Sherlock Holmes & Hound of the Nokiaville? Why Did Nokia Market Share Crash-Dive? I May Have An Answer..

I was definitely stunned yesterday, when analyzing the Nokia Quarterly Results. The findings were so utterly opposite to what I had expected. I was engaged with several discussions, some who had emotions of 'we told you so, Tomi' and at the other extreme there was Steve Litchfield of All About Symbian, who suggested I was over-reacting.

It was Steve's comments and our back-and-forth on Twitter, that made me re-think the issue. Steve is one of the experts of our industry that I respect immensely, and a very wise, calm voice. I was thinking, that maybe I was now spreading undue panic, maybe I was yelling 'Fire' in a crowded theater and just making matters worse. Why did Steve think this was not such a big deal. Steve argued that when you are the biggest in the market, you tend to grow more slowly - as a mathematical measure of 'growth rate' and the smallest players can have far faster 'growth rates' yet their total sales growth be smaller. Fine, this seemed reasonable but - it came to market share. Previously, in most quarterly results, and most annual results, Nokia market share in all mobile phones, and in smartphones, was very stable. Thus Nokia's growth numbers would be roughly in line with the industry growth number. If Nokia's number was a little bit below the industry overall growth number - like from Q4 2009 to Q1 2010 - then of course Nokia's market share would dip a little - one or two percentage points from one quarter to the next - and if Nokia performed better than the industry - as it did last year from Q1 to Q2 - then correspondingly Nokia's market share would gain one or two percentage points. This is 'normal'.

What happened in the past 6 months was utterly abnormal. Not unusual in the mobile telecoms sense - unusual, abnormal in fact, in ANY global industry serving mass market customers. So we have to understand why this truly is alarming, so first - understand the unpredecented growth rate of smartphones in 2010. Never before has any mass market consumer goods industry worth more than 10 Billion dollars in annual revenues (smartphones were roughly worth 25 Billion in 2009) grow by 75% in just one year. That rate of growth is typical of new industries, tiny ones, of the size of under 1 Billion dollars, but once you sell tens of Billions of dollars, then the industry never grows at 75% or more per year. The PC industry at its peak, the plasma screen TVs, the hottest fight of Playstations vs Wii vs Xbox never got this level of annual growth, nor did Blueray DVD players etc. We do not see this kind of growth in any industries, not even in mobile telecoms, I believe that 2010 was the peak year of highest growth rate in smartphones and now this year 2011 we'll grow at a rate closer to 50% from last year.

Because the growth rate is pretty much unprecedented and phenomenal, it hides 'bad news' inside exceptionally great growth numbers. So take Nokia smartphones. They grew 36% in one year! In any other industry you can imagine, in cars, in plasma screen TVs, in personal computers, in clothing, in soft drinks, whatever - if you grow 36% in one year, it is a fantastic year! Except if the industry grew 75% and you grew the slowest of any of the big competitors - it means you lost ground (compared to your rivals). While you grew numbers, you effectively lost sales that your rivals picked from you!

MARKET SHARE MARKET SHARE MARKET SHARE

I am obsessed about market share. Why is that? I wrote 'the' book for the mobile industry on how to win in the market, for carriers/operators, a book called 3G Marketing (my third) co-authored with Timo Kasper and Sara Melkko. It was not just a bestseller and gone into multiple printings and editions and translated - it was celebrated by the world's biggest publisher of technology and science books, John Wiley & Sons, as the fastest-selling telecoms book of all time - when they brought me to the world's biggest telecoms event (The GSM World Congress) to a special book-signing event for the launch of the second edition. That book is all about market share, how do you build loyalty in mobile telecoms, how do you handle churn, how to you gain customer affection, how you do pricing, etc if you are a mobile operator/carrier.

And why would I know how to write a book like this? Because I've done it. Back in the 1990s, I led the team at Elisa/Finnet/Helsinki Telephone that set the world record for taking market share from the incumbent! I own a world record in telecoms market share battles! I really know what I am talking about. The long-range race is for market share - and the only major constraint you have, is that you have to remain profitable, you should not dip into loss-making in market share battle - that is non-sustainable in the long run. But as long as your company is healthy (makes profits) then the battle is for market share. This is my history, this is my legacy to the industry, this is core to much of my consulting, and this is what I keep focusing on, at this blog. Not about the market valuation of share prices (I do not allow any discussion of market share prices here on this blog, this is not a blog about Wall Street speculation) but I obsess about market share.

