Nokia: The Rise and the (Spectacular) Decline

In 2001 Nokia was the undisputed leader of the mobile phone industry. It had increased
its market share to 35% from 30.6% the year before, with sales of 139.7 million units.
Motorola, at number two, held 14.8% of the handset market. One analyst observed:
“They are demonstrating that they are hugely superior to everybody else in this market.”
Another commented: “There is no other company in the sector that’s in as good shape as
Nokia. What’s impressive is their efficiency at keeping high margins in the slowdown
part of an economic cycle.”

Fast-forward 10 years. In February 2011, incoming CEO Stephen Elop circulated a memo
to his colleagues, saying Nokia was in deep trouble and was standing on a “burning
platform.” He attributed the company’s problems to a changing competitive environment:
“The first iPhone shipped in 2007 and we still don’t have a product that is close to their
experience. Android came on the scene just over two years ago and this week they took
our leadership position in smartphone volumes. Unbelievable”.

By mid-2011 Nokia was making one tenth as much money on its phones as Apple. Its
market capitalization stood at US$43 billion, compared to a high of nearly US$250
billion in 20006. What had happened over this 10-year period? How had Nokia
surrendered its leadership position in the industry so quickly?

Nokia: Background

The Nokia Group, a conglomerate established in 1967, traced its origins to three
independent businesses: a wood-pulp mill in 1865, the 1898 Rubber Works and the 1912
Finnish Cable Works. It took its first tentative steps into telecommunications in 1960.
Through the 1960s and 1970s the Group successfully expanded into digitalization and
wireless. Nokia’s mobile phone division produced one of the first phones for the new
joint-Scandinavian network, the Nordic Mobile Telephone system, in 1981.

By the mid-1980s it was making large acquisitions across Europe in televisions and
consumer electronics. Its early involvement as a key developer in GSM (the so-called
“second-generation technology” (2G) that carried data as well as voice) helped the
company when GSM became the European standard in 1987.

In 1994 the board consented to divest of everything that fell outside two divisions:
Telecommunications (equipment and systems for cellular and fixed networks) and mobile
phones. Research & Development was prioritized, accounting for 10% of revenues and
one third of employees. During 1993 and 1994 Nokia posted profits of $135 million and
$575 million.

1996-2000: Spectacular growth

During the second half of the 1990s mobile phone sales grew at an annual rate (CAGR)
of nearly 60%. The 2G technology operated with different standards in each major world
region – GSM in Europe and parts of Asia; CDMA in North America; and PDC in Japan.

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Compared to the other standards, GSM allowed handset makers to include additional
features such as text messaging, call forwarding and location services.

With the technology evolving quickly, manufacturers added new features alongside basic
calling and answering services. Nokia’s Communicator (1996), which could receive fax
and browse the web, (See Exhibit 1) and Ericsson’s GS88 (1997) were the first of these
high-end offerings that became known as ‘smartphones’. At the same time, Nokia also
began pushing the idea of a phone as a fashion accessory, with a range of offerings at
multiple price-points to different types of consumers.

With the emergence of the first smartphones, the underlying software on which value-
added features were built started to become important. Initially, every handset
manufacturer used its own software, but with the knowledge that Microsoft was
developing a mobile version of its ubiquitous Windows system, Nokia and its
competitors decided to work together to forestall Microsoft’s advance. In June 1998,
Nokia joined forces with Ericsson, Motorola, and Psion (a UK company who had created
a graphical operating system for portable devices known as EPOC) to create Symbian,
which they hoped would become the de facto operating system standard for smartphones.
Nokia invested large sums in R&D and in addition created the Nokia Ventures
Organisation (NVO), a separate business unit with a number of venture-like funding
mechanisms, whose aim was “to foster growth opportunities beyond the scope of the
existing business groups”.

By the end of the 1990s Nokia had consolidated its market leadership in handsets, selling
to more than 50 operators in the GSM-dominated European market. In 1999 it had sold
78.5 million units (28% market share), while Motorola and Ericsson held 16% and 11.5%
respectively. While Motorola and Ericsson had operating margins of 7-8% and 5-6%,
Nokia was achieving more than 23%. In the mobile infrastructure industry, Nokia was in
fourth place with 13% market share, compared to market leader Ericsson with 26%.

The technology landscape in the early 2000s

In addition to mobile smartphones, there were many different personal technology

products on the market: laptops, personal digital assistants or PDAs (such as Palm),
pagers, MP3 music players, and digital cameras. Some astute industry analysts were
predicting that consolidation of devices was going to happen.

