ONCE UPON A TIME, in the deep past-about six months ago, say-the global handset business started looking fairly predictable.
Nokia Corp. had steadily amassed dominant market share while maintaining relatively steady if sometimes unspectacular revenue and profits. Motorola Inc. made giddy strides in pursuit of its rival, managing to achieve unheard-of growth in both profit and market share by mid-2006.
Together, the two giants held more than half the world’s handset business in their hands. Samsung Electronics Co. Ltd. and LG Electronics Co. seemed “stuck in the middle,” as one
analyst put it. Only Sony Ericsson Mobile Communications L.P. was making moves on its larger competitors, with prodigious growth in revenue, profit and market share.
Motorola’s recent unraveling, however, reveals that this relatively placid portrait has obscured more exciting market dynamics: The handset business is in play. Giants stumble. The forces of convergence and new and nimble competition could challenge the prevalent mantra that the top five handset vendors are simply tidying up their division of the globe.
That said, the top vendors have displayed a willingness to adapt their teams to the job at hand. Nokia has reorganized its stalled North American business. Motorola last week appointed a new president/COO and replaced its CFO-though it has not settled on anyone to lead its troubled handset division or made any design-related announcements. (See sidebar for more on Motorola.) Samsung’s and LG’s handset businesses both have new leadership.
Meanwhile, Chinese vendors are raising their profile and winning business at the world’s largest operators, testing the notion that the industry’s maturation implies shrinking opportunity. Apple is upsetting the cart. Myriad vendors continue to press on, ever vigilant to any door that stands ajar.
A fresh look at the top two players reveals much about the vagaries of the business, the connection between one’s daily bread-and-butter and a long-term, attainable vision-and the degree to which the best-laid plans can go awry.
Nokia’s vision
Nokia has been emphasizing “multimedia computing devices” and its intent to move beyond the role of mere handset vendor to become an Internet company. As it moves ahead on this vision, the company makes a sizeable, if undisclosed, proportion of its profits on enormous volumes of low-cost handsets in emerging markets. In developed markets-even in its own European backyard-the Finnish giant has been buffeted by myriad challengers.
As first-time buyers in emerging markets move to replace their handsets, Nokia believes that its pervasive brand will guide those consumers to more profitable handsets and, eventually, Internet-based uses that mirror those being pushed in developed markets.
“As markets mature and as an entry-level end user becomes a higher-end device user, the quality of experience they’ve had with Nokia will usher them into the next level,” said Bill Plummer, who is transitioning from serving Nokia as vice president of external affairs in North America to a lead role in sales and channel management in Nokia’s multimedia efforts here.
Plummer reiterated Nokia’s “value and volume” mantra-that is, that Nokia makes money on fat margins on high-end products, typically in developed markets, and lesser margins on big volumes in emerging markets. That’s the vendor’s daily bread-and-butter. To butter its bread, the vendor is offering its operator partners the benefit of its own consumer research, which Nokia believes is comprehensive, insightful and a guide to connecting with end users.
“We offer a broad range of devices,” Plummer said. “That’s no longer defined by price point, but it’s defined by the ‘experience.’ That experience is built around a local understanding of consumer preferences, a local understanding of local cultures.”
Nokia is approaching the convergence of mobility and the Internet with “great fervor,” Plummer continued. He cited Nokia’s acquisition of Loudeye for music content and Gate5 for geo-location and navigation as examples.
“Nokia recognizes that there’s more to marrying mobility and the Internet than putting a browser on a phone,” Plummer said. “We’re implementing around that recognition right now. I can’t tell you where that’s going to end up, (but) we look at ourselves as an Internet company as well as a device vendor.”
Nokia’s logic and success makes it easy to believe this vision, though Motorola’s recent experience reflects the potential for reversals of fortune. One difference, an analyst said, is that Nokia has tangible products that embody its long-range plans.
Chris Ambrosio, analyst at Strategy Analytics, said that much of Nokia’s current and future ambitions are embodied in its N-Series handsets, a vehicle to achieve its short- and long-term goals.
“The N Series is a long-term, strategic initiative aimed at providing a future roadmap for emerging market users for multimedia, as well as being their 3G platform of choice for delivering Symbian and their mobile Internet ‘experience’ to users in mature markets,” Ambrosio said. “Those are two completely different issues, but the N Series gives Nokia an evolutionary product development approach.”
Ambrosio said that Nokia’s closest competitors simply don’t have an equivalent breadth and depth of vision, or the market position to realize that vision.
“You can’t say that Motorola has this sort of plan for emerging markets,” Ambrosio said. “They’re very much focused on providing voice and low-cost products there. Neither Samsung nor LG has that kind of approach.”
In the short run, Nokia is pushing the concept of multimedia computing in Europe, where its brand is strongest, which helps the company overcome any shortcomings in design or technology limitations, Ambrosio said. That message isn’t getting through in the U.S., but that’s symptomatic of a larger problem for Nokia, the analyst said.
Moto challenges
For Motorola, regaining momentum in design and in 3G devices is “exponentially more difficult” than executing on a long-term strategy like Nokia is doing with the N Series, noted Ambrosio.
“Motorola has more pressing, short-term issues,” the analyst said. “Now that Razr is at a low price point and not as profitable, Motorola is stuck with the same problems they had a year-and-a-half ago: lack of a compelling design portfolio, lack of a 3G product roadmap and an incoherent message around their ‘seamless mobility’ strategy, which is still floating in space.”
“Motorola bought their own snake oil and believed that the Razr, by itself, instantly made them the best handset design company in the world,” Ambrosio said. “The performance of their products in the market today is evidence that that’s not the reality.”
Besides the changes CEO Ed Zander announced last week, what would Ambrosio look for that would signal that Motorola has righted its ship?
“It comes back to the fundamentals of industrial design that Nokia has struggled with for years,” Ambrosio said. “Motorola needs to make personnel changes. A conceptual change is needed at the top. I’d like to see some fresh blood in Motorola’s industrial design effort. The first step is to admit, at least internally, that the Krzr and Rizr are not the iconic designs they want them to be.”
And on the positive side?
The Razr still has volumes ahead of it, Ambrosio said. Efforts in China and India with its C Series look healthy. Motorola has a good foundation upon which to stabilize its business this year. The company’s announcements of business with Qualcomm Inc. and Freescale Technologies on 3G platforms could translate into innovative 3G designs.
As to the prevalent idea that hit handsets draw subscribers to the network operators, thus increasing the top vendors’s sway in the market, at least one analyst has a contrary theory.
Iain Gillott, of iGR, said that in his view the fortunes of the large handset vendors such as Nokia and Motorola have grown more perilous as network operators increasingly wield their purchasing clout.
“Cingular (Wireless), for instance, doesn’t actually need the leading handset OEMs,” Gillott said. “Does it want to continue its relationship with them? Yes, because the top OEMs have brand power and research-and-development dollars. But the reality is, the carriers can source phones from other vendors. Apple didn’t need Motorola to make the iPhone and I think that scares the daylights out of the OEMs. So, in Nokia’s case, the need to move beyond devices into mobile computing and applications is actually a push to remain relevant.”
“The top OEMs have nowhere to go but down,” Gillott added. “The reality is, they won’t disappear, but they may lose share to Chinese vendors. The two with the most to lose are Nokia and Motorola, because they have the greatest market share. The Korean vendors are part of diversified, durable-goods conglomerates that can use mobile devices as loss-leading halo products that take brand consciousness from wireless to their other appliances.”
How will operators maintain this primary role in the food chain?
“Spectrum,” Gillott said. “It’s rare and expensive, and with it carriers retain the trump card in ecosystem.”