Market share wins. Sony's Betamax VCR was technically better, in every generation than the VHS video recorders, yet Betamax lost and VHS won (I remember, I owned VCRs on both standards haha). The Apple Macintosh was the clever smart 'superior' PC but the IBM-compatible/Windows-compatible PCs took over 90% of the market and the Mac sells at about 4% of all personal computers annually. The Concorde was technically the superior aircraft but the lumbering Boeing 747 is what won the market share of jet aircraft in the 1980s selling over 1,000 planes while the Concorde managed to sell 14 units. Market share market share market share. In the mobile telecoms world, GSM took over from CDMA, not because it was somehow technically a better solution (in some ways it is, in other ways it is not) but because GSM got the market share, globally (about 90% of all mobile phones in use are now on GSM or compatible networks).

NOKIA LOSS QUANTIFIED

Nokia did GROW smartphone unit sales. The 4Q Results tell us that Nokia grew smartphone sales 7% from Q3, and 36% from the same period one year ago. That alone seems to be good news. If the industry sales were 'flat' for the year, then any growth (or loss) of sales would directly relate to market share. If you grew 5% sales (in unit sales, not dollar value), and the world total sales number was flat, then your market share grew 5%. If the market shrunk 5%, and you simultaneously grew unit sales by 5%, that means your market share actually picked up 10%. You see what I mean. It is all about market share.

In June of 2010, after Q2, 2010, Nokia's smartphone market share stood at 39%. In Q3 it fell dramatically to 33%. Now in Q4 it fell further to 28%. Yes. In only six months, Nokia's market share in smartphones fell from 39% to 28% - Nokia lost more than one quarter of its total market, in just six months!

This does not happen anywhere! When Toyota the carmaker had its global recall problems with its breaks, it did not lose one quarter of its total market in a year, far less than in six months. A car-maker will have a great year if they pick up one tenth of their market and may have a horrid year (like Toyota did) if they lose one tenth of their market in one year. When Sprint-Nextel the US telecoms carrier/operator made its famous marketing blunder of 'firiring the Sprint 1,000 customers who complained too much' - Sprint experienced an instant exodus of customers, but it did not lose a quarter of its customers in a year, it lost about a tenth. When Motorola experienced the iPhone effect and suddenly the Razr went from the hottest phone on the planet to the undesirable, Motorola lost one quarter of its customers - in one year, not in six months.

This level of Nokia market share loss is pretty much unprecedented. I have been a close follower of global business for over thirty years, I honestly do not remember any such instance in any industry where any major global brand lost a quarter of its total customer base in a period of only six months. Even airlines with air crashes or devastating strikes do not suffer this badly. Cars with 'unintended acceleration' (ie 'killer cars') like Audi experiences in 1995 did not destroy a quarter of their customer base globally in six months. This might be something like Tylenol maybe (a US medicine that had deadly poison in it) which I recall was in the 1980s - or perhaps some terrorism action - like Israeli oranges that were once injected by the PLO with some poisons in the 1970s, something like that which can destroy a quarter of your market in half a year.

But Nokia's market share in June of 2010 - half a year ago - was 39% of all smartphones. Its now 28%. How big is that loss? Its 11 million smartphone units of 'opportunity cost' as the economists say. This is what Nokia should have had. How big is that? Its more than all HTC smartphones! Or its more than all of Samsung's smartphones. Or its more than all of Motorola and all of SonyEricsson smartphones - combined. That is how much of Nokia's market has vanished in just six months.

What is it in money? 11 million smartphones in one quarter at Nokia ASP for smartphones of 156 Euros is about 1.7 Billion Euros (2.2 Billion dollars). And at 12% profit margin for all phones (probably more for smartphones, but Nokia does not break down that number for us) means at least 265 Million dollars of abandoned profits. For a full year, Nokia has just destroyed almost 9 Billion dollars of total revenues and 1 Billion dollars of total profit! This is not market share that Nokia could have 'attempted to gain'. It is market share that Nokia used to own! These were Nokia customers who had faithfully been loyal for years. They were not lost in 2007 when the iPhone came or 2008 when the App Store launched or 2009 when the N97 was a disasterous phone or 2010 when the N8 was delayed. Nokia lost one quarter of its customers in the past six months.

