In the Hutong
Nokia made a major announcement today, telling the world that in 27 weeks the company will significantly reorganize itself. Ostensibly, the reorganization is to focus on “future growth opportunities around converging Internet and telephony services.”
If that sounds pretty innocuous, you can be assured that this is intentional. Using buzzwords like “convergence” and “Internet,” and even aping Apple and Motorola by talking about “rich, mobile experiences,” Nokia appears to be taking a logical step in its evolution.
I applaud Nokia’s efforts to change with the times. But as I read between the lines in the reorganization announcement, I’m disappointed to find that this reorganization merely appears to solidify the Finns’ traditional approach to the market, an approach that is, in my opinion, tragically misguided.
Getting past the obligatory jargon-laden CEO quote and digging into the Tell You As Little As Possible details, some interesting points pop up. First, the company is moving to a more vertical structure, an approach that should give CEO Olli-Pekka Kallasvuo more direct control over the company. That could be good thing for Nokia, arguably making them more nimble.
They’re also apparently pulling their supply chain, sales channel, and marketing activities into one unit, divorcing them from the product divisions. Whether that’s going to work or not depends on the details – me, I’m a big fan for keeping the marketing close to the product and both of those as close to the ultimate customers as possible. But let’s wait and see.
The Rise of Services and Software
The real wake-up comes when you look at the structure underneath Nokia’s consumer products division, Devices and Services. Devices, okay, that’s handsets. We get it. The real juice of this reorganization is in the introduction of a new Services & Software unit. The wording refers to that unit as “reflecting Nokia’s strategic emphasis on growing its offering of consumer Internet services”.
This is not a small move. Creating an organization inside of Nokia that enjoys a status co-equal to that of the group that actually manufactures the mobile devices means that Nokia sees its future at least as much in the services side of the business as in the devices.
That’s an announcement clearly designed to make investors wiggle. The problem is, the investors are not the only people Nokia needs to please.
Competing with Customers
Nokia believes the Services unit will help it “offer its customers complete solutions” that are “coupled” with their devices. Now, when Nokia refers to its customers, it is primarily referring to mobile network operators. So what it is saying here is that it wants its Services team to come up with end-to-end packaged solutions that it can sell to operators as is. One assumes Nokia will sell the software, or perhaps just partner with the operator.
In short, the justification for the services unit is so that Nokia can sell a single integrated solution to the operators – network gear, software, services, and devices. In other words, Nokia still dreams of owning the whole value chain, and selling it all as a package to operators.
The question – particularly in Asia, and especially here in China – is whether the operators are even interested in that proposition.
If anything, operators in Asia have demonstrated that they are willing to make mistakes – sometimes a series of very expensive mistakes – in their quests to develop bouquets of services that users find exciting, relevant, and worth spending money on. Initially these operators have tried to go it on their own, but most of them have come to the realization that they are better off working with a dependable group of service providers.
In the case of operators like SKT in South Korea and DoCoMo in Japan, the most successful mobile operators have created their own branded platforms that they have used to make their brands mean more than pipe providers. China Mobile and Unicom are studying them – and operators like Orange and Verizon – with great care, and are conducting their own experiments. And they seem to be getting closer to the right mix.
The question is – what does Nokia have to offer to mobile operators that the mobile operators cannot – or do not – want to create or acquire through partnerships with dedicated service providers? And why would they want prepackaged “complete” solutions over bouquets they assembled for markets and customers they understand far better?
Nobody Loves a Value-Chain Hog
As Nokia publicly preens itself for being different than what it derisively calls “point solution vendors,” it risks alienating the entire mobile industry. It makes operators uneasy about letting them too close, service and software providers leery of working with them, and it hands their competitors all of the ammunition they need to sow fear, uncertainty, and doubt about Nokia’s ulterior motives with everyone else.
Nokia may not care. Their scope of their vision is now clear. They are not satisfied with being the market leader. They want more. They want to own the ecosystem – or as much of it as they can get – and either lock out other players or force them to play on Nokia’s rules.
In other words, Nokia wants to be Apple. Nokia hardware, Nokia software, Nokia back-end, Nokia services, all on Nokia’s terms.
There are only a couple of problems with that. First, Nokia is not Apple. Despite pretensions to the contrary, it lack’s Apple’s cachet, design leadership, superior user experience, and history of delivering and selling a closed system.
Second, despite some resemblances, the mobile business is neither the computer industry nor the consumer electronics business. Apple has created an entire closed value chain because it has never had to work through a major intermediary. Nokia cannot realize its vision of service leadership without running afoul of its major customers – the operators.
Get Back To Where You Once Belonged
Nokia’s market share leadership in mobile devices has served to obscure some fundamental problems in the business. The integration of Siemens on the networks is still unfinished, and the hollow-eyed looks among the lunch crowd at Pacific Century Plaza in Beijing underscore that layoffs are ongoing. In the mobile business, the design effort is still two years behind Motorola and a year behind Samsung. Nokia runs third in mobile entertainment behind Sony Ericsson and Motorola, and its leadership in entry level phones will be challenged by a resurgent Motorola and a Samsung that is now determined to take its fair share of that market. And, of course, Nokia is still recovering from its failures in mobile games and its perennial weakness in the US market.
Sure, none of these problems is insurmountable. But they are considerable, and collectively they argue for the company to focus on its fundamental business rather than undertake a major reorganization and shift focus to services and software.
Can Nokia do it all at once?
As I close this piece, Nokia’s NYSE shares are up less than one half of one percent. That’s far from a resounding endorsement, and Motorola is up by the same amount. It’s clear the Street is as skeptical as the Hutong.