Mobile wireless was possible with phones, PDAs, and Research in Motion’s (RIM)
BlackBerry, which was by far the most useful for email. At that time, email on a mobile
phone used the phone keyboard. Phones and PDAs also had cumbersome email
connections, typically requiring the user to dial their provider, connect to a website, or
call a special phone number. BlackBerry was always connected to a wireless network and
used software for corporate e-mail servers that “pushed” incoming messages from an
existing email address to the BlackBerry. Palm and a few other companies were targeting
consumers with PDAs that could access email accounts, while RIM was focused on the
corporate market and did not see a huge opportunity in the consumer segment.

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Third-Generation (3G) mobile technology was first introduced by NTT DoCoMo in
Japan in 2001 and was launched in Europe from 2002 onwards. 3G offered data as well
as voice transmission, further enhancing the potential range of services that smartphones
could offer.

2000 - 2006: First signs of trouble

The dotcom bubble burst in April 2000 and recession followed, causing corporate
spending on information technology to drop and encouraging manufacturers to look for
cheaper sourcing and manufacturing in the Far East. The mobile handset industry was
already maturing, but these cost pressures accelerated the process and Asian
manufacturers – Samsung and LG in particular – started to take an increasing share of the
market at the low end. Several players, including Philips, exited the industry. Ericsson
and Sony merged their handset activities in 2001 to create an independent company,
SonyEricsson.

In 2001 Nokia launched the 9210 Communicator, the first smartphone built on the
Symbian platform (See Exhibit 2). That year nearly 500,000 Symbian phones were
shipped, rising to 2.1 million in 2002. By 2005 there were 10 manufacturers offering 60
different phones powered by Symbian. Microsoft announced it was launching the
Microsoft Windows Powered Smartphone 2002, based on its Windows CE Pocket PC
operating system. Nokia launched the first touch-screen devices in 2003 –the Nokia 6108
and 3108 phones – which worked with a stylus. The 7280 phone released in 2004
contained a scroll bar instead of a keypad (See Exhibit 3).

In an attempt to capture value from the commoditizing industry and to defend its market
leadership, Nokia split its core mobile phones business into nine different ‘value
domains’. Each domain had to focus on growth. During the early 2000s, Nokia pushed
further into emerging markets, selling handsets in over 130 countries. Rather than just
pushing “old-technology” phones, it employed anthropologists to understand what people
in each country required. Nokia then leveraged what had become a highly sophisticated
global supply chain to produce phones for that market, including dust-resistant keypads,
radio capabilities and extended life batteries, at low prices.

While it continued to be the market-share leader through this period, Nokia did not have
everything its own way. At the top end of the market, an unknown Canadian company,
Research In Motion (RIM), suddenly became popular in 2002 with its BlackBerry
smartphone. With global roaming, Internet compatibility and full QWERTY keypad, it
became the handset of choice for business executives (See Exhibit 4). By mid-2001,
about 800,000 Blackberries had been sold for $349 and up plus a $40 monthly fee. A new
BlackBerry was introduced—the 957 was bigger than the original version and shaped like
a Palm device. RIM established a number of marketing partnerships that included co-
branding, bundling, and reselling arrangements with companies such as Compaq, AOL,
and Nortel Networks.

In July 2003, Motorola unveiled the first of a series of what would be its highly
successful clamshell phones called RAZR (See Exhibit 5). When asked why Nokia

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wasn’t launching any clamshell phones, an executive dismissively replied that they
wanted to come up with “something more than silver clamshell phones: I think we have
to aim a little higher”. Yet the RAZR was a runaway success and between autumn 2004
and summer 2006 it had sold over 50 million units.

Nokia continued to push technological innovation but it lost the lead in several crucial
areas by failing to fast- track its designs for touch screens, software applications and 3-D
interfaces. Although it had introduced the first touch-screen phone (using a stylus) in
2003, it did not improve the technology. In 2004 two other potential breakthroughs were
rejected: an online application store and an internet-ready, touch-screen handset with
large display. The latter circulated around the upper level of management before they
chose not to bring it to market.

By 2006, despite its 35% market share, Nokia seemed to be faltering. Motorola RAZR
was performing well and Sony-Ericsson had launched a successful range of Walkman
mobile phones. 3G was firmly established and LG and Samsung had taken an early lead.
In 2006 Japan and Europe were ahead of the US, where SMS and mobile data services
were barely used. In terms of operating system market share, Microsoft Windows mobile
held 14%, RIM 8% and Palm 5%, with the remainder belonging to Symbian. The total
world smartphone market in 2006 was 80 million handsets, a mere 8% of the total market
for mobile handsets.

