Over the course of the last several months, dozens of companies have announced plans to enter the smartphone business. With an open platform available in the form of Android, there is little to stop anyone from joining the fray in much the same way anyone could enter the personal computer market twenty-five years ago. Obviously the vast majority will fail for all types of reasons, but the motivation is the same for all – it is the next new thing and provides a vehicle for growth, particularly if you have a moribund top line right now.
Rarely do you see a company considering jumping back in time while talking about the move as the next logical strategic step forward. Yet that is just what Nokia CEO Olli-Pekka Kallas did in an interview with Finnish reporters the other day when he announced that the company is considering entering the laptop market. No, that’s not a misprint! Olli-Pekka indicated that he sees the mobile phone and the personal computer market converging and that because millions of people have their first Internet experience on a phone, this somehow suggests that Nokia should jump into the laptop game.
While the market “convergence” vision has been flashing like neon lights on the highway ahead for quite some time, Nokia’s laptop logic eludes me. If anything the number of laptop players had been shrinking because of very difficult competitive dynamics. This trend has recently reversed somewhat with the introduction of new netbooks -- pushed primarily by Intel, which needed a platform to sell its new Atom microprocessor. Now, however, that means there are dozens of small companies in Taiwan and China who are splashing into the netbook pond. (See LG & Intel Work on 'Future' Device and Qualcomm Has New Gobi.)
However, aside from the competitive dynamics, Nokia would face a number of issues that would make a laptop venture a classic disaster. Let’s examine them.
First, what does Nokia bring to the party? Nothing really. That may sound harsh, but the vast majority of laptops are designed to spec by the Taiwanese original design manufacturers (ODM) and the parts are all off-the-shelf. So, in essence, Nokia wouldn’t even be an assembler of other people’s technology, they would just be making a list of what it should include.
Today, a large percentage of Nokia’s handsets are distributed via the service providers. Do they believe that that will be the case with a laptop or netbook? I doubt it, but it will mean a far heavier reliance on retail then the company currently has. And while Best Buy or XYZ will want to carry Nokia handsets because they are No. 1 in the business, Nokia laptops would be just one of the many vying for shelf space at a retailer.
When you or I buy a laptop today, its network connection is built in as virtually 100 percent of all units include WiFi. If Intel has its way, that built-in connection will quickly transition to WiFi/WiMax, but that’s still down the road a piece. If Nokia truly believes in “convergence” it would appear that their laptop would need to support a cellular network as well as WiFi (at a minimum). Is that simply to be achieved as they do today via a USB cellular card? That would seem to be Nokia’s only reasonable solution since they would not know what air-interface technology the customer’s current cellular account utilizes.
I know some will suggest that Nokia is addressing the problem every day with their handsets, which, obviously, are specific to GSM, WCDMA, and/or CDMA. That’s true, but they’re also dealing in volumes that are north of 100 million of units each quarter. It is a lot easier to do financially at those levels than it is just starting out with laptops.
There is one last issue that will raise its ugly head and that will be an uproar from its investors if Nokia goes through with this.
Currently, despite the depressed conditions in the handset industry, Nokia’s handset operations deliver gross margin in the mid-30 percent range and operating margin of about 17 percent. And it was a tough year! One of the reasons for these margins is size of the company’s handset operations. The company reported revenue of €35.1 billion in 2008 on sales of more than 450 million units. Adding to this advantage is the fact that Nokia has its own intellectual property (IP) in the devices in the form of software and circuitry designs for the digital baseband and applications processors. Semiconductor suppliers like Texas Instruments Inc. (NYSE: TXN), Qualcomm Inc. (Nasdaq: QCOM), and Broadcom Corp. (Nasdaq: BRCM) are willing to provide Nokia-specific solutions because of the volume potential that Nokia can deliver. Along with that comes better pricing for Nokia and pretty good margins relative to their peers, as you can see in the table below.
Table 1: Handset Operating Margin - Q4/08
Nokia
LG
Motorola
Samsung
Sony-Ericsson
Margin
17%
11%
Loss
9%
Loss
Source: Company Reports
In the land-of-laptops, there is no Nokia IP and, as a result, there will be no margin premium. For comparison, Dell Inc. (Nasdaq: DELL) and Hewlett-Packard Co. (NYSE: HPQ) have mid-single-digit operating margins. Granted those figures include more than just laptops but these two companies are also pushing far greater volumes than Nokia would be. Given the fierce competition in that market, I can’t imagine Nokia’s operating margins would be significantly different from that of Dell or Hewlett.
