Summary
Nokia is losing market share in the smartphone market, but more importantly, its ASP are decreasing too. This is the result of years at the top, not being seriously challenged by competition. This lead to lack of innovation, and putting too much importance on the mobile phone functionalities, rather that its users.
Analysis
Problem
Nokia Devices & Services division’s net sales fell 28.1% year-on-year, to €6.59 billion (US$9.25 billion), with Services accounting for just €140 million of it. With a division's operating margin of 11.6%, this is a nearly historical quarterly low for the company. Given Nokia’s reliance on that division to generate profits, the company needs to ensure that its profit per handset does not fall further. It can do so by increasing its ASP, reducing its costs or developing alternative revenue streams. Nokia is looking to address all three areas.
The problem may not be about maintaining market share in the smartphone market for nokia, after all it is by far the market leader, but learning from its fall and developing devices and solutions which will help keep its profitability.
In the period of H1 09, while the iPhone only reached 8% market share, it is responsible for 32% industry operating profit.
Why
Of course it is normal that nokia's market share has been diluted with the entrance of new competitors, but what lured their customers to these competitors, and, most importantly, stay with them?
Nokia has succeeded thanks to these key factors:
- economies of scale and developing efficient manufacturing practices
- lean and efficient distribution channels, cutting the middle man as much as possible, which had been key to its success in China, for instance
- regular update of its portfolio, offering more functionalities and more performing hardware
- good relationships with European and Asian operators
- work in emerging market, including branding and distribution
Nokia does regular 360 studies to understand what users do with their smartphones, but the focus is on the functionalities, leading to reports and conclusions on how many times each identified segment used the camera, calendar, etc, rather that what they liked and disliked about it. A step further would be to try and understand what they actually want to do with the phone, which is the hardest for the manufacturer and the users alike to spell out.
Therefore, nokia has not concentrated on the fun element of mobile devices, on the user experience and usability. This is where apple, Android and RIM have managed to take market share; providing a user experience adapted to the targeted user, not a platform rich in functionalities which are hard to understand and discover.
Achieving smarter performance
nokia is working on so many fronts:
- re-inventing itself once more and move in the service industry it wants to conquer
- developing new categories, such as netbooks and high-end smartphones with its maemo platform
- push Symbian platform into the low-end smartphone segment
- reducing costs
- attract developers
- enter US market
- (the list is far too long)
However, what we don't hear about is a more user-oriented approach to tackle competition.
The success of the iPhone has shown how important it is to make mobile devices fun. Furthermore, the application store and user interface attractiveness are key to its success and created customer loyalty.
nokia needs to learn from this, and explore how this could be expanded further, putting the users at the centre of the analysis.
In a typical nokia approach, looking at new functionality, software and hardware innovation, it could consider using sensors, design, augmented reality which could add a new valuable dimension to how mobile phones are used. This might lead to new ways to look at their customer segments, and finally develop more differentiated devices which resonate with users.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