In 2006, Nokia merged its infrastructure business with that of Siemens to form a joint-
venture company, Nokia Siemens Networks. This gave the merged firm increased scale
in the network equipment area and allowed Nokia to focus on building a more closely
integrated device and digital services company. Nokia’s net profits were up 19% on
2005. It had introduced 39 new handsets across all levels of the market and opened two
more research centres in the US. In 2007, Nokia’s new CEO embarked on a strategy to
refocus Nokia onto software and mobile web service.

2007-2010: Changing Competitive Landscape

Competition was heating up in the so-called smartphone segment - phones that included
an advanced operating system and combined phone and email capabilities with other
features such as cameras, video games, and media players. In addition to BlackBerry,
Samsung, Siemens, Motorola, and HP had also launched, or were planning to launch,
wireless email devices. PalmOne had sold about a million devices called the Palm Treo,
which included an MP3 player and camera. Microsoft added mobile email software to its
servers and offered it at no charge to service providers. Microsoft had also developed a
version of Windows OS for handheld devices, which PalmOne was considering.

2007: the Launch of iPhone

In January 2007, Apple announced at the MacWorld Expo that it would introduce a
phone, called the iPhone, which would be controlled by touch, play music, and surf the
Internet. The iPhone was a 2G smartphone with limited functionality but with a
‘revolutionary’ touchscreen and a distinctive appearance. Apple’s CEO, Steve Jobs, said

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in his keynote speech that the phone would be much more user-friendly than other smart
phones in the market (See Exhibit 6). Jobs said that current smartphones with keypads
and fixed control buttons had limited flexibility. The iPhone would have a patented
control surface operated by a user’s fingers—“the best pointing device in the world.”

The iPhone started selling on June 29, 2007 and many customers lined up hours in
advance. The phone was available in the United States only through AT&T Wireless.
Goldman Sachs analysts said sales during the first weekend of sales “blew through our
expectations” and were at least twice that of their previous estimates. Apple sold more
than four million iPhones in the six months from launch date to January 2008, and was
second only to BlackBerry in unit sales.

Nokia had already launched its flagship smartphone, the N95, a vastly superior handset to
the iPhone that included a wide range of multimedia features: GPS, a 5-megapixel
camera, LED flash, 3G and WiFi, and a TV-out capability (See Exhibit 7). An ex-Nokia
executive observed: “The iPhone 2G was not even a proper smartphone – it didn’t offer
users the ability to install apps ... and didn’t support industry standards like MMS ... GPS
and stereo Bluetooth. But that didn’t matter. If your smartphone didn’t have the one cool
thing the iPhone did – a touch screen – it seemed that your phone was old-fashioned”.

Despite its strong debut, the iPhone struggled to gain traction with corporate users. The
iPhone had compatibility issues with corporate email systems, and many businesses
prohibited their employees from using the phones because of security concerns. Apple
was working to solve these issues. Apple was also making available a software
development kit to independent software developers who could develop applications
(apps) for the iPhone.

In 2008, the Apple App Store was launched with 500 apps at a price point of free or
$0.99 with payment through iTunes. As an app distributor, Apple kept 30% of the
revenue. Apple also updated its software with additional security and several other
features designed to make the phone more attractive to corporate users. For its part,
Nokia had launched its online store, Ovi, in August 2007 to sell songs, games and maps
compatible with Nokia’s Symbian OS phones. Nokia paid $8.1billion in October 2007 to
buy Navteq, the digital map database.

2008: Launch of New Products by Nokia

In June 2008 Nokia launched the E90 Communicator, which was the last Nokia
smartphone to win in tech press comparisons against the iPhone 3G, Apple’s second
handset model. In 2009 the N97 was positioned as the answer to the iPhone (See Exhibit
8). While it had an impressive spec sheet, the phone was seen as a ‘dud’ and received
negative reviews. Anssi Vanjoki, EVP of Nokia Markets, admitted that the software had
suffered from poor quality control, giving consumers a poor user experience.

Nokia had also decided to sell the N97 directly to consumers via the Internet, bypassing
the US carriers. A former executive said: “Instead of going the carrier route ... and
accepting the bizarre, often archaic ways of the US market, Nokia went defiantly its own

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way ... You can’t bypass the carriers... Nokia knew this, they were stupid to do this. That
would not get them the US market ... blatantly fighting the US carriers, rather than
humbly working with them”.

