Numero Uno’s Gambit

By M H Ahssan

Nokia is banking on new models and personalised services to stay at the top.

About a month ago, Ramanjot Singh’s 90 sq. ft outlet, Novelty Communication, in south Delhi’s Chittaranjan Park was handpicked to be a Nokia Solutions Partner (NSP) — one of the 300 such outlets across the country. Nokia blessed each one of them with a laptop, Bose Companion 2 speakers, a high-end noise-cancelling JBL headphone, three of the latest Nokia smartphones, a modern counter, complete with a hi-speed broadband connection, a Wi-Fi router and a trained executive. NSPs are crucial links in the experiment of the world’s largest handset maker, the €50-billion Nokia Corporation, to generate new revenue streams and fend off the half a dozen rivals, who are nibbling market share from practically every segment. Nokia hopes NSPs will eventually sell its customers music downloads, latest games and new applications (apps), besides hooking the customer with freebies such as email, calendar and contacts sync.

Nokia’s NSPs are its first brush with an offline, physical infrastructure anywhere in the world to build a brand new monetisable services ecosystem around its handsets. Its rival Apple Inc. has shown the way, clocking $4.05 billion in 2008 through online content and services. But Nokia is trying to leverage its distribution with physical touchpoints. NSPs’ success or failure will reverberate at its Helsinki, Finland, headquarters and will determine whether these can be rolled out in other parts of the world such as China, the Middle-East and Africa, where handsets sell independent of mobile connections. “We need to sell a lot more apps and solutions from our retail points so that consumers can experience and sideload it. We will have to move from a physical business model to a combination of physical and virtual business model,” says D. Shivakumar, Nokia India’s vice-president and managing director.

An apps and solutions ecosystem is vital for parent Nokia Corp. morphing into a 360-degree mobile company. “Wow (factor) more and more will come from tight integration of service. Hardware alone won’t be enough,” says Olli-Pekka Kallasvuo, CEO, Nokia Corp. (Incidentally, this is a view that Apple also champions, and other smartphone makers are following). Nokia’s network equipment business Nokia Siemens Networks is incurring losses and the handset business is under intense pressure. Its global market share has shrunk from 38.6 per cent in 2008 to 36.5 per cent in the first half of 2009, according to research firm Gartner. But Kallasvuo insists Nokia’s share has fluctuated in the range of 34-40 per cent in the past five years. “This has been our normal level,” he says.

In 2008, Nokia’s global handset sales fell 14.2 per cent while the recession-hit market shrank 6.5 per cent. As a result, Nokia’s profits fell 40 per cent to €4.97 billion. In the first quarter (Q1) of 2009, Nokia saw a 90 per cent profit erosion, citing an “exceptionally tough environment”. Earlier this year, Nokia predicted that the industry’s handset volumes in 2009 may fall for the first time in two decades by as much as 10 per cent from the 2008 level of 1.22 billion.

Goldman Sachs has projected that Nokia’s share of the top-end smartphones costing $350 and higher could shrink to 13 per cent this year as against 33 per cent in 2007, largely because its average product price has seen a steeper fall (from €79 in Q1 of 2008 to €65 in Q1 of 2009) than its rivals’. In Q1 of 2008, according to Gartner, Nokia still had a dominant 45.2 per cent share in the global smartphone market. But in the US, where 50 per cent of the world’s smartphones are sold, Nokia lags behind BlackBerry and Apple.

Clearly, there is a lot at stake for Nokia in NSPs, which will define its strategy in China and India that account for nearly one-third of its handsets revenues. Its traditional markets are replete with bad news. In November 2008, Nokia withdrew all its products (except Vertu) from Japan — the world’s fourth largest market — after years of struggle to penetrate the country. Its last reported share was less than 1 per cent in that market.

Competence Over Innovation
For a while analysts have been attributing the erosion in Nokia’s market share to its inability to produce a ‘Wow’ product any more. From a highly innovative company that beat cellphone- inventor Motorola, Nokia grew into an enormous size, making four out of every 10 cellphones on the planet. But that size became as much its weakness as it was its strength. Like a charging elephant that takes time to turn around, Nokia is today a competent manufacturer, a dexterous marketer and a nimble distributor, but it isn’t the most innovative. All through the 2000s, it has been playing catch-up with rivals on new technologies, software and form factors.

Take, for instance, touchscreens. The world’s first touchscreen phone Simon was launched by IBM in 1993, Nokia launched only in 2003. Nokia is also among the last to offer online content. Its own music, games and apps store Ovi.com was launched in 2007, much later than Apple, which introduced Apple Store in 2003. Even the tilting-slider form factor that defines Nokia’s latest N97 is similar to T-Mobile-HTC’s G1 (the world’s first phone with Google’s Android OS) and AT&T and HTC’s Pro.

