Does the phone market forgive failure?

One of the details of Nokia’s warning which did not get a lot of attention was the mention that profitability for the current quarter could not be guaranteed. That is to say that Nokia may make a loss, perhaps for the first time in more than a decade.

This may not be that newsworthy except for the strange fact that as far as I’ve been able to observe, any company in the mobile phone market that ended up losing money has never recovered its standing in terms of share or profit (i.e. AMP index value has never recovered).

Here is a list companies that have “hit the rocks” in terms of mobile phone profitability and their fates (in no particular order).

  1. Alcatel of France. Sold its brand and operations to TCL Communications of China in 2004.
  2. Siemens of Germany. Exited in 2005 through acquisition by BenQ of Taiwan.
  3. BenQ of Taiwan. Mobile devices division declared bankruptcy in 2006.
  4. Ericsson of Sweden. Exited by merging with Sony in 2001 even though third in volume share the prior year.
  5. Sony of Japan.  Joined with Ericsson to form Sony Ericsson in 2001. Held less than 1% share prior to merger.
  6. Motorola of the United States. Even though once the largest vendors, after a period of severe distress, Motorola spun off Motorola Mobility. Market value shows long-term viability still a concern.
  7. Casio of Japan. Merged with NEC and Hitachi in 2010.
  8. NEC of Japan. Merged phone units with Casio and Hitachi in 2010.
  9. Hitachi of Japan. Merged phone units with NEC and Casio in 2010.
  10. Fujitsu of Japan. Merged with Toshiba in 2010. Held 15 percent of Japanese market prior to merger.
  11. Toshiba of Japan. Merged with Fujitsu in 2010. Held 4% share in Japan.
  12. Palm of the United States. Sold to HP in 2010.
  13. Handspring of the United States. Sold to Palm in 2003.

That makes 13 large phone brands that, in less than a decade, have either exited or lost independence after suffering crises of profitability.

As the following chart shows, at this time Motorola, Sony Ericsson and LG are still operating but have been dipping into the red.

The three suffered severe volume contractions in feature phones and have no differentiation in software or platform products which makes their position precarious.

This cursory survey shows that it’s difficult to be optimistic once a company reaches a point of crisis. It’s a curious outcome given that the market is so vast and growth is so robust.

But the fact is that because of the technology cycle time, rapid business model evolution and fairly low barriers to entry, there is great rivalry between competitors. Profitability is the canary in the coal mine. It causes a brand to be tarnished in the eyes of distributors who, because of sales cycle times, are extremely sensitive to obsolete inventory. A loss maker is seen as a maker of damaged goods.

It then turns off the tap of incentives, promotions and hence visibility in the eyes of consumers. It’s a vicious cycle from which few (if any) can recover. Past greatness offers no succor.

And so, with Nokia about to join the list of loss-makers it’s only natural to question its fate as an independent company.

  • rattyuk

    I wonder if this was why everyone was trying to push Antennagate at the launch of the iPhone 4? Trying to kill off or put some kind of fear, uncertainty and doubt in the way of the purchase decision?

    • asymco

      You give too much credit to Apple's competitors. They don't know the consequences of their own performance failures and thus can't act or conspire to act. Remember that self knowledge is almost non-existent in large companies.

    • The tech media community wants a return to "normalcy" as it were. For 15-20 years, being a tech reporter was easy. Microsoft announced a new product/technology. Tech community would discus its wonderful merits on how this new product/technology would lead to the end of world hunger. The product/technology would become a market success. The tech media got used to the concept of:

      1) Fully integrated software vendor.
      2) Fully integrated micro-processor vendor.
      3) Multiple component based hardware vendors using a fully integrated software/processor solution.

      The tech media had issue with any model outside of that. A fully integrated Systems solution like the Mac, Amiga, Sun or SGI was a different beast. The media would be very very critical of every small little flaw of any integrated systems solution while allowing mass transgressions (like security issues) on the MS/Intel duopoly. This made reporting easy. You only really had to think critically about one part of the system.

      The tech media has a vested interest in the success of Android and/or WP7. It returns to the normalcy of a single software company with lots of bottom feeders. What is interesting, however, is the tech community has shifted to wanting:

      1) Fully integrated software vendor.
      2) Multiple component based micro-processor vendors.
      3) Multiple component based hardware vendors using a fully integrated software/processor solution.

      But they lambaste the idea of any vendor doing original thought or software design. "The pure Android experience" concept comes to mind. In an effort to differentiate, the handset makers of Android will be driven to get lower and lower on the AMP rating to the point where they dip below 0.