Sales of the iPhone took off, despite its limited functionality. The iPhone 3G and Apple’s
App Store both launched in 2008, increased Apple’s mobile popularity with consumers.
Within one week of launching the App Store, iPhone and iPod touch users downloaded
more than 10 million apps across the 800 that were available. Developers flocked to build
applications for the App Store.

2008: Google and Android

Another new entrant on the horizon was Google, which was trying to get phone makers to
adopt its Android operating system for smartphones. In 2008, Google entered the mobile
phone industry by developing the open-standard Android operating system (through the
purchase of Android Inc in 2005) and by persuading Taiwanese manufacturer HTC to
launch a smartphone on its platform.

The Android business model was unique. The base Android operating system (including
some applications) was open-source software. Handset manufacturers and wireless
carriers licensed the Android trademark from Google under individual contracts.
Proprietary software, such as Google Mobile Services, which included applications such
as Google Play Store and Google Search, were also licensed from Google. Android-based
phone sales grew rapidly, from 4% to 23% in 2010. Gartner forecasted that by 2014
Android’s market share would equal that of Symbian at around 30%.

Wireless Carriers and the Shift in Balance of Power

The evolution of wireless carriers in the U.S. and their relationship with cell and then
smartphone makers was a journey of network expansion and a rebalancing of power.
Before the arrival of the smartphone, the carriers were king. Handsets with specifications
dictated by the carriers were inexpensive hardware devices subsidized to link customers
with networks. Aggressive carrier price competition eroded the margins for voice calls
and messaging, leading to industry consolidation and the need for additional growth
avenues.

The dynamics between carriers and manufacturers shifted with the launch of the iPhone.
Verizon, one of the largest U.S. carriers, rebuffed Apple’s offer of partnership due to
Apple’s requirement for total control over the phone’s specifications. Verizon was fearful
of losing control of their network before seeing a prototype device. Cingular
(subsequently merged with AT&T), willing to bet on the iPhone’s potential to increase
data traffic and revenue, acquiesced on design control, granted unlimited bandwidth to
develop services for internet browsing, maps, and other internet services (previously
denied to BlackBerry), and relinquished a portion of each customer’s AT&T bill (around
$10 a month) to Apple—in exchange for an exclusive five-year contract. AT&T did not
even see an initial iPhone prototype until just before launch.

With iPhone sales soaring, Verizon executives wanted a competitive touchscreen device

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and allocated a substantial marketing budget to RIM’s BlackBerry Storm, launched in
2008. After problems with the Storm, Verizon decided they needed a backup plan with
Android and heavily marketed an Android launch in 2009. Android sales continued to
rise. Other manufacturers, including LG and Samsung, quickly adopted the Android
platform as a cheaper option than Symbian (while the Apple and RIM platforms
remained proprietary).

Further troubles

In December 2008 Nokia bought out all its partners in Symbian and became the major
contributor to the Symbian code. It had invested almost €6.2 billion by 2010 into
Symbian (more than 10 times the total R&D budget at Apple). Despite all the concerns
raised, it was still the leading operating system in 2009 and 2010, with a 37.6% market
share at the end of this period (See Exhibit 9). But Nokia’s executives recognized that
Symbian did not give the company the platform it needed for future growth. Looking for
alternatives, Nokia and Intel started to develop a software platform, which they called
‘MeeGo’ in February 2010. A Linux-based OS, MeeGo was to build a platform that
would power official MeeGo mobile products such as tablets, phones and netbooks.

Nokia had built up a dominant position in selling low-end phones in emerging markets.
But not only was this sector becoming less profitable, Nokia’s position was also being
attacked by new entrants from China. These ‘white-box’ manufacturers, who traditionally
used chipset solutions to produce non-branded products for sale through non-traditional
channels, were attempting to move into higher-end segments, producing more
sophisticated handsets (See Exhibit 10). Micromax and Spice in India were bulk-buying
handsets from China, adding further features and selling them at prices lower than Nokia.
They had already captured 20% of the market in India and set their sights on expansions
in other markets in which Nokia competed, such as Brazil and Nigeria.

In the summer of 2010, Nokia embarked on a second reorganization of the company,

designed to “speed up execution and accelerate innovation” in smartphones. The handset
division was split into three: Mobile Solutions, Mobile Phones and Markets. Yet Nokia
was still losing profitability. In 2009 it reported its first ever loss-making quarter and in
2010 twice issued profit warnings.

