The Cost of Watching Versus Doing? $126 Billion!

Recently it was reported that Nokia has been discussing with both Microsoft and Huawei the option of them buying its mobile-phone business. Nokia also recently suspended the company’s dividend. It is clearly panic time at Nokia.

While they traditionally dominated the low-end cellphone market, they have been losing significant market share in that category to Chinese competitors. They have put virtually all of their energies behind their very late smartphone entry called Lumina, which has made no dent at all in the massive market shares that have been built up over the years by Samsung and Apple.

What a dramatic change versus 2007 when the company was announcing record revenue and profits and achieved its all-time-high stock price. On the other hand, some of the actions by Nokia management back in 2007 were clear signals that Nokia was headed for trouble. For example, just after announcing stunning third-quarter financial results, which were almost exclusively due to their cellphone sales, not their smartphone entry, the CFO proudly stated that “even when we are selling a $40 low-end cellphone, we are making gross margins in the high 20% range, just like our $400 smartphones. Nobody else can do that.”

Watching the smart phones?

Their great pride in their cellphone business caused them to dismiss smartphone potential. In fact when analysts strongly questioned the CEO about in incredible innovations recently released iPhone and the Android smartphones, he assured them Nokia was “watching those two new entries closely.”

Well, Nokia watched, but basically did nothing for the next three years and the financial results plummeted. Then, in 2010, the Nokia board finally fired the CEO and hired an outsider from Microsoft to lead the company. While that CEO made some good moves by scrapping their existing smartphone operating system and latched onto the Microsoft entry, and finally produced the Lumina smartphones that are at least somewhat competitive with the iPhone and the Android entries like Samsung, it is way too late and the company continues its struggle to fight off total collapse.

Huge market value decline

Nokia has seen its market value decline for the $140 billion range in 2007 to today’s $14 billion. That is a staggering loss of $126 billion! The stock price has gone from the high of $39 in 2007 to today’s $3.80.

So…why would a smart bunch of folks running Nokia in 2007-2010 just “watch” their competitors? While they were funding a huge R&D budget at the time, and a lot of what they were doing in R&D was leading edge stuff, none of it ever made it to the marketplace. What was the problem? Here is my take:

# 1. Pride

In 2007, the business press was full of quotes by Nokia top management about the profitability of their cellphone business, while they dismissed the very small but fast growing smartphone segment. Clearly Nokia management was incredibly proud of their record profitability, all-time-high stock price, and their massive 40% market share of the cellphone business, more than Samsung, Motorola, and Sony Ericsson combined.

# 2. Bureaucracy

To be clear, the R&D unit of Nokia in that 2007 period can’t be faulted. As mentioned above, they developed all kinds of smartphone and tablet prototypes during that time, but the company was so bureaucratic that nothing could get to the market place. Alastair Curtis was Nokia’s chief designer from 2006 to 2009 he said recently to a Wall Street Journal reporter “You were spending more time fighting politics than doing design. It was very hard for the team to drive through any change.”

# 3. Protecting the Status Quo

By 2009 there was a growing realization by Nokia management that the modified Symbian operating system (Symbian was their cellphone OS) on their very weak smartphone entry was not robust enough to provide users with the kinds of things Apple and Samsung had been putting in the hands of consumers for the past three years. A team was assembled to generate a totally new smartphone OS to be called MeeGo. Unfortunately, the team had to fight for resources and management attention and the effort went nowhere.

What a sad story. But we see it all the time (remember Kodak!). No matter how successful you are, tomorrow is a new day and you better tackle it with a vengeance! Your competitors are.

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