The deterioration of Nokia's core business

The saga of Nokia’s challenges has been well documented in this weblog.

For this quarter, we take a look at the sequential deterioration in Nokia’s bottom line and draw causal inferences to its lack of competitiveness in mobile operating systems.

First, the bottom and top lines are shown below (in blue) and compared with Apple (in orange):

The charts show how Nokia’s bottom line (left) collapsed while the top line (right) remained relatively solid. By comparison, Apple remained consistent in revenue with slight dip in profit as it transitioned to a new model.

The top line (sales) is the product of units sold and their average selling price (ASP). Here are these two quantities side-by-side:

Note how Apple’s units are hard to discern relative to Nokia’s volume and how the opposite is true for the selling price. These values include all phones sold by the companies.

The story is a bit more clear when comparing the smartphone part of Nokia’s business, again with units and ASP:

The story here is telling: even in smartphones, Apple’s ASP is dramatically higher and much more resilient.

The question has to be why: Why can Apple retain not only higher prices (and hence margins)? The answer is competitiveness. Margin is an indication of value created and value differential is competitive differentiation. All the user satisfaction surveys, the reviews and tests boil down to these hard numbers above. The deterioration of Nokia’s business is directly traceable to its historic failure to embrace mobile software as a disruptive force and instead using it to sustain a hardware business.

  • Suraj V

    Yes, and Nokia did realize that they cannot sustain in the hardware business, and hence Ovi. I'd give them credit for chalking out a plan to actually use software as the disruptive force, using Ovi. The implementation has been dismal, because they are not an application software company in the core. Apple and Google, software companies, have been able to embrace hardware well because of industrial design expertise and external partners like HTC, respectively. Nokia will take longer to master software design but eventually they will be in the top 3 because the rest haven't caught up with this yet. Don't rule them out yet. The smartphone race is a very long one and will give every player an even chance. Apple may remain at 15% with high profits always, like in the PC market. Android is the real danger for the rest. Its a juggernaut. Even Samsung realizes the software part and thus has come up with Bada OS. Eventually the mobile phone vendors will have to choose between Android and their own OS – Bada, Symbian, MeeGo, BlackBerry OS. Google is too big to let the phone vendors benefit from using Android. In short term, Android is great, because it has helped companies like Motorola to begin making profits.

  • Chris Harris

    The big problem that Nokia and Google's Android have, despite them both having App stores, is the large problems you get when you develop for them. As a developer for the iPhone we are continually evaluating whether either of the competing platforms are viable for development and all have the same problem. Multiple SKUs to develop for with differing Implementations. We estimated as many as 15 different handsets were required to target all of Android, and Nokia have similar issues. The real killer is widely varing screen sizes. This increases the amount of testing, design to the point where we can't make a profit on even the free apps that clients ask us to develop. Until this basic issue is resolved, by manufacturers agrreeing on some kind of standard aspect ratio, both platforms will remain extremly unattractive.

    • That's a good point, Chris. Do you think that the split between iPhone 4 and 3GS (in terms of hardware) will make the developer's life more difficult?

      • Chris Harris

        We're currently upgrading the graphics for the BBC Listener App in the US App Store and it has taken four straight days to redo the graphics in a scalable photoshop form. In addition we have a further extra days to add background capability for audio and multitasking support so it is about 12 man days to upgrade to iPhone 4. A not insignifficant amount. Our new app for the Football League which is launching shortly has been developed at the double resolution to begin with and was a far easier process.

        To sum up: Yes it does make your life more difficult if you have to upgrade an old app, but it's far easier if you start that way. Maybe 5% extra development time. Apple has however made it very easy to upgrade your App and we only have three devices to test against. All in all we're happy with the added features and the extra time required to develop for them, due to the happy clients and customers.

  • Suraj V

    Yes, you do have to consider multiple screen sizes for Android and Symbian but don't you have an opportunity to make more money?