Competing ecosystems

Many observers argued that Apple and Google had changed the rules of the game in
mobile handsets – from a focus on the handset to a focus on the software platform and the
ecosystem of partners who built applications and services on it. A former Nokia engineer
felt that the company had continued to focus on handsets, with the software as a
secondary concern: “Nokia’s terminology shows the mindset. The focus was on the
phone, because Nokia had this amazing factory that could crank out 100 million units a
year if you got a hit.”

According to one observer this led to Nokia having: “... no overall vision on which
features to prioritize or on user experience. R&D portfolio lacked management and

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guidelines. Instead, teams were allowed to ‘lobby’ to get their new hardware, such as a
new camera, built into Symbian.”

Despite having launched its ‘app store’, Ovi, ahead of Apple, critics complained Nokia
never put any “marketing muscle” behind it and developers “largely ignored it”. “It was
an ignorant complacency, not an arrogant complacency,” said Nokia’s HR head Juha
Akras. Nokia apparently had no coherent strategy for either building or helping external
app developers populate its Ovi store. A common complaint was that Apple and Google
created software tools that encouraged external developers to create apps, whereas
developing apps on the Symbian platform was much less straightforward. As a former
Nokia employee said, “Developing for Symbian could make you want to slice your
wrists.”

Analyst John Gruber commented: “Nokia’s problem is that their handset business is
fundamentally based around hardware teams. When they decide to make a phone, they
put together a hardware team for that model and that team makes all decisions. That’s
why they have no cohesive software strategy. Nokia sees software as one component in a
hardware-based view of the industry.”

2011 and Beyond

Nokia was facing pressure from both low-end competitors in emerging markets and from
high-end competitors Apple, Google and RIM. In Smartphones Nokia’s market share had
fallen from 49% in 2007, prior to the iPhone launch, to 25% in 2011 and 3% in 2013 (See
Exhibit 11). The new platform, MeeGo, was Nokia’s main hope but development was
slow and only three new MeeGo products were expected to be launched before 2014.
With time against him, Elop concluded there was no choice but to bypass MeeGo and
migrate to either Android or Microsoft’s Windows Phone 7. He started to negotiate with
both companies. Speculation was rife that Nokia would join with all its rivals in choosing
Google’s free software platform; however Google, with its strong market position, would
offer no concessions to Nokia.

On February 11 2011, just a week after Elop’s “burning platform” memo to his
colleagues, Nokia and Microsoft announced a “broad strategic partnership” between the
two companies. The press release described how they would combine the strengths of the
two companies to build “a new global mobile ecosystem” and that Nokia brought a
history of hardware innovation and global scale with Microsoft’s leadership in software
and systems.

The press release signed off with a call to arms: “There are other mobile ecosystems. We
will disrupt them. There will be challenges. We will overcome them. Success requires
speed. We will be swift. Together, we see the opportunity, and we have the will.”

Observers responded to the announcement with mixed views. One technology

correspondent said: “Investors reacted badly when Nokia unveiled its plan to try and
strike back at Apple and Google in the smartphone market by using Microsoft’s operating
system. Nokia’s shares fell 14% as some analysts claimed Nokia’s strategic partnership

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with Microsoft was good for the US group but bad for the Finnish company.”

 
Exhibit  1  Nokia  9000  Communicator  

Source: [Link]

 
Exhibit  2  Nokia  9210  Communicator  

 
Source: Wikipedia

 
 
 

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Exhibit  3  Nokia  6108,  Nokia  3108,  and  Nokia  7280  
 

 
 
Source: [Link]

Exhibit  4  BlackBerry  in  2001  

 

 
 
Source: [Link]

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Exhibit  5  Motorola  RAZR  V3  launched  in  2004  
 

Source: [Link]

 
Exhibit  6.  The  smartphone  evolution:  1983-­‐2007  

Source: [Link]/2009/10/the making of digital nostalgia – mobile evolution

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Exhibit  7.  Nokia  N95  in  2007  
 

Source: [Link]
 

Exhibit  8.  Nokia  E90  and  N97  

 

 
E90 N97
 
Source: [Link]
 
 

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Exhibit  9.  Smartphone  Operating  System  market  share  

Source: [Link]
 
Exhibit  10  Global  smartphone  shipments:  2009-­‐2011    

Source: [Link]

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Exhibit  11.  Global  smartphone  market  share  of  Nokia  

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