A New Kind Of Lock In – Is This The End Of Nokia?

Six and a half years ago I wrote this letter to Nokia and posted it here on my blog. I received no reply from Nokia and, not long after, stopped using their phones. I’ve re-posted an edited version of the letter here:

Sunday, February 16, 2003

Fone Frustrations

Dear Nokia

I’ve been a long-time customer of yours, but it’s getting harder and harder to buy your phones now. Back in 1989 I had a Motorola 8800X, then an NEC-P9 but then I found Nokia. I started with the 2110, from there to 6150s, 6190s, 8800, 6210, 8850, 8890, 6310, 6310i, 8910, 7650 and, finally, the 6610. I’m a bit of a phone junky, I think that’s obvious. From the first Nokia to today, I’ve only had one non-Nokia phone, the Ericsson T68i – because I wanted a triband phone and had lost my 8890. Today, nothing would make me buy another Motorola or an Ericsson.

This weekend I spent a good two hours trying to take the settings from my 7650 (a Symbian phone) to the 6610 (not a Symbian phone). Why would I do that? Well, the 7650 is a great phone, with some useful and well-designed features. But, it has a terrible battery life. It rarely lasts a day, usually perhaps only until about 5pm – and that’s after fully draining and re-charging. So, despite the fact that I think it’s Nokia’s best phone yet, it had to go.

So, dear Nokia people, here are some things for to consider for your next few versions:

– Make better sync software and keep it the same so that every phone can use it

– Figure out a way to make the T9 dictionary portable between phones

– Let me move contacts with assigned ringtones and photos between phones

– If you come up with a good idea, like programmable function keys on the front panel, keep them in future phones

– A joystiq works better than a 4 way button set

– People need to move contacts between devices more than anything; make that incredibly simple and make it compatible with e.g. Outlook

– Fix your bugs, regularly

The sad news is that I’ll have to stick to this phone for a while. The battery life looks good, it’s triband, 300 contacts is enough for now (although I’m sitting at 289 right now), the polyphonic tunes are reasonable (but not as good as the 7650) and it’s small and lightweight. But my Nokia friends, if anyone ever figures out how to do a phone at least as good as yours, I’ll be gone in a flash. Just because Motorola and Ericsson aren’t doing what you’re doing, don’t get complacent. Others will soon figure it out.

Given that the UK market looks pretty saturated, the odds are that most people are either going through or are about to go through their first upgrade – colour screens, polyphonics, cameras etc are all beckoning. I imagine that few of them will have stored all of their contacts on the SIM (which is no use if you store more than one phone number per person), many will have figured out predictive text and so filled up their T9 dictionaries and they’ll want to move phones easily and quickly. Good luck to all those who try.

That was a long letter and a long time ago. My essential complaint, in a sentence, was that Nokia made moving from one phone in their range to another in the range very, very hard. Essentially they relied on you liking the interface of a Nokia phone as reason enough to switch to a new phone – and, for a time, that worked; lots of people I knew loved that the interface was consistent. But I was telling them, in that last paragraph, that this wouldn’t last. They failed to lock you into Nokia both emotionally and technically by not delivering on a simple method to move data between phones.

Not so Apple.

I observed to a colleague at work today that Apple had pretty much secured me as a phone customer for life. I see no way of ever switching to a phone other than an iPhone. This is a whole new kind of lock in. why?

1. Apple have ensured, probably accidentally, that there’s an application for everything. For instance, I control the music systems in my house using a free application, Sonos. If I didn’t use my phone, I’d have to pay £270 for a controller and perhaps one in every room. Is there another phone with this app? No, not yet. And if there was, I’d move to a list of other apps that I seem to use and need more and more – ones that aren’t available elsewhere.
2. For a long time, the only way to get bugs fixed on a phone was to change phones. The Treo managed occasional software upgrades but they seemed to bring new bugs as well as fixing old ones. Phone software wasn’t ever tested, it was just released. Witness the first Microsoft phones, the SPV released by Orange in the UK, which crashed whenever a text was received and you were on the phone at the same time. Apple fixes bugs and releases new capability several times a year – FOR NOTHING
3. The iPhone just works. By itself. I have no idea how or why, I know that it does. I read about people having trouble with their iPhones – exploding screens, rapidly draining batteries and so on. I don’t have those problems – I have had each of the new iPhones as have many people I know, and no one has reported such problems. Well, ok, the battery drain seems a bit of a problem but if you must play games for the entire tube journey to work, what do you expect?
4. My contacts, my email, my calendar, everything syncs between the Macs I have at home, the laptop I carry, the phone and the web. I can’t seem to lose anything because it’s always in multiple places. I imagine a bulk delete would soon replicate, but that’s what time machine is for.
5. I could go on

This didn’t start off as a pro-Apple post, it started off as a warning for Nokia so let me return to that theme.

I think Nokia is in trouble. Back at the end of August I said, via Twitter:

Will nokia be the next Chrysler? Acquired, sold to Private Equity, bankrupt, competitively acquired? How long until that?

I think that process is accelerating. Nokia isn’t going away, at least no time soon – after all, look at the numbers

• Last year, Nokia sold 472 million phones
• Its global market share in 2008 was 38.6%
• In 2007, it had 49.4% share of the global smartphone market; that fell to 43.7% in 2008 and is falling further; in Q1 2009, it’s share in this important (read high margin) market was only 41.2%
• In 2008, Nokia’s revenue was $70 billion
• 2008 profits were $7 billion
• It is the 88th largest company in the world by revenue
• 1.1 billion people use or have used Nokia products
• Nokia’s next 3 competitors together account for only 32% market share
• Their latest phones are getting poor reviews – Wired scored the new N97 only 6 out of 10 (the iPhone was 8 out of 10 and the Samsung i8910 also scored 8)

Nokia has so far engaged in a me-too battle. Apple brought out a market-changing product and everyone is playing catchup. Whilst me-too products will capture some of the market, they won’t break the hold of genuine innovative players who will gain increasing share. My own experience, anecdotal as it is, says that once you’re an iPhone owner you may very well stay one forever – so every customer Apple gains is one that Nokia will never get back.

