Kenenter: Can Nokia Recapture Its Glory Days?

Can Nokia Recapture Its Glory Days?

12/14/2009 01:21:00 PM

IF there’s anywhere left in the world where it’s still impolite to flash a BlackBerry or an iPhone, it’s Nokia’s annual analyst meeting.

But earlier this month, as executives talked up the company’s plans for 2010, the optimistic message from the stage was belied by the behavior of the audience. In the back of the room, one money manager after another distractedly toyed with a competing device, typically a BlackBerry, even as cheery PowerPoint slides promoted Nokia’s latest offerings.

Francois Meunier, an analyst with Cazenove in London, whispered doubts about the presentation as he tried to catch the eye of one of the floor managers handing out microphones for the question-and-answer session. Finally, it was Mr. Meunier’s turn, but before he could ask an actual question, he couldn’t resist declaring publicly what he’d been muttering all afternoon.

“I don’t think anyone in this room is expecting an improvement in earnings next year,” he told the assembled executives, before asking whether Nokia’s 4 percent dividend is sustainable.

Mr. Meunier’s downbeat assessment of the once-mighty mobile phone maker’s prospects in 2010 comes after an equally gloomy 2009, a year the company would just as soon forget.

Although Nokia, based near Helsinki in Espoo, still commands 37 percent of the world’s handset market, it’s facing bruising competition in the lucrative high end of the industry, where Apple’s iPhone and Research in Motion’s BlackBerry have grabbed the cool factor in smartphones that can surf the Web and handle e-mail.

“The whole user experience is a nightmare,” moans Nick Jones, a senior analyst with Gartner, which tracks the technology sector. “It’s just not in any sense a competitive experience with iPhone.”

Olli-Pekka Kallasvuo, the company’s taciturn chief executive, admits the mood out there is gloomy, especially on Wall Street. “We are not getting the benefit of the doubt,” he said in an interview the day after the analysts’ meeting. “We need to change that.”

Nokia’s problems are especially acute in North America, where its hold on smartphones equals a barely visible 3.9 percent, compared with 51 percent for Research in Motion and 29.5 percent for Apple, according to Gartner. As if to underscore its problems in the United States, Nokia announced Thursday that it would shutter its flagship stores in New York and Chicago.

“We made wrong decisions in the American market,” says Kai Oistamo, executive vice president for devices. For example, Nokia was slow to make the change to so-called clamshell phones, sticking with “monoblock” models even as consumers abandoned them.

And while Nokia first offered touch-screen technology in 2004 — three years before the debut of the iPhone — Apple’s models quickly made Nokia’s competing products look stodgy. Most of Nokia’s touch-screen phones can’t quickly transform their screen with the jab of a finger, which is among the factors that make the iPhone seem so much more slick.

Until recently, according to both Nokia executives and industry experts, the company didn’t want to produce phones specifically tailored for American consumer tastes, and it resisted demands from the major carriers to come up with phones based around their brands and individual specifications.

“The market in the U.S. has always been dominated by the carriers, so they call the shots,” says Carolina Milanesi of Gartner. “And Nokia has had a difficult relationship with the carriers.”

Nokia has also been hobbled by its traditional weakness in phones employing C.D.M.A., the wireless technology offered by Sprint and Verizon Wireless that’s used by about 50 percent of American consumers. (Sprint’s current lineup does not include any Nokia models.) Nokia focuses instead on G.S.M. phones for AT&T and T-Mobile. However, AT&T’s exclusive deal with Apple has hurt Nokia in the high-end smartphone market.

And though Nokia sells a lot of smartphones elsewhere in the world, its share of the global smartphone market has fallen to 39.3 percent, down from 42.3 percent a year ago. Even in Nokia’s home base of Europe, the iPhone is rapidly gaining in popularity.

Nokia is finally responding — its lithe, BlackBerry-like E72 appeared in the United States on Tuesday — but it is facing looming threats in other segments.

Google is offering Android, a rival to Nokia’s own operating system, which has been picked up by competitors like HTC, Motorola and Dell, while Asian manufacturers are turning up the heat with low-priced handsets in emerging economies where Nokia has long enjoyed outsize market share. Meanwhile, Apple and Nokia are locked in a legal battle over patents.

“Nokia faces competition everywhere,” says Sherief Bakr, a Citigroup analyst. “At the high end from Apple, in the midrange by Research in Motion, and by the Koreans and the Chinese in the low end.”

ALL in all, it’s enough to make the mood as grim as a December day in Helsinki, where the sun struggles to get above the horizon by 9 a.m and night falls at 4 p.m.

Once a stock market darling, Nokia shares have fallen 20 percent since September even as the broader market has rallied. The company reported its first quarterly loss in more than a decade in October after a $1.3 billion write-down in its equipment business.

Here in Finland, Nokia’s problems are felt especially keenly. Nokia accounts for 25 percent of the Helsinki stock exchange’s capitalization and one-third of Finland’s total research and development spending, according to Jyrki Ali-Yrkko, of the private Research Institute of the Finnish Economy.

Deeper than the numbers, however, has been the damage to Nokia’s role as a wellspring of pride in a country historically known for exporting wood and paper products, not high tech.

Nokia’s roots go back to 1865, and as recently as the 1980s, its products included not only cable and telecom equipment but also rubber boots and toilet paper. But in the early 1990s, many businesses were spun off in favor of the growing cellphone sector. By the mid-1990s, under its former chief executive and current chairman, Jorma Ollila, the profits were rolling in.

Nokia quickly became one of Europe’s rare technology success stories, an exception in an industry dominated by American and Japanese giants. And in a traditional, social-democratic Nordic country where ostentatious displays of wealth are frowned upon, hundreds of long-time employees became Nokia millionaires, says Mr. Ali-Yrkko.

“Nokia has been the flagship of Finland in terms of a company succeeding on a global scale,” he says. “But that sense of glory we had has disappeared, or at least diminished.”

The problems have reached all the way to Finland’s national coffers. In 2007, Nokia paid 18 percent of Finland’s overall corporate taxes, but that dropped to 9 percent last year, and the contribution is expected to be even lower in 2009. The Finnish government may have to increase borrowing to make up for the shortfall, warns Mr. Ali-Yrkko.

A lawyer by training, the C.E.O. Mr. Kallasvuo is a much more cautious leader than his predecessor, the charismatic Mr. Ollila, who some Finns thought might go into politics after he stepped down as chief executive in 2006. At times, Mr. Kallasvuo seems uneasy when pressed for his vision of Nokia’s future, and repeated earnings disappointments have led many analysts to question whether his dour style is what’s needed as new competitors circle.

“The market believes this is a management team that can’t and won’t execute,” says Mr. Bakr. “There is a large element of investors who are not convinced that Kallasvuo is the man who can make this transition and compete with the likes of Steve Jobs.”

Despite the pessimism outside, Mr. Kallasvuo insists spirits are still high inside the company. “Competition is nothing new; we’ve been attacked by many players,” he says. And while last quarter’s performance “was difficult for me and the C.F.O., it wasn’t a difficult moment for an excited Nokia engineer who wants to change the world.”

IF Olli-Pekka Kallasvuo seems to have stepped off the set of an Ingmar Bergman movie, then Anssi Vanjoki’s charisma and sculpted features recall Michael Douglas. An 18-year veteran of Nokia, he is the executive vice president for markets as well as something of a standout in Nokia’s geeky culture. In a country where speeding tickets are directly tied to income on a sliding scale, he racked up a 116,000 euro ($170,000) fine racing his motorcycle through Helsinki, although he was able to negotiate that figure down somewhat.

Much more feisty than Mr. Kallasvuo, he is unwilling to admit Nokia has lost any of its competitive edge. “We have not lost our ability to innovate; we have not lost our ability to truly understand the consumer and make intuitive solutions for them,” Mr. Vanjoki says.

Indeed, for all the new competition in smartphones, Nokia remains the dominant player in conventional handsets, selling roughly 15 phones a second worldwide, according to the company, including the Nokia 1201, a basic model that is its best seller. Analysts project revenue in 2010 will top $60 billion, while profit is expected to equal $3.5 billion next year as the overall phone market grows 10 percent.

And while market share might be minuscule in North America, the company commands a whopping 62.3 percent of the market in the Middle East and Africa, as well as 48.5 percent in Eastern Europe and 41.8 percent in Asia. “We are the incumbent behemoth of the mobile arena,” Mr. Vanjoki boasts.

What’s more, Nokia has been written off before.

Citing past crises in 1998 (the advent of smaller phones), 2001 (the bursting of the tech bubble) and 2004 (the sudden popularity of flip phones), Mr. Vanjoki says. “we’ve always had points where technology hit a plateau and had to be reconfigured.”

SO why didn’t Nokia move more quickly to counter Apple and Research in Motion in smartphones? “We didn’t execute; we were aiming at too geeky a community,” he says. “Apple is made for the common man. It’s more for Joe Six-Pack than techno-geeks. But we understand Joe Six-Pack too.”

The coming 12 months will show whether Mr. Vanjoki’s confidence is warranted, and he better be right as far as shareholders are concerned, since smartphones are where the growth is.

By 2013, Gartner predicts smart device sales will represent 82.5 percent of the mobile phone business in Western Europe, and 58.2 percent of sales in North America and 18.2 percent in Asia. Nokia generated $5.6 billion in sales from conventional phones in the third quarter worldwide, compared to $4.6 billion for smartphones.

Nokia executives say new offerings like the N900, which is as much a mobile computer as it is a phone, or the N97 Mini, which combines touch-screen technology with a qwerty keyboard, will win back buzz from Apple and BlackBerry while appealing to the company’s 1.1 billion customers. Then there’s the X6, out this month, which includes Nokia’s Comes With Music plan, allowing users to choose from millions of songs they can download free from Nokia’s Music Store.

Another crucial development in 2010, according to Mr. Kallasvuo, will be a bigger push for North American market share, as Nokia works more closely with carriers and brings out more smartphones. “We have not invested enough there,” he says. “It’s a necessity for us.”

Although it’s still secret, Nokia executives are also promising a smartphone for next year that will update the company’s aging Symbian operating system, combining the touch-screen coolness of the iPhone with a BlackBerry-like e-mail solution. “We intend to give R.I.M. a run for their money,” says Mr. Kallasvuo.

And though Nokia’s flagship outlets in the United States may be folding, the Finnish giant is still trying to compete directly with Apple online, opening Ovi (“door” in Finnish) in May to compete with Apple’s hugely successful Apps Store.

Looking out further, Nokia’s engineers are promising nifty new features like the ability to simply point your phone at a friend to connect to the person’s Facebook page.

For all of Nokia’s mistakes, Citigroup’s Mr. Bakr says the company can bounce back yet again. “Sitting in London or New York, you don’t appreciate the dynamics of Nokia’s huge market share, especially in emerging markets,” he says. “I think they know what they’ve done wrong and what they need to do right. It’s just a question of whether they can execute in time.”

Labels

Blog Archive

Can Nokia Recapture Its Glory Days?

0 Response to "Can Nokia Recapture Its Glory Days?"

Post a Comment