All this is in stark contrast with the 1990s when Nokia 2100 was the first phone ever to feature a tune. In 1997, the Nokia 6110 was the first phone to feature a game, Snake. In 1999, the Nokia 7110 was the first WAP phone, bringing the internet to the cellphone. These innovations rocketed Nokia to the No.1 status in 1998 from where nobody has been able to unsettle it yet. But now its market share, revenues and profits are all under tremendous pressure.

A Blizzard Of Handsets
In India, which is Nokia’s second-largest market after China, 2008 revenue grew just €35 million to €3.72 billion (Brazil grew the highest €645 million to €1.9 billion). Its share in the domestic market shrank from 72.2 per cent in 2007 to 49.7 per cent in Q1 of 2009, according to Gartner and GFK (see ‘Losing Grip’). “Nokia’s share is declining... There is a drop of 1-2 per cent quarter on quarter,” says Anshul Gupta, principal research analyst at Gartner. Among its biggest rivals, Samsung gained market share from 6.7 per cent in 2008 to 7.67 per cent today. “We have doubled from what we were in 2007,” says Sunil Dutt, country head, Mobile Business, Samsung India. Nokia declined to share any sales numbers, and insists its market share in India is 64 per cent.

Nokia has traditionally been a strong player in the below-Rs 4,000 segment that accounts for 77 per cent of the market. But in the past couple of years over 20 China-made local brands such as Fly, Spice and Micromax and Samsung’s Guru have cornered about 15 per cent of the market due to their low price points. “People (in this segment) are looking at low-value, high-feature handsets,” says Rajiv Agarwal, CEO and director of mobile retail chain The MobileStore.

At the top end, the Rs 10,000-plus segment is barely 6 per cent of the market where rivals such as BlackBerry, iPhone and HTC are gaining ground. “In Croma, the sale share of Nokia is coming down. We used to have a large share of Nokia products, but of late HTC, iPhone and Samsung are doing well,” says Ajit Joshi, CEO and MD of Tata-owned Infiniti Retail, which runs Croma electronics stores. Among high-end phones, Croma sells an equal number of Nokia, BlackBerry and HTCs. “In modern trade, we have a higher presence than most of the big players in high-end phones,” says Ajay Sharma, country manager, HTC India. It says it sold 300,000 units last year. Nokia does not disclose its smartphone numbers separately.

In the middle segment, Nokia is no more the customer’s only choice. “Previously, people were only looking for Nokia phones. But now customers also want to see Samsung, LG and Sony Ericsson,” says Ziaul Tauseef, a retailer in Chandni Chowk, Delhi. In such a market situation, Nokia is relying heavily on what is inarguably its most potent weapon — the industry’s largest distribution network set up painstakingly over its 15-year presence in India. Its unmatched FMCG-like sprawl covers 190,000 retailers. Its biggest rival Samsung reaches barely 50,000 outlets. It will pump its distribution bandwidth with 50 new handsets this year, up from an average of 28-30 in the previous two-three years. Currently, of the 350-400 models in the market at any point in time, Nokia has 60-75. Rivals Samsung and LG too will introduce 40 and 45 models this year.

So far this year, Nokia has launched nine phones, including the N97, N95 and 5230. Nokia does not disclose product-specific numbers, but says the N97 is flying off the shelves. Its dealers, however, say the product is encountering many problems, including hung software. Bloggers across the world have hailed the device and its features but have unanimously thumbed down its touchscreen and the operating system (OS). Ginny Miles’ blog on pcworld.com says: “It has more memory than the Palm Pre, iPhone and T Mobile G1... But the N97 falls short of its potential, largely because the OS — Symbian S60 5th Edition — lacks the refinement of other OSs. Still, the N97 impresses in… audio and video.”

According to Damian Koh on cnet.com, “…the touch interface is still very inconsistent and bears traces of a stylus-centric design. This should have been avoided for a touchscreen device. … Clearly, the S60 platform is still playing catch-up.”

Nokia’s retailers say one of the key reasons why Nokia’s market share has fallen is the firm’s intransigence in offering price protection of more than a week when its rivals offer up to 30 days. Novelty’s Ramanjot, for instance, lost Rs 3,000 each on the two unsold units of Nokia 5800 when the company dropped price this week. Kalvinder Singh, a retailer in Delhi’s Ghaffar Market says, “The biggest problem with Nokia is that the distributors do not replace the handsets easily.” Fear of such losses prevents retailers from stocking up, he says. “We’ve been requesting Nokia that this has to be kept in mind but nothing has been done,” says Ramanjot.

