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Can Nokia keep ringing up sales?

Experts from Knowledge@Wharton say the world's dominant mobile phone manufacturer is going to face unique challenges in 2004.

Can Nokia keep ringing up sales?
From Knowledge@Wharton
Special to CNET
December 13, 2003

Nokia, the Finnish company that began as a paper-pulp mill and grew to become the world's dominant manufacturer of mobile phones, is again in transition as the market for handsets matures.

With 39 percent of the worldwide market for mobile phones, Nokia dominates the wireless phone industry and had annual sales last year of $30.8 billion, but revenue growth has been trailing off. The company is trying to fend off additional erosion with new products that have music, video and interactive gaming capabilities.

The most visible aspect of this strategy is the big bet that Nokia is making on a new cell phone called N-Gage, which incorporates several new features meant to appeal to younger users. As The New York Times recently reported, N-Gage offers "graphically rich, three-dimensional full-color video games stored on cards," in contrast to duller games available on cell phones today. In addition, N-Gage lets players compete against one another whether they are in the same location or around the world, and also includes an MP3 player. The company hopes that N-Gage will, well, engage its customers and help it retain its lead over competitors such as Motorola and Ericsson.

In fact, the competitive landscape that Nokia faces is already being transformed. Last month Vodafone and Microsoft announced an alliance to promote software that can be used on both mobile phones and personal computers. The move is aimed at developing standards for new software that will be used by all operators in the mobile and software industries. While Microsoft founder Bill Gates said it may take five to 10 years for the venture's software to be accepted by consumers--and that meanwhile, Microsoft can afford to wait--no company can afford to take a competitive threat from Microsoft and Vodafone lightly.

So will Nokia be able to pull through these challenges? Experts at Wharton and elsewhere say that the company faces unique challenges--such as the uncertainty that reigns in the wireless industry and the fact that it is less visible than it needs to be. Still, Nokia has had an innovative past, and if it keeps drawing on its traditional strengths, it could well retain its strategic lead.

Out of the woodwork
"Nokia is one of the great companies in this business in the world. It came from being a forestry products company and in 15 years has popped out of the woodwork," says Gerald Faulhaber, a Wharton professor of business and public policy. Nokia took Finland's early acceptance of wireless communications and built that into a global market, leaving better-known rivals behind. "Nokia took on the company that everyone might think would be the right one--Motorola--and just buried them," he said.

But like any technology company, Nokia faces constant change. "The question everyone in wireless has is, 'Where are we going now?'" says Faulhaber. "The wireless market seems to be leveling off. It's gone through a tremendous growth period and now it's become a mature product. Everyone is thinking, 'What can we do next?' The fact is nobody knows."

Nokia has been through many transformations since it was founded in 1865 as a pulp mill on the Nokia River in Southern Finland.
Nokia has been through many transformations since it was founded in 1865 as a pulp mill on the Nokia River in Southern Finland. A neighboring company, Finnish Rubber Works, which made tires and boots in the first half of the 20th Century, bought a majority of the Finnish Cable Works after World War II. In 1967 Finnish Rubber Works merged with the pulp operations to form the Nokia Group. At that point, electronics accounted for 3 percent of the group's business.

In the 1980s, Nokia moved into other new businesses including television manufacturing and information technology. Among the world's first portable phones was the Nokia Cityman, launched in 1987. In the early 1990s, when Finland was in recession, Nokia's telecommunications and mobile phone divisions kept the firm afloat and by 1992 it divested its other divisions to focus on telecommunications. In 1994 Nokia introduced its 2100 series phone with the goal of selling 500,000 units. Instead it sold 20 million. The company has 52,000 employees working at 17 production plants in nine countries and 14 research and development facilities in 14 countries.

Wharton marketing professor Peter Fader says Nokia has done a good job of combining technology and marketing to bring consumers along the continuum with new and fashionable products. As the market for new phones slows, he adds, the major players, including Nokia, will need to create well-defined niches to differentiate themselves.

"We need to see them moving to corners, where you have high-end versus low-end. Right now, all of these manufacturers are pretty much trying to be everything to everybody and that is inefficient for them," says Fader. Phone makers may begin to develop sub-brands the way The Gap created a lower end retail chain, Old Navy, and a higher-priced brand, Banana Republic.

Fader says Nokia has one unusual marketing problem. Many people still believe it is a Japanese firm, and with the exception of Sony, Japanese brands are not necessarily perceived as high-end products, says Fader. Nokia, he says, should be better known than it is considering its hefty market share. That could create value for Nokia and the networks that use its phones, the same way Intel markets its brand to consumers with the phrase "Intel Inside." "Nokia is clearly doing something right," he says, "but the company is not as visible as it should be. In some industries visibility is not an issue, like office supplies. But this is a highly visible, sexy industry to be in."