These customers were lost between June of 2010 and December of 2010, when Nokia had finally released its best touch screen operating system, when the Ovi Store was well established as the world's second best-selling app store for handset makers behind only Apple, and with the N8 finally released. Do you understand now, why I obsess about market share. If someone focused on unit sales - Nokia grew 7% in just one quarter - that is excellent growth in most industries, in the car industry, seven percent growth in one YEAR is excellent growth. Nokia unit sales grew 36% in one year, that is fantastic growth in just about any other industry and the CEO would be getting fat bonuses. It was so disasterous at Nokia that the CEO was fired. You cannot study this industry by focusing (only) on unit sales. You have to look at market share.

Nokia also reported better margins, and better profits from the previous quarter. This in almost any other instance is good news. I am devastated. Its not that I am somehow a communist, hating profits haha. No, I am a Finance MBA, I fully have internalized the corporation's and the CEO's mission to increase shareholder value - yes, I fully support the need to be profitable, and a growth in profitability is good news, in most cases. But if the company is already profitable (as Nokia was in Q3) and the growth in profits comes at the expense of market share - that is a perilous situation. Market share is long term viability. I don't believe in excessive profits, and I don't believe in excessive market share. But a sudden drop in either (market share or profits) is bad news. I signalled it here on this blog when reviewing Nokia numbers earlier in the year, that the profit margin was slipping dangerously low, but that reflected a global economy, where most of Nokia's traditional rivals (Motorola, SonyEricsson, LG etc) were reporting losses. Other major industries like Banking and Automobiles were so badly in the red, that they needed government bail-outs! Nokia was still making profits in its handset unit - but those profits had shrunk to very slim. That was cause of concern but - as long as you are profitable, then you focus on market share... That is my mantra. Once you are not profitable - that is not sustainable, that means you may go bankrupt and be gobbled up like Palm was - so if you can't make profits, then fix that, but Nokia was making profits, it should focus on market share.

So what do we know. Nokia lost market share from 39% to 28% in only six months. That means, Nokia has abandoned one quarter of its total smartphone market in only half a year. I have never witnessed such a wholesale destruction of any company's market share in a similar period of time. The nearest I can find, is Motorola which lost a quarter of its market in all handsets from 2006 to 2007 in a period of one year. Nokia smartphones today is twice as bad, as Motorola Razr led mobile phones was when facing the iPhone in 2007.

THE DAMAGE IS HIDDEN

This is such an important point, and when I debated it with Steve Litchfield on Twitter, it hit me. The disaster is hidden inside Nokia's enormous numbers. Nokia has 'too much of a market share lead' that this damage is 'hidden'. Nokia has such a 'buffer' that even abandoning one quarter of its market, Nokia is still by far the biggest smartphone maker. Its pain is not visible in any way! But market share does not lie. Let me show with a familiar example.

Lets go to my favorite analogy to phones: cars. The world's biggest car-maker in 2010 is (by a slim margin still) Toyota ahead of GM. What would happen if Toyota lost one quarter of its market - I am not destroying 11 market share points because Toyota's total market share is only 12%, so we can't drop them to 1% haha, that is destroying nine out of ten customers. No, the same 'ratio' of loss. If Toyota lost one quarter of its market, and instead of selling 8.4 million cars, they would only sell 6.3 million cars. That is the same proportion of loss as Nokia going from 39 million to 28 million sales. If Toyota fell from 8.4 million to 6.3 million, Toyota would be in the news headlines all over as the ultimate catastrophic collapse of a global market juggernaut - Toyota would fall behind General Motors, AND Renault-Nissan AND even behind Volkswagen Group, landing in 4th place, just ahead of Ford Motor Company. Do you see what I mean? It is a totally exceptional situation in mobile telecoms, that Nokia has such a massive lead in its own industry, that even when it loses one quarter of its market, we 'do not even notice' because before this happened, Nokia was the biggest, and after it happened, Nokia is still the biggest. Nokia still today is bigger than RIM and Apple, the two nearest rivals making smartphones - combined.

