At times you can feel sorry for Nokia. The company is damned when it dares to plan for the future, and it’s damned if it doesn’t.
But that illustrates the depth of its dilemma. Today, Nokia is phenomenally successful in one business – handsets – which generates £27bn ($54bn) a year, with a margin of between 15 to 20 per cent.
However, Nokia relies on a small number of powerful customers as its route to market. This isn’t a problem for every business. If you sell fighter aircraft, you know who your handful of customers are, and can schmooze them directly. If you sell bangles from a market stall, you can choose which market you sell from. Nokia doesn’t have the luxury of either: its channel is its market.
And “getting from here to there” is the problem.
At great expense last week, Nokia began to imagine itself as a very different kind of company: a vertically integrated services business. Mobile users would flock to the company’s new portal, Ovi, for games, music, information and “social” interaction. You might call this a “post-operator” world, but it’s also a “post-Nokia” world, as it presumes that both data and devices are commoditised. It’s a Plan B.
However, the strategy takes today’s complex mobile data eco-system and promises to torch it. Today, there’s room for a Real Networks selling games or ringtones, for example, or an AQA providing an answers service. Nokia’s Ovi portal effectively declares war on all these smaller service providers. That can be considered bad manners (or a business necessity) – but it isn’t fatal to Nokia’s plans. It’s the biggest, would-be service companies who are the most threatened.
As you can imagine, network operators don’t look too kindly on this kind of logic. They know very well that being reduced to a commoditised bit-pipe, to a low-value data utility, spells death. No one wants to be in that business. So the knives are already out.
One senior industry source with strong relationships on either side, speaking in confidence last week, told us the operators were “aghast” at Nokia’s move.
“The operators own the relationship with the customer. They’re not going to allow Nokia to own it. Where does that leave them?”
Today’s bloggers are probably too young to remember it, but several years ago Nokia had similar ambitions for its Club Nokia portal. This morphed into an über-portal designed to take on Microsoft, which forged a direct relationship between punter and Nokia (you got a green membership card when you signed up). What happened? The operators ensured it was strangled at birth.
Two bald men fighting over a comb?
The irony is that both Nokia and the operators are fundamentally mistaken in believing a pot of gold awaits them. The internet may be a laboratory of innovation today – look at the thousands of ideas being tried using the Facebook API, for example – but it’s a graveyard for wealth creation.
Well almost a decade ago, Andrew Odlyzko published a paper that studied the history of communication services called Content is Not King [interview].
Odlyzko recalled how the first telephone networks were marketed as one-to-many premium content services. They were the portals of their day – and no one came. The phone business only exploded after the operators scrapped these and let people talk to each other.
And today it’s still communication, not content, that remains king. Because the content is text and pictures and audio, some people get terribly confused. But what gets called “content” – the funny clips and Chuck Norris jokes we send each other – is still really just chatter, and isn’t considered worth paying for. We’ll subscribe to services that make it easier to communicate with each other, but we won’t pay a premium for “content” any more today than 90 years ago.
Even though “Connecting People” is Nokia’s slogan, and communication is engraved into the boot logo for every one of its phones, the Finns are guilty of neglecting the basics. The company seems rather too in thrall to the Californian web utopians to remember that “innovation” is a conjurer’s trick. Far smarter to follow the money – and the lessons of economics and history.
Already investment analysts are placing doubts on the consequences of this strategy for Nokia’s main business today:
“The content campaign is likely to lead to a noticeable increase in marketing spending without a commensurate rise in sales and/or gross profits,” warned one last week. “The effects on device market shares may transpire within six-nine months.”
In other words, mobile operators will strangle Ovi, just as they strangled Club Nokia, by choosing their handsets from other manufacturers.