Nokia: no longer defying gravity

Julian Hewett, Chief Analyst

I’ve forgotten how many times I’ve used the phrase ‘defying gravity’, when talking about Nokia results. In the past, Nokia has repeatedly kept its margins up even when unit sales did not meet expectations.

No longer. Nokia’s shares fell by 15% last Friday, after it forecast a drop in profits in Q3. It blamed currency shifts, and lack of uptake of top-end phones.

I think Nokia’s short-term issues are exaggerated by the financial analysts. Much of the shortfall in revenues and margins is due to the strong euro and weak dollar. Indeed, Nokia claims its market share increased to 39% in Q2.

On the other hand, the long-term will be much more challenging for Nokia. But only if its competitors execute better than they have in the past.

Nokia has executed brilliantly. But let’s face it, Nokia also prospered because of the incompetence of its competitors. Motorola failed to capitalise on its category-killing StarTAC phone. The apparent dream team of SonyEricsson failed to deliver. Siemens didn’t ‘get’ design. Philips and others went nowhere. This incompetence allowed Nokia to grab a 35-40% share, growing revenue from euro 9 to 30 billion in just three years (1998-2000).

But the competition is hotting up. Cool designs, sharp colour screens and 2.5G capability are all becoming standard, together with cameras and other features for those who want them. Samsung, Siemens, and SonyEricsson are all gradually building market share.

Then there are operator-branded handsets. The Vodafone Live service was launched with three handsets – clam shells from Sharp and Panasonic, and the familiar Nokia 7650 camera-phone. The Sharp phone was built to Vodafone’s design, and Vodafone claims that it is outselling the Nokia model. Vodafone CEO Chris Gent says it’s unlikely that Nokia’s share of Vodafone’s handset sales will be close to 40% in four year’s time. In my view, operator-branded handsets will become increasingly popular, particularly at the low end where consumers care less about the brand. Although at the top end, I suspect consumers will prefer a handset brand to an operator brand.

Finally, there is the vast Chinese market, with 36 vendors and hundreds of models. Local brands are taking 40% of the market. As we warned in May, Chinese production capacity is running ahead of demand. It’s already reached 200 million phones per year and is still growing.

Nokia has tremendous advantages of brand and scale leadership. But its design and user interface are no longer the clear differentiators that they used to be.

Mind you, plenty of big questions about the competitors remain. Can Samsung continue its spectacular rise? Will SonyEricsson get to profitability quickly enough for its beleaguered parents? Will a Motorola-Siemens handset merger finally make sense? Will one or two Chinese vendors emerge from the pack? Oh – and will Microsoft get off the ground?

Long term, someone will surely make a dent in Nokia’s share. But who will execute best? I did a quick poll of Ovum’s wireless experts. Half voted for Samsung. The remainder were spread between Microsoft, ‘a SonyEricsson resurgence’, ‘one of the Chinese manufacturers’, and ‘non-branded/operator-branded phones’. Plenty for the flying Finns to watch out for.

Julian Hewett is an Ovum founder. Contact him directly on JJH@Ovum.com. Or see WirelessMultimedia@Ovum and Mobile@Ovum.

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