‘Nokia can’t remain a handset business’

‘Nokia can’t remain a handset business’

Anyone who thought Simon Ainslie would become bored after leaving his sales director role at T-Mobile to become UK MD of Nokia couldn’t have been more wrong. The days when the job of Nokia UK boss involved little more than deciding the size of each network’s allocation is over.

Ainslie and the UK team are now at the centre of the Finnish manufacturer’s biggest change since it produced its first mobile phone in the mid 1980s. The company is very purposefully moving beyond making phones and into services.

It is a shift that confronts new competitors, takes Nokia away from its home turf and threatens to destabilise its relationships with network operators. It is a bold step, but Ainslie considers it absolutely critical. He talks of Nokia now becoming a ‘Web 2.0 company, and no longer just a device company’.

The signs have been apparent over the last 18 months. Nokia purchased music download company Loudeye in August 2006 for $60m, and followed it up with an even bigger acquisition - $8bn for navigation company, Navteq. The biggest announcement from Nokia last year wasn’t a phone, but the unveiling of its own digital Music Store.

It poses questions of where Nokia is going, the rationale behind it, and what’s at stake. A good place to start is to explain the change itself. When Ainslie joined Nokia in August 2006, his big concern was managing the launch of some straight-forward mobile phones that would be used for texting and making phone calls. The business model was based on shipping phones to operators and retailers with a standard mark-up.

Advance of the iPod
Motorola had just swept the board with its RAZR V3, while Samsung, Sony Ericsson and LG were all growing their market share in the UK, and pushing prices down.

In that time a little white device with a clever click-wheel that played MP3 music files swept the consumer market, creating an excitement that a mobile phone hadn’t for as long as anyone can remember. The prospect of Apple adding mobile phone capability to its iPods was a real threat, and one that everyone at Nokia feared.

Consumers started using their PCs and laptops in new ways, with the internet becoming far more engaging and important than other media, with the likes of Yahoo! and Google looking to extend the web experience of customers. Navigation and emailing became mobile and mainstream, making TomTom and Blackberry highly successful brands.

The new players in this arena were luring loyal consumers not through some shiny piece of hardware, but through services and software applications. This was epitomised by no-one better than Apple as it put its iTunes application at the centre of its business, with devices arguably playing a supporting role.

Ainslie says: ‘Apple are a fantastic example [of a company] that moved from hardware to experience.’

So is the change Nokia is making purely a defensive one? ‘We are in a competitive market so it would be wrong of us to sit back and let someone come in and take our lunch.’

‘But we’re also running out of space in a market we already own so it is offensive and defensive,’ he adds.

Nokia, he says, has little choice but to make this shift. He points to rival manufacturers like Samsung and LG, which ‘will be quite happy to just deliver devices’. He adds: ‘That’s a very different business model [to ours now], and they’ll be driving down margins at a much lower level, so it could be more challenging for them.’

For Nokia, the idea is to wrap customers into its own music, navigation and web services. ‘The change is much more about growing the organisation. To do that, we’re moving into a space we haven’t been in before, and our competitors of the future are Apple and Google.’

Ainslie maintains that this change is essential, and that the risk is worth taking, despite the new and unknown territory Nokia is moving towards, and despite the fact that it is actually in a very healthy financial state at the moment.

‘We’ve had fabulous market share growth this year, and most companies in our position would just keep going. The refreshing thing about Nokia is the recognition that change is the only option. In this Web 2.0 space, you can’t stand still.

‘As we’re in more of a saturated mobile phone market [certainly in the UK], you need to expand beyond mobile phones.’

More about services

Ainslie points to the PC market where Dell is creating a bigger emphasis on PC support, and HP is moving towards software.

He adds: ‘To maintain our margins and maintain the best experience for users, you’ve got to move out of hardware and into experience. We can’t remain a devices business. We have to take leadership here by growing the market for everyone in our supply chain.’

Ainslie says that 2007 will be seen as a breakthrough year for changes at Nokia and the industry: ‘We will look back in five years and say “Everything came together then”.’

To underline this, he says don’t expect any breakthrough devices from Nokia in 2008. ‘You’ll see more navigation, more capability and making more out of NSeries.

‘What more can you do with a product that has certain physical dimensions that you have to sit with - you can have bigger cameras and faster processors, but those leaps that happened three years ago are much harder now.’

Instead, Nokia will expand on its navigation, music, email and internet services this year.

The manufacturer recently announced a new free unlimited music download service, ‘Comes With Music’, which will be available in the second half of this year on certain products.

The suspicion is that Nokia has delved into its deep pockets with the acquisitions and investments in music and navigation, simply to keep Apple at bay, and protect its market share.

Ainslie says these investments are not cash-burning exercises. ‘We’re not in the business of not making money from investments. Navteq is a profitable business, but if you were to view the [$8bn] investment as a standalone operation, you could question it. But if you replicate that business in, say, 50 million cars, and then move that to three billion mobile phones around the world, the economics suddenly start to look very different. ’The long vision is that [people] expect GPS in phones like they expect Bluetooth. And GPS is only useful if you have a mapping device.’

Music is the big one though; and one where Nokia has its biggest challenge, and its biggest opponent. The first iPhone may not be the runaway success predicted by some, but it is a statement of intent from Apple.

Nokia is looking at the market, learning, investing, trying to stay ahead of the game, and building new relationships in the music

Written by Mobile Today
Mobile Today

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