Nokia’s market share will decline precipitously in smartphones and, to replace that lost market share, they will increasingly chase higher volumes of lower margin phones in emerging economies. Those emerging economies won’t be satisfied for long with low end phones and they too will chase more capability.

As the volume of smartphones grows Nokia will find its overall market share shrinks. Revenues will fall, but not as fast as profits. Lower and lower margin phones will reduce how much Nokia can spend on research and development, so curbing their potential to bring out new, mould breaking, phones.

How long will this take? A couple of years perhaps. It’s a long way down from $70 billion in revenue, but stranger things have happened. The rot is already setting in. Barrons published this story online in mid-October:

Yesterday’s nasty Q3 financial reportfrom Nokia(NOK)continues to have ripple effects, and the stock remains under pressure.

• Nokia has made some management changes. CFO Rick Simonsonbecomes head of the Mobile Phones segment of the company’s Devices unit, as well as head of strategic sourcing for all of Devices, which includes both Mobile Phones and Smart Phones. Timo Ihamuotila, now head of sales, becomes CFO.
• Moody’stoday downgraded Nokia’s senior debtto A2 from A1 to reflect the rating agency’s view that the mobile phone market will become more challenging for Nokia due to more modest long-term growth and more formidable competition. Moody’s says that Nokia “is unlikely to return near-term to the superior credit metrics that have marked the company’s credit profile for many years.” The agency also said that it believes the mobile phone market is “nearing saturation.” And it asserts that the Nokia Siemens venture may require more restructuring.
• Bloomberg notesthat Nokia yesterday took a $1.35 billion writedown of its stake in Nokia Siemens, and that that partnership may be “unraveling.” Just what would happen is unclear; neither side seems eager to buy out the stake of the other, and an IPO would seem problematic given the troubles in the business.

It is not just Apple who are eating Nokia’s lunch of course. Apple with one phone physically upgraded only once per year may never take a significant market share – but it may be that they continue to take the slice of the market with the highest margins and the largest wow factor for a time.

• Microsoft has committed billions to their mobile platform and recent conversations with Steve Balmer suggest that they will continue to do the same. The old joke was that it took Microsoft three versions to get it right; they are way past that now at v6.5 but it could be that they’ve finally made it, especially with the customised interfaces that some providers lay on top of windows to mask some of its inadequacies.
• RIMM is mainly battling with Microsoft for share of the corporate email marketplace (and many will rightly argue that RIMM won by a knockout long ago), but RIMM is extending more and more into consumer phones. The new storm, v2, looks like it has corrected many of the faults of the first version and could sell well, albeit mainly a me too phone with its main selling point being a haptic touch screen (probably proving the point that anything that has to be explained won’t prove to be a selling point – one of the defining moments of Apple’s iPhone launch has to be the cry of “you had me at scrolling”)
• HTC is aggressively providing phones for network providers that they can rebadge whilst also creating its own, well positioned, brand. They’ve come a long way, in a very short time, from their first smartphone, the HTC touch
• Other vendors, certainly Samsung and perhaps even a resurgent Motorola are going to be working hard to take share away and, for a new customer looking for their first mobile phone, what would tie them to Nokia?
• Google is the wildcard for me. They have the money and the proven innovation capability coupled with a huge box of tools (gmail, gearth, gcal etc) to create some stunning products. Android v1 didn’t wow too many people but v2 is looking quite different. Given that google isn’t particularly trying to make money off the operating system, but is relying on increased traffic and therefore ads, anyone building to the Android spec may have a lower cost advantage. Whilst the ad business is growing so well, the shareholders will indulge google in the mobile space, but at some point they might start demanding specific returns – that point is some way off, if it ever comes.

There is, though, one fact that so far plays into Apple’s and perhaps Google’s hands. When you write an app for their phones you instantly know how many people could potentially download it. Every phone is not quite the same – compass and video were all introduced in the most recent phone as was a bump in processing capability – but broadly, an app will work on any iPhone and perhaps any Android phone (although I’m a little less clear there). Other vendors will battle that: touch screen or not, keyboard or not, wide screen or not, small screen versus large screen, joystiq or buttons etc. Every variant increases the development cost and reduces the potential market share. The sheer variety of models might be what kills off Nokia – after all, car manufacturers learned a decade ago that you want as few variants at the base level as possible. It’s the software that should handle the complexity. l

Ten years ago, one reason for having a Nokia phone was that everyone around you had one – and you could, in theory at least, beam information between the phones using infrared. As Nokia’s market share falls, new customers looking at what their friends have will increasingly not see Nokia phones in their hands and so will choose another brand. That will accelerate Nokia’s decline.

Two years from now, is it possible that Nokia’s market share will be less than 20% of the global total with a single digit percentage share in smartphones? It sounds far fetched, but it’s possible. Were that to happen, it strikes me that acquirers would move in – and Nokia’s response would be to close down failing businesses and make significant cost reductions to fend them off. Would the Finnish government allow a foreign company to acquire all or large parts of Nokia? We will, perhaps, see. Place your bets – are you long or short Nokia?

Separately, Apple increasingly looks like it is becoming the new gold. Even in tough economic times, Apple is selling more and more product, magnifying the halo effect that sees iPhone buyers trade in their PCs for Macs. Amazing to watch. Apple is the new gold. I can see a new logo coming; the Golden Apple.

You might be short Apple now but I bet you’re not short Apple for the long term.