Nokia cedes smartphone crown to Apple

Terrible second quarter sales in 2011 for Nokia, coupled with a strong performance by Apple, marks a fall from grace for Nokia, which has been the industry leader for more than a decade.

07/22/2011


“The only thing constant in life is change." - Francois de la Rochefoucauld

Perhaps no phrase better describes the mobile handset market. Those of us that follow this industry have long grown accustomed to the continual fluctuations in what has become one of the most competitive markets in the world. Whether it’s the rise of a new industry player or the development of an innovative technology, the handset market rarely stops for a moment to take its breath. (I should note consumers also learn to appreciate the pace of change in the industry when their new handset is considered outdated before they even learn how to change its ringtone).

However, despite these seemingly never-ending shifts, one constant that has remained is Nokia’s place as the global market share leader in handsets and smartphones. Nokia has been number one for so long that despite losing significant market share in recent years, it was hard for many of us to envision anyone but the Finnish phone-maker at the top of the OEM charts. However, with yesterday’s announcement of its abysmal 2Q performance, Nokia has officially ceded its smartphone crown to Apple, with iPhone sales outpacing those of Nokia’s smartphone portfolio by about 4 million in the most recent three month period. 

So how did we get here? How did a relative newcomer to the mobile handset market overtake the industry giant that invented the smartphone back in 1996? Just as recently as the 1st quarter of this year Nokia sold 6 million more smartphones than its rival from Cupertino. And in 2009, IMS Research estimates Nokia’s smartphone business represented nearly 38% of the total market, more than that of RIM, Apple, and Samsung combined.

At least part of the reason for this swing must be attributed to Apple. Since its introduction in 1997, the iPhone’s intuitive user interface and capacitive touchscreen has resonated with a wide range of consumers. After its initial introduction in the US market, the product has been successfully rolled out throughout Europe and Asia and has become one of the world’s hottest consumer products. The device is now viewed as a status symbol in many countries. I actually used to live across the street from an Apple store and I still remember the crowd of customers that camped out overnight to be among the first to get their hands on iPhone 4. Recently, this sort of fanaticism seems to have spread to China, which now represents Apple's fastest-growing region in terms of sales, including a 250% increase in iPhone sales over the last year. Clearly Apple has done some things right.

While I give Apple a great deal of credit for what it has is accomplished, it is also clear Nokia’s own poorly executed strategy and questionable decision-making placed it in very vulnerable position. The company’ s drastic choice to drop the Symbian platform that has historically powered its smartphones in favor of Microsoft’s Windows Phone OS will be debated for years, and to be fair, the long term outcome of this decision will not be known until the company actually releases some Windows-based devices. However, the short term consequences of this decision have not been surprising. Sales of Symbian-powered smartphones (which is all Nokia has in its portfolio) have fallen off the cliff since the announcement, evidence by the 34% year on year drop revealed in the 2Q earnings release. This fall-off is being seen in all regions, including -30% YoY drop in Europe and an astonishing -41% YoY decrease in China. It’s hard to imagine that this is what Stephen Elop had in mind when he made the OS transition announcement this past February.

So what does the future hold? In the short term, the prognosis does not appear to be good for Nokia. The company’s first Windows-based device isn’t expected to reach the market until the 4Q, and it will likely be 2012 until we see any significant volume. In the meantime, even Nokia’s traditionally loyal customer base are likely jump off the Symbian platform and turn to other vendors. Apple clearly has considerable momentum, which will be rejuvenated again with the probable release of the iPhone 5 this fall. And I expect the company will expand its potential customer base even further by releasing an entry-level iPhone later this year. Of course, Apple isn’t Nokia’s only competition, and the continued uptake of Android-based devices will also grab large portions of Nokia’s remaining market share.

For Nokia to compete in this highly intensely competitive market, simply releasing a variety of Windows-based devices will not be enough. Motorola’s recent performance attests to the fact that merely producing a diverse smartphone portfolio is part, but not the entire solution. Nokia’s needs to offer devices that possess differentiating features that stand out in the crowded smartphone marketplace. Nokia is apparently cognizant of this, and has already announced it will offer customizations and capabilities that will not be seen on other Windows Phone devices. At the same time, the company will have to work with Microsoft to develop a close relationship with the application developer community  (recent numbers suggest there are only about 25,000 apps available on the Windows platform, compared to some 400,000 for iOS). Only after taking these steps will Nokia be in a position to try to reclaim some of its former glory.  



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