And that’s where the investors come in. They’ll have a fit! No one wants to see a company that they have stock in commit suicide. That’s what Nokia would be doing by entering a new business in which growth is slowing, they have no competitive advantage, and the operations are going to be a drag on corporate margins. It is a prescription for how to send your stock south in a hurry.
Rather than wasting time and resources on this white elephant, Nokia should continue to concentrate its efforts on developing a credible smartphone. That is where the growth is and will continue to be, but the company’s offerings have demonstrated that it was late to the party. (See Nokia to Cut Phone Production.)
As I have noted on these pages before, I think that smartphones are going to squeeze the mid-tier of the handset business to the point that it will be far smaller than it is today and that segment is Nokia’s sweet-spot. Right now, the question management needs to answer is, “Can they catch up?” (See Chaos in the Wireless World.)
Well, Im not a shareholder of Nokia. As a consumer and employee in the business, though, I would love to see what Nokia could do in the laptop marketplace. I'm sure they could bring some fresh ideas, much like Apple has revitalized the handset market with iPhone.
Besides, a laptop adventure wouldn't hurt Nokia's profits much. Ngage is a disaster, but Nokia is still doing just fine.
Maybe (hopefully) it's not a laptop and we know today. Maybe it's something like that described on the Qualcomm Snapdragon page here: http://www.qctconnect.com/products/snapdragon.html
I wouldn't be so pessimistic. I can see Nokia bringing a few things to the market. This is especially the case if the laptop market goes in the same direction as the mobile handset market: Focus on new markets such as India and China, low price etc.
First, of course, a brand. Nokia is a much bigger brand worldwide than any of the laptop manufacturers, even including Apple.
Secondly, volume. Nokia is a much bigger company with much bigger volumes than the laptop manufacturers (eg about 4 times the entire Dell revenue). If laptop prices do drop to $100-$200, this will matter. The handset market is higher-volume and shorter-life cycle than the laptop one.
Third, channels. Nokia is a truly global player. Also, it's quite possible that wireless operators will start selling and subsidizing laptops to promote their data services (already happening in Europe anyway). Perhaps wireless operators will become the key channel for laptops in the future?
The key problem is probaby the margins, which are traditionally low to negative in the PC marketplace. However, one should remember that Nokia is the only company in the handset market with these hefty margins - the competitors are struggling to break even much like the PC companies.
The Fins are obviously very skilled. The whole reason Nokia became the dominant handset provider was that they understood before anyone else that handsets (we're talking early 90's) were transitioning from boxes sold by price and technical specs to consumer products sold on design and brand. They could do the same with laptops.
Actually, all they care about is that Nokia continues to put out "successful" products that grows the top and bottom lines so that the stock price goes up. However, if the new product's margins are substantially lower than the current corporate margins, earnings estimates don't go up, the valuations contract and investors look for other places to put their money.
Anything's possible but realistically, I don't see Nokia doing anything that won't deliver a severe margin hit. Their operating margins today are a function of massive volume and their IP that's embedded in the parts. Those two conditions are not going to exist in a laptop/netbook/whatever.
"Success" can be defined in a number of ways. Unfortunately, I don't see a path for this to be a financial success and that's going to upset a lot of investors.
A netbook running Symbian OS (or Android, or whatever) could be good -- optimized power consumption, always-on, integrated 3G, light-weight form-factor.
Potentially Nokia (or others) could build something *way* better than the mini laptops on the market today at a cost not much different to, or even lower than, a smartphone.
If it’s just a copy-cat notebook similar to that designed by a zero margin ODM, then yeah, Nokia will struggle. But what if it can build something better?
I noted on my twitter stream the other day about a demo of Symbian OS running on an (unnamed) multicore processor during a media tour of the Symbian Labs last year. That didn’t seem to be aimed at the traditional smartphone market. See http://twitter.com/gabeuk
I agree that the laptop market is a tough one, where every brand name gets its design and manufacturing from Taiwanese ODMs. However, the cell phone market is going in the same direction. That is particularly true for smartphones. Even Nokia now gets some of its handsets from ODMs.
In the end, I think success in both laptop and handset markets depends a lot on a companie's marketing ability and its brand recognition, both of which are strong points for Nokia.
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