238-Nokia Makes a Bet in the Smart Phone Market

Nokia has a big problem in the smart phone market. It has to do something to change its outlook. It just made a bet with the choice of its pathway to the future.

Nokia produces both the hardware and the operating system for smart phones. Its hardware is the handset and its software is either the Symbian or MeeGo operating systems. The company uses the Symbian software with its less advanced smart phones and the MeeGo system for the more advanced and more expensive phones.

Nokia is losing market share rapidly, especially to phones using Google’s Android operating system. Over the last year, the Symbian operating system’s market share fell from 45% to 37% of the market. In the meantime, Android has garnered 25% of the market, up from less than 4% a year ago. Nokia developed the MeeGo system to counter the flowing tide to both the Android and the Apple operating platforms. These platforms from Apple and Android have nearly shut Nokia out of the high end smart phone business in the U.S.

Nokia has decided against adopting the Android operating system for its phones. It is afraid that the adoption of Android would leave it competing in an increasingly less attractive hardware market, while the profits go to the operating software manufacturers. Nokia is undoubtedly right here. (See “Video #3: Predicting the Direction of Margins” on StrategyStreet.com.) The question is, can they catch up fast enough?

Nokia is working hard to get the MeeGo system up to speed for developers. Today, the developers feel that the MeeGo operating system is in its early stages. It is attractive, though, because this operating system supports a number of different products that consumers use, including tablets, televisions and phones. And Nokia has acquired and developed software, called QT, that enables software developers to write an application once and have it work on a number of hardware products.

Nokia has time to get this right. The smart phone market is still a high-end, Performance Leader, product. It will take time for the mass market to adopt the smart phones and their operating systems. Nokia has a large base of customers using its phones and operating systems. Most of these customers would prefer not to leave a supplier they have come to know and like. If Nokia can pull its act together quickly, it can be a strong performer. And, certainly, there will be room for three operating systems in this market. In fact, if Nokia does well, it could still end up the long term leader, a position it has owned in the cell phone market for the last several years. Failing that, it has a reasonable chance to beat out the Apple operating system over the longer term. To accomplish this, Nokia must develop and use its superior economies of scale to price its products aggressively to take share again. (See “Video #53: Productivity and Economies of Scale in Hostility” on StrategyStreet.com.)

But, there is a lingering question. Why not hedge the bet by developing Android phones as well? They could maintain good economies of scale and keep handset profits if their software bet fails.

Posted 12/6/10

Update:

Nokia was overwhelmed by the popularity of the iOS system and, especially, of the Android operating system. Eventually, Nokia teamed up with Microsoft and their fates were intertwined. Microsoft similarly failed as it was also outclassed by Apple and Android.

The Microsoft phone operating system achieved very favorable reviews for the quality of its integration with Microsoft software and the speed of its response. On its initial release, several hardware manufacturers, especially Nokia, enthusiastically adopted the operating system. However, the operating system could never overcome its woeful lack of apps compared to those for the Apple iPhone and the various Android phones.

Microsoft bought Nokia in 2014 in the hopes that it might be able to set a consistent strategic direction for its operating software. Unfortunately, the two companies aimed at different goals. Microsoft wanted to produce a high-end product competitive with the iPhone. Nokia preferred the low end of the market as it developed its potential in India. The acquisition never worked because of these conflicting goals.

By 2015, the smart phone market was a duopoly. The combination of the Apple iPhone and the Android phones owned almost 97% of all the smart phones sold. Microsoft had a 2.5% share and began withdrawing from the market.  By then, the Microsoft Lumia phones occupied the low end price points of the smart phone market.

This was a costly venture for Microsoft. It might have been able to see its likely failure on Function due to the few apps it offered compared to its competition. By 2010, when the new Microsoft operating system debuted, it was clear that the market for any phone rose and fell on the quality of its apps. Microsoft failed here and should have withdrawn from the market much earlier. See HERE and HERE for more perspective.

11/22

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