      Nokia is sad, because they could have made a go of Symbian. They had a viable developer community making more profit than Android developers. While they were seeing smart phone market share dropping, they were seeing subte unit deliveries growing. They had markets they were strong in. They were never going to go back to the profit share they had in 2007, but Nokia could have done very well.

      • KenC

        Interestingly, Apple is now worth $319B, while Microsoft+Intel is only worth $321.3B. Only $2.4B for Apple to pass the old Wintelopoly. It could be tomorrow.

      • iosweekly

        interesting observation.

  • eyez00

    MS-Nokia? Brian S Hall says "By August".

  • asymco

    I spent a while reading minimsft and it seems that inside Microsoft it's called Nosoft.

    • Niilolainen

      Nosoft? That's just cruel!

    • iosweekly

      What are nokia patents worth to microsoft? or to anyone for that matter.

      If Microsoft is happy to sit back and collect royalty payments for every android phone sold, maybe it wants more patent royalties from handset manufacturers of every kind.

      saves them doing any actual innovative work.

  • It's all about speed of change. Losses stem from being out of touch and the market knows it. Once you've demonstrated slowness, you're forever a loser.

  • JonathanU

    I'm not sure Microsoft really needs to pounce yet for Nokia – the company is burning and the share price has further to fall. So probably no deal yet, but it's definitely something to watch out for in the near to medium future…

    • eyez00

      MS needs to buy it before Google does imo.

      MS-Nokia running Win8 is a threat to Android. Bing is a threat to Google.

      Let the price go too low & Google will step in with promises of Job Security and then put it's lights out.

      Tax efficient too!

  • Omar

    Nokia has enough money and brand recognition to last another 5-7 years before a merger or buyout is needed.

    • That might be true if the shareholders didn't have a say, but if the company valuation plummets far enough, fast enough, Nokia will be a ripe take over target.

    • A public company is by definition permanently for sale. Their cash reserves and brand are not particular relevant.

      Once their stock falls low enough they'll be in play. Could already be.

      I wonder if Huawei or ZTE would be interested or capable?

    • 1 year max.

  • Simon

    I think it's the two pronged attack that's killing Nokia. The iPhone and Android phones have effectively sipped most of Nokia's high end consumers and even the low end market, traditionally been Nokia's strength, is getting hammered by the players from China and India equipped with cheap but increasingly competent hardware and Android. Also RIM has made its mark eating up some of the emerging market demand.

    If it was just on one end Nokia could've probably had a bit more time, but their astounding ineptitude to cope with the iPhone shock and the lack of dependable core competency – e.g: RIM and its message-centric devices – have combined with attacks on both ends are making things really difficult for Nokia.

    Also I've commented in another Asymco article, The "Nokia hardware is great" mantra is about to meet its dead end as well. In today's world of smartphones, it means relatively little if all you have is a sturdy casing and a good signal with some little goodies like an FM transmitter thrown in. If you want to compete on the merit of hardware, you absolutely need large high resolution display with latest tech and the fastest processor you can find. Nokia has done horrible on both counts.

  • LG is a large company that sells many different types of products. Mobility is just one division within the whole company. I don't think Horace would argue that LG as a whole will fail, but that the mobile unit will either be sold, spun off, or killed off internally.

    • asymco

      That's right. LG and Samsung are chaebols for whom the phone businesses are not critical to survival. Let's not forget that Ericsson, Siemens, Alcatel, Motorola and Nokia maintained network equipment businesses to complement or sustain their device businesses. ZTE and Huawei do the same today. It is an interesting coincidence, no?

  • I'd think LG would be a strong candidate for recovery based on Android

    • asymco

      Android could be sustaining to the incumbents or it could enable low cost entrants to kill the incumbents. If Google is tempted to sustain but the market forces spin into disruption, then Android does not have a bright future.

      • asymco

        Thanks for the link.

  • asymco

    It's not so much a theory as an observation. Perhaps recovery is possible. Perhaps Android is a sustaining technology for incumbent phone vendors. My instinct tells me that the odds are very low.

    • If you think that Android will eventually commoditize the HW it runs on, or at least some significant portion. Then success will be down to making good enough phones, in high volume, cheaply, with a strong brand and having the right channels to market (if you'll forgive the crass oversimplification).

      I would think LG (like Samsung) would tick all the boxes. Huawei and ZTE currently struggle with the 'good enough phones' and 'strong brand' bit.

      Just a hunch.

      • KenC

        The problem for LG is that Samsung is ticking all the boxes a little faster than they are. Plus, I'd wager that most of their profit is made in their home market, Korea, and there, Samsung has also been eating LG's lunch.

      • I'd agree they are way behind Samsung. But in handsets they still seem to make nice products, have a strong brand, they're aggressive, have excellent operator relationships etc.

        I'll be interested to see how they fare in the Q2 smartphone league table. They might overtake Motorola in Android sales to be #3 behind Samsung, HTC.

        But let's see

      • Huawei and ZTE are doing ok as OEMs for carrier branded phones just as HTC did before them.

    • kevin

      Windows Mobile didn't help Palm and Symbian didn't help SonyEricsson avoid market failure. Perhaps Android is different because Google has been able to keep up with Apple at a good-enough pace.

      • Niilolainen

        Very good points re WinMo, Symbian and Android. That was back in the day before OS really mattered and competition was based on other things such as scale, channels the whole confrontation strategy package.

        Now things are different. As long as Android stays good enough relative to iOS from an elopsystem point of view then LG and their ilk have a shot

      • SE's Symbian efforts after the P910 were dismally poor. P990 had too little RAM, a slow CPU and was a year or so late. They continued for a while after that before releasing some dismally poor WinMo phones too.

        The OS wasn't really the problem, it was the hardware, which was always underspecified. Nokia were eating SE's lunch.

        Android just doesn't run on the dismal hardware SE were using for their Symbian UIQ and WinMo phones. SE's first Android phones were marginal though they seem to have learned that they can't skimp on hardware now if they want to compete with Samsung and HTC.

  • Simon

    I remember when Nokia was a progressive and forward looking company, who took design seriously. Sketches for futuristic devices were created by designers (even though the supportive technology were years ahead) and shown at design shows. The phones from the late nineties has solid, coherent, easy to use devices and they were great at segmenting their line of products in meaningful ways; music phone, n-gage, business and etc. But at some point they slipped. Their devices lost coherency and seemed to mimic pc's more than integrated devices and the difference between the models became blurry and crippled. Design became a pretty shell around a mediocre standard device. It's sad to see such a downfall, but it is deserved.

    • maddoguk69

      Actually I think N-Gage was the point at which they slipped. It was a device where neither the hardware nor software was up to the job of providing the very proposition upon which N-Gage was marketed. The hardware wasn't there, the development tools weren't there, the distribution platform wasn't there, none of it.
      Apple *always* waits until they can implement without compromise, and they've demonstrated that they're not afraid to leave things out until they can be done properly, the big example being cut and paste, but also the whole SDK thing. It makes me chuckle when I hear people claiming that Apple only shipped an SDK because of developer unrest, as though something like Xcode for iOS could have been created from scratch in such a short space of time. It was always part of the plan, they just didn't ship it until it was ready.
      For a diametrically opposite example of this mindset, just look at RIM.

      • I haven't heard a definitive answer on this. Of course Apple had an internal SDK, so the creating it from scratch argument doesn't hold water. The better question is did Apple plan all along for 3rd party apps, or were they surprised by developer demand and scramble to put a polish on their internal SDK.

        Until someone at Apple tells the story authoritatively, we're just guessing. The evidence available doesn't make a strong case either way.

    • N-Gage was a horrible turkey.

      Post 2001 few of Nokia's best ideas were allowed to make it out of the labs. They usually got killed by a bureaucracy designed to reduce risk.

    • guest

      they never minded software, but focusing on merely hardware

  • Turnarounds are hard and difficult as you highlight, but are not impossible.
    Apple is a good example.
    From Marc Andreessen interview at D9:

    "The transformation of Apple is probably the biggest tech story of the last 15 years. They were 90 days from bankruptcy. Steve has really demonstrated there was nothing wrong with Apple that a few great products couldn’t fix. So if Apple was recoverable, I think any company today could recover. If the next version of Windows or Windows Mobile is spectacular, it could change."

    • Ted Kluaf

      You're kind of missing the decade of slow recovery initiated by the iMac, severe cuts, the online AppleStore, and brick and mortar Apple Stores in the first half and iTunes/iPod in the second half. The question is can a straight mobile phone company or mobile division recover on its own. Sure, one would think that is possible, but past evidence shows the odds are extremely remote.

      Hell, even suggesting that another company could achieve an Apple-like turnaround, irrespective of its particular market focus, doesn't seem very plausible to me.

    • Jaxian

      You're not seriously comparing Apple to Nokia, are you?

      Apple is an outlier in a league of its own. They largely control their own destiny and had one of the giants of business at the top to make the recovery possible.

      Nokia has terrible leadership, no revenue source outside of mobile and now wholly reliant upon Microsoft for the most important component — the smartphone OS. On top of that WP7 has fizzled in the marketplace with terrible adoption rates. I would normally agree that it's not impossible to come back, but those are reserved for exceptional companies. Sadly, Nokia isn't one of those.