WHAT DID NOT CAUSE THIS

Lets now play Sherlock Holmes and try to find out what happened. Please read carefully, we have many possible suspects and we must examine each to see if they have a valid alibi or perhaps a motive and opportunity.. Many have been saying this is clear evidence how badly Nokia's smartphones are undesirable, the Symbian OS is old and the Ovi store is bad etc. The important point to understand is - that the Nokia market share has been stable - very stable, usually a variation of one or two market share points per quarter - for most of the past years. Yes the market share has been in gradual decline, but very gradual, on average less than one percentage point per quarter. And from Q1 to Q2 in 2010 - Nokia smartphone market share grew by two percentage points from 37% to 39%. There was no dramatic fall in any period in past years, until from Q2 of 2010 to Q3 of 2010, when the market share plummetted from 39% to 33%. And then the immediate next quarter from Q3 to Q4, another massive fall from 33% to 28%. The Nokia market share has been very flat - including many periods of slight growth - with gradual decline over time, and then utterly out of the blue, a catastrophic fall.

Something happened between Q2 of 2010 and Q3 of 2010. THAT is what we need to focus on. First, there was not abnormal external event, like terrorism, suddenly a Finnish Nokia exec writes some horrible cartoon about religious figures related to the Middle East and the world starts to boycott Nokia phones.. No, nothing like that. And its not like Sony batteries on laptop PCs that started to explode. No exploding Nokias in the summer of 2010. And we don't find cases of poison paint from China and children eating Nokia phones and starting to die. Or a poison cloud in an Indian town due to some chemical factory explosion etc. Or a big oilspill off New Orleans by Nokia's oil rig. No radiation damage like health causes like Toyota's brake problems and massive recalls, etc. No, there was nothing like that, we'd have covered it in the news. We have eliminated one possible cause for a catastrophic market share crash.

The reason cannot be 'Symbian is the obsolete OS' because it was equally obsolete in Q1, and more explicitly, the new OS was released at the start of Q4 - if Symbian was the reason, the fall should have happened in long before - and the decline should have mostly stopped by Q4. No, I know its popular to beat on Nokia for having a horribly old and obsolete and cumbersome and 'ugly' OS, Symbian, but we are exploring the cause for the dramatic fall in Nokia market share. It is NOT caused by Symbian. It cannot be, else the fall would have started many quarters before Q3 of 2010. Remember, the Nokia market share GREW from Q1 to Q2 using that horrid Symbian OS.

The reason is not Ovi store, for the same reason. The Ovi store was launched less than two years ago. Its been steadily growing. It became the world's second most-popular handset-maker app store behind only Apple's App Store during 2010. In the beginning of the year, Ovi was achieving activity at the rate of less than half a billion downloads per year (Apple gets 7 B per yer), today Ovi is doing three times better at about 1.5 Billion downloads per year. There was steady almost linear growth of Ovi. If Ovi was the reason, we would have seen a dramatic failure of Ovi around June or July of 2010 and after that, an wholesale rejection of Ovi. That Ovi keeps growing and grew steadily during the summer - guarantees us, that Ovi is not the reason. Sorry, you guys who hate Ovi store - that is not the reason why Nokia lost market share. Ovi is helping Nokia now in the second half, not hurting it.

Something happened in the summer of 2010. Well, Nokia did its second delay of the N8. That was times right then in the summer, that could be it. Very good my dear Dr Watson, yes what of the N8? It was delayed once before and the industry expected it for exactly that Q3 period, when it was suddenly delayed again. That could be it. Big disappointement, big drop in Nokia sales in Q3. That part of the pattern makes sense - but then Q4 makes no sense at all. If delaying N8 causes 6 market share point drop in Q3, then the launch of N8 three months later must achieve at least a partial recoverly in Q4. Not complete recovery, fine, but must achieve a partial recovery! What happened in Q4, after the N8 was launched, Nokia market share crashed a further 5 points! It cannot be the N8. It cannot be the 'delay to N8' because that would mean that in Q4 we must have seen a recovery. Because Nokia market share crashed FURTHER even after the N8 was released, no - the N8 delay is not the cause for this crash, even though the delay announcement is conveniently timed. That cannot be the reason either.

I know there are very VALID reasons to dislike Nokia's current product portfolio, its elderly Symbian OS, the Ovi store etc, and the frