Nokia Wake-up Call Part 2

When Nokia reported its Q1 results we suggested that it might serve as a wake-up call in the company's Espoo corporate HQ... But if the slumbering giant has awakend, Q2 results, just in, are not demonstrating any movement as yet. Om Malik writes that Nokia is in "deep do-doo."

Conversations with friends in Finland tell me that the company is bracing for widespread layoffs when the traditional July holiday season comes to an end. It is important to understand that despite its technology driven organization, at the top Nokia is run by people from the financial world. There will be a focus on margins and a healthy near-term business before there is a focus on long-term structural issues. Given the "grim third quarter outlook" (International Herald Tribune) this financial focus will not turn Nokia around quickly. So what can save the company?

John Markoff writes today in the New York Times that "Small is no longer beautiful. At least not in wireless phones." He is referring to the next generation of mobile phones which are fully programmable computers. This is one end of the product spectrum, where Nokia champions the Symbian operating system. The two other tiers are the mid-market consumer phones, increasingly dominated by camera phones, and the basic voice phones (typically provided free by carriers with service activation). For the company to do well, it must succeed in all three categories.

Nokia has actually been doing well in the middle market. BusinessWeek reports that this division of the company "...booked $839 million in revenues, 24% higher than a year ago." But the company has been dissapointing consumers on the high-end and the low-end.

The company has announced aggressive discounting plans which should repair its market share on the low-end of the spectrum, if not improve operating results. The New York Times quoted analysts as saying that these price cuts "...could force other cellphone makers to merge or drop out of the business."

But the real threat to the business, in my view, is on the high-end. This is partly because of the higher margins available at this end of the spectrum, but more importantly -- this is where product innovation begins before moving through the lifecycle from high-end, to mid-market, to low-end. Giving up the high-end of the market would truncate innovation needed to fuel next year's mid-market devices.

And this is where John Markoff's article today, The New Miniature Computers (They Also Make Phone Calls), is particularly interesting. As the mobile industry and the computer industry collide, the mobile industry will learn that product success is not exclusively about physical design, hardware integration, voice quality, and manufacturing costs. Instead, a whole new value chain of 3rd party software applications will become critical for a product's success. Microsoft is the only OS vendor in the world that understands this symbiotic relationship between software development and platform success. Symbian, and by extension Nokia, are still struggling with their strategy and investment in this critical area. This is going to be the real battle to watch, not price cuts on today's low-end phones. Pricing games are just tactical noise in the long term battle for providing the way in which people will access voice and data networks in the future.