Sexy it might be, but growth is slowing down after explosive expansion in the 1990s. Nokia reported third quarter sales of $8 billion, down 5 percent from the same quarter a year ago, despite a 23 percent increase in the number of units shipped to 45.5 million. The sales decline was due largely to currency fluctuations, but also lower prices--19 percent lower on average compared with a year ago. The company said sales will remain flat or grow only slightly through the end of the year.

Nokia has emphasized that it will grow with the market for high-speed data transmission--sending video, photos and text over new networks expected to come online with better 3G technology in the next few years. Its Nokia 7600 imaging phone is torqued to fit the curves of the palm and its Kaleidoscope model transmits images. The company has even developed the Nokia Medallion for phone users who want to upload images into their phone and display them on chokers around their necks.

Mike Walkley, an analyst with RBC Capital Markets in Minneapolis, says the company may get some growth out of new CDMA (code division multiple access) technology. The company only has a 20 percent share in this growing mobile technology, which has been dominated by Motorola and Asian phone manufacturers. Another near-term strategy, he said, is Nokia's ultra low-end phones sold into emerging markets such as China, India and Eastern Europe. "That's driving revenue, but it is lowering the selling point of the phone, which is worrying some investors," Walkley said.

Another closely watched product is the new N-Gage gaming phone. "This is a long-term growth strategy. Nokia is going after the large installed base of mobile game players from the GameBoy era and moving from teenagers to the 30-year-old."

Nokia also has a networking division that makes equipment for mobile infrastructures, but it is a clear second to Ericsson, Nokia's Scandinavian neighbor based in Sweden. In the third quarter, sales at Nokia Networks were $1.4 billion, down by 21 percent from the year earlier. Nokia said rising network sales in the United States were offset by lower sales in Europe and Asia. The company said it expects the overall network infrastructure market to decline by 15 percent or more by the end of this year. Still, Nokia enjoys profit margins of more than 20 percent. In the third quarter profits were up 35 percent compared to the same quarter a year ago when the company wrote off bad debt. Profit would have been down 2 percent in the third quarter, if not for the earlier charge.

"The major issue is to keep margins at 20 percent-plus and the strategy is to migrate Nokia's brand from hardware into software. That brings it into direct conflict with the operators," said Richard Windsor, an analyst with Nomura Securities in London. "They also want to increase the stickiness of the consumer and not just be a pipe. That brings it into the software-user area."

Meanwhile, Nokia is a leading member of the Symbian consortium of cell phone manufacturers and operators that is attempting to develop smart phones on an open operating system to work on the upcoming 3G networks. Motorola, the second-largest handset maker, broke away from the group in August.

As for Microsoft's alliance with Vodafone, Nokia needs to be concerned about the agreement because it forces the company to compete across broader businesses, says Windsor. "Up until now they've been selling phones to do voice and the market is becoming increasingly segmented," he says. "You have to juggle a lot more plates than you did before. That's why the company has to be excellent across a number of fields."

Windsor says Nokia management is up to the challenge. "Whether they choose the right strategy or not is the question," he says. "Execution is not the problem." Windsor says Nokia's strategy of searching for opportunities in short-term markets may add up to continued long-term success. "It's difficult to tell right now what the right strategy for the company is," says Windsor. "Each short-term opportunity comes with its own challenges. Right now Nokia's major challenge is to get the top line moving again. It hasn't been moving in two years."

Cell phone companies are moving toward selling games and gizmos.
Faulhaber said that Nokia should consider a truly bold move on landlines rather than looking for growth through advancing data technology. He is uncertain that people need 3G technology for the simple things they like from mobile units, such as e-mail, stock quotes, or Internet browsing.

"My vision of where wireless could go is right out there and obvious," he says. "I think the real value of wireless is going to be as a substitute for wire-land service. That would sell a lot more telephones." He said there remain technical problems in this scenario, which would have more impact on wireless carriers than phone makers like Nokia. An added benefit for companies involved would be less regulation because wireless typically has had less government oversight than traditional service.

Faulhaber says the same mistake is being made with fuel cells. "Everyone is looking at fuel cells for cars. How about a fuel cell to heat my house? Autos are not the only way to use fuel cells." He points to Pearl Harbor as a symbol of radical technological change in which battleships were supplanted by airplanes. Cell phone companies "are moving toward selling games and gizmos," he says. "I see tremendous value for Verizon and SBC to position their wireless product not as a premium mobility service but to say, 'Cut the cord. You don't need this anymore.'"

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All materials copyright © 2003 of the Wharton School of the University of Pennsylvania.

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