      • I'd disagree. Nokia have been exceptional in their past.

        The problem today is that Nokia's historical strengths are not what they need now.

    • asymco

      Turnarounds are not impossible. They just have not been observed in the mobile phone market

      • Darwin

        Andressen was just as wrong about Apple as he has been about everything else. They were not 90 days from bankruptcy for one thing. That guys only claim to fame is taking credit for the work of alot of other people. Plus he helped run Netscape into the ground as well as a string of VCs. Why anyone listens to anything he says is beyond me.

  • poke

    The mobile phone market is an odd market because the carriers act as intermediaries between the manufacturers and the consumers. The model is, you choose a carrier, and then they give you a choice of phones. The carriers are a serious bottleneck and they make the market operate in weird ways (they essentially add an element of speculation). I think what's happening here is that a particular manufacturer reaches a point where the carriers lose faith in them and they can't regain their position (there are too many other companies competing for the carriers' attention).

    This model really makes no sense in a world of smart phones, where you're more interested in what the phone can do than what services the carrier provides, but only Apple has managed to disrupt the traditional model. The iPhone is the same everywhere. Android is still subject to carrier branding. At some point I think Apple will circumvent the carriers completely. It just has to convince them it can do a better job selling phones – and therefore a better job of sending customers their way – than they can.

    • frankk

      I am not so sure that this assertion is correct i.e. that carriers are the intermediary . It was probably true before Apple came on the scene, but they changed everything both for carriers and consumers. When the iPhone launched Apple chose the carriers and customers chose the carrier with the iPhone. Operators just had to respond. They really didnt want Apple coming in and taking a major part of the value chain away from them but in the end they had no choice…… I agree that no other OEM, despite their best efforts, has managed to develop the Apple market power. Many of the high end Android devices are broadly comparable to the iPhone in terms of functionality but in terms of brand and ecosystem they are way behind Apple. Right now I cant see this changing anytime soon with the possible exception of Nokia/MS where the brands/technology/market power just might make it and if if they are also willing to take the carriers head on as did Apple. Maintaining legacy carrier sell thru business model is setting them up for failure. IMHO this is going to be a difficult mindset change for Nokia tho. Maybe they do need MS to take them over and take carriers head on????

  • Gromit1704

    It was incredibly dumb to announce the demise of Symbian while the Nokia/Windows Phone was still vaporware. What were Nokia's customers supposed to buy in the next 6/9 months? Nokia's sales and profits were bound to plummet in the interim. A real cynic might think that Microsoft went public on the "collaboration" safe in the knowledge that before the products hit market they could acquire Nokia for a fraction of what it was worth a few months ago. But that would be very evil.

    • pk de cville

      Absolutely right.

      "What were Nokia's customers supposed to buy in the next 6/9 months?"

      You have to note that their customers aren't the same as their buyers; their customers are the carriers who, knowing Symbian is dead, are not buying Symbian. Normal users would probably not even be aware the handset is Symbian and could care less that it's going away.

      Their other customers are the Symbian developers who've just lost hundreds of $Millions in this knifing.

  • pk de cville
    • asymco

      Perhaps a blog could be set up to summarize Tomi's articles so that they can be understood.

  • Quite a nice article, even though they refer to Asymco without proper credit:

    • Darwin

      What do you expect. It's the Register.

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  • What's awesome to see is the correlated growth of samsung and apple which have the very similar rate of growth snce Q2'10, Samsung makes a lot of hardware elements for apple and are killing it with galaxy devices.

    Im very interested to see where their bitch fight over interface patents go and what impact it will play on samsung's growth

    • How is Samsung "killing" Apple with the Galaxy devices. The Galaxy Tab was a huge loss with local Costcos selling them for $35 last Feb-Mar timeframe.

      The iPhone/iPad are still production limited in their sales.

  • Sam doji

    This os a question for Horaca

    How do you see the benefit of stock split for Apple now that the stock price is range bound for 7 months with a PE decoupled of Its earning
    as you rcently présentes.?

    • asymco

      I cannot see what the benefit to splitting stocks could be.

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  • Agree with @cdelrosso It is all about perception, both consumers and finance audience

  • Niilolainen

    Hmmm… Did the RAZR not see at least a temporary revival of MOT's fortunes some years ago? If they'd have followed that up with another hit, would that have changed their history?

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  • Cip

    I remember having a Bosch phone a billion years ago. I wonder what happened to them, considering I haven’t seen a Bosch mobile phone ever since.

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  • Is LG currently making profit?