Apple takes another bite out of Nokia

June 16, 2010

Apple has taken another bite out of Nokia. As customers stampeded for the new iPhone, the Finnish cellphone giant warned of disappointing sales and operating margins. It lost another 9.7 percent, or about $3.5 billion, of its market capitalization on Wednesday. Nokia is increasingly at risk of becoming just a commoditized, low-margin manufacturer.

Nokia pinned the blame for its lower expectations on several causes: competition in high-end phones; the weak euro increasing the cost of goods sold; and a shift in product mix to low-margin devices. But it is smartphone competition that is really vexing the Finns.

In electronics, the highest margins are typically found in bleeding-edge products. Customers are willing to pay a premium for the shiniest devices, while competition is fiercer in more easily produced, lower-end ones. Nokia is losing this battle. While it appears to be slashing prices to keep market share, Apple’s  customers are whining they can’t get their hands on the new iPhone fast enough.

The dichotomy in margins is clear. Nokia says its devices and services unit will be lucky to get 11 percent this year. Largely thanks to the iPhone, it seems, Apple should achieve about 30 percent overall.

Nokia has two hopes. First, it still controls about a third of the global market for handsets. Economies of scale mean it can still squeeze out a profit even on extremely cheap devices. Second, Nokia is increasingly bundling services such as email and music into phones, as well as introducing a better operating system later this year. Success would mean Nokia’s margins are currently near bottom.

Yet history suggests margins could go lower still. Take electronics makers such as Sony  or Toshiba. While their brands still have a quality reputation, selling largely undifferentiated PCs, televisions and MP3 players isn’t a very profitable business due to intense competition. Operating margins often come in below 5 percent despite continued attempts to restructure. Nokia needs to find an answer to Apple soon if it wants to avoid turning Japanese.

Comments

If Apple was concerned about market share they wouldn’t persist in the exclusive deal with AT&T which alienates a substantial fraction of potential iPhone users.

Their competitors have to look beyond that to understand both their strategy and their success, which is why they’ve controlled the smartphone segment so effectively.

Posted by strategist | Report as abusive
 

Nope. Nokia does not have those two hopes.

First, it may be still controlling about a third of the entry- level mobile phones market. But, for how long? If you look at its sales figures carefully in the so-called emerging markets it is slowly but surely dwindling due to cut-throat price competition by cheap Chinese phones flooding the markets previously controlled by Nokia in India and many African countries. A new Indian mobile phone maker Micromax is challenging Nokia in India and gaining rapidly market share from Nokia and others in this entry-level segment.

Secondly, the services such as email and music are of no use to the rural population in those emerging markets. To whom will the poor farmer send an email, when he can talk to the person concerned by phone? Have you ever tried writing an SMS on a normal 12- button mobile phone? It is a frustrating experience even for the technically qualified. How would a basically illiterate person or one with a modest primary school education cope with this? And the veeeery slow data speed on a 2G network is not inspiring at all.
Thirdly, The LifeTools service has some use to the rural population but the service by which money can be sent by a mobile phone is full of security threats. When money transactions by mobile phones are risky even in the highly developed economies of the west, how can you guarantee, that malicious hackers and criminal elements do not cause havoc in this service in those poor countries? Mobile phone viruses are already a nuisance in the west. How can a poor peasant afford to lose his money by sending it over an insecure mobile network?

Music can be heard for free almost on every street and corner in a country like India. Who would like to pay for the slow download speed on a 2G network even if Nokia were to offer the music download free? The cost of the on-line phone time will still have to paid by the phone user. Connection breakdowns and communication dropouts are common in developing countries. People get used to such on-off connections. But, music downloads on such a connection can be very frustrating indeed. In a country, where you cannot avoid listening to popular music loud and clear almost everywhere this Nokia slogan of “Comes with Music” seems to be superfluous. It may appeal to the youngsters living in metropolitan cities. But, that is not the place, where Nokia is at its strongest. People living in big cities have the extra money to upgrade their mobile phones to the newer trendy smart-phones like the iPhone.

So, Nokia is at present like a big tanker lost in a storm with its rudder and compass broken. It does’nt know in which direction to steer?

Nokia has had all the time and the resources to find an answer to Apple for the past three years. It has now squandered this opportunity and is destined to turn into not a Japanese but a Chinese maker of bulk – class mobile phones. But, that’s not where the beef is in the sandwich.

Posted by ulludapattha | Report as abusive
 

“Nokia pinned the blame for its lower expectations on several causes: competition in high-end phones; the weak euro increasing the cost of goods sold; and a shift in product mix to low-margin devices.”

Really? And not on the several patents that Apple has been infringing on for several years from Nokia, among other manufacturers?

I smell a zealousy boastful bias on this article.

Posted by pandemonium | Report as abusive
 

“Nokia pinned the blame for its lower expectations on several causes: competition in high-end phones; the weak euro increasing the cost of goods sold; and a shift in product mix to low-margin devices.”

Really? Those are the primary causes and not the patent disputes of Apple using technologies that Nokia spent millions developing (among several other companies as well)?

@ulludapattha – That was a lot of effort wasted to subverted tangents.

“People living in big cities have the extra money to upgrade their mobile phones to the newer trendy smart-phones like the iPhone.”

Particularly funny since Nokia has several models which make all of Apple’s products combined look like Tonka toys.

Posted by pandemonium | Report as abusive
 

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