Shivakumar says Nokia does not intend to change the price protection policy. “Our policy hasn’t changed since 2006. At 30 days there’s no way we will make money.” Nokia believes its dominant market share, fast-moving products and high volumes justify a lower price protection. “The No.2 in India has changed every year for the past five years. That’s the inherent resilience of the Nokia brand,” says Shivakumar.

But retailers are also clamouring for margins over 1.5-3 per cent that Nokia offers — rivals offer up to 4-5 per cent. “Competition is so intense that we have to sell phones at nearly the purchase price. We make margins of 1.5 per cent if we meet the monthly targets,” says another retailer.

Company In Transition
While handset revenues account for a majority of the 69 per cent Nokia Corp. earns under “devices and services”, it expects a significant uptick in services and content business comprising music, map and games. Recently, it has gone into an overdrive, building a portfolio around these. In 2008 alone, it completed acquisition of digital mapping firm Navteq and OS firm Symbian, mobile messaging firm OZ Communications, social activity service provider Plazes AG and applications development firm Trolltech ASA.

And even though Nokia followed the path shown by Apple Store with its own Ovi.com in 2008, poor penetration of internet in India called for physical touch points such as the NSPs. Nokia though is still learning the ropes of monetising its NSPs — most of them have been a drain so far. The NSP executive is paid Rs 150 for each activation of a customer’s ID and the shop gets another Rs 75. As for monetisation, offerings are free right now with the greatest emphasis being on music for which Nokia has set up its first India-specific apps site — Nokia plans to sell vouchers (from Rs 25 to Rs 100) which are yet to hit the market. So far every phone comes with a complimentary voucher of 10-100 songs that can be downloaded at the NSPs or over the internet. Its NSP retailers say they are benefiting from higher footfalls. Novelty’s monthly sales have shot up from Rs 14-15 lakh to around Rs 20-25 lakh, while its average sale price of a phone has nearly doubled from Rs 4,000-5,000 to Rs 7,000-8,000 since it set up NSP.

In the meantime, Nokia is building its offerings on its two primary sites, Ovi.com and Nokia.com. It currently offers a total of 5,500 services against Apple Store’s 65,000 and BlackBerry’s 2,000. Of all the apps, Shiva-kumar believes music will see the greatest traction and, perhaps, revenues. “The best site in India has 100,000 tracks. We are starting with 3 million tracks on our site,” says Shivakumar.

“Music will be the killer application if the price points are right. Video and games are still early to talk about, though it is important to offer a range of services,” says Manesh Patel, partner, advisory services at consulting firm Ernst & Young. Interestingly, none of Nokia’s rivals believe in the physical content stores. Samsung is running a few pilot stores in Europe, but it neither has a physical content store in India, nor does it plan to start one. Sony Ericsson, which has decided to focus only on phones priced at Rs 10,000 and above, also has online stores playnow-arena.com and sonyeric-sson.com, but no physical store. “We have various developers building content for us and we share 70 per cent of the revenues with them. This also ensures good quality content,” says Anil Sethi, president, Sony Ericsson India.

Opening New Fronts
Globally, Nokia has opened another front in its quest for more revenue streams by entering the laptop business with the Booklet 3G, a 10-inch netbook powered by Intel’s Atom processor. Though Nokia has not yet projected revenues from its sales, it is Nokia’s answer to PC maker Apple’s entry into cellphones. Earlier, in 2005, its ‘Internet tablets’ failed as spectacularly as tablet PCs from all manufacturers did, but Booklet 3G is getting rave reviews. Though Internet Tablet as a concept is still to take off, this month Nokia showcased the N900, the successor to the N800 and N770. The tablet may never bring huge revenues to Nokia, but it completes the portfolio of the world’s largest cellphone company.

Nokia’s biggest challenge in India and abroad, however, continues to be the transition from a purebred hardware maker to a hardware and services provider. Apple has shown this is possible. So while Nokia has strengthened its offerings at ovi.com, it has also forged new relationships to safeguard its interests. It now has a tie-up with Microsoft to load MS Office applications on its proprietory mobile OS Symbian. The company believes an open source Symbian will remain its biggest guard against Google’s Android and Microsoft’s MS Mobile.

As far as metamorphosis goes, few companies can match Nokia’s ingenuity. From a company that was founded in 1865 as a wood pulp and paper making unit, it made a successful transition to electric cables, footwear, tyres, industrial rubber and raincoats in the 1920s. By 1960s, it had entered computers and electronics business. By 1970s, it was manufacturing digital telecom switches, by 1980s mobile car phones and televisions — and by early 1990s, it had shed all its businesses to concentrate on cellphone and telecom equipment. Now, Nokia has to leverage every bit of its gene pool to make that next transition to services, tools and apps.