the world. They could be yet another great whose remnants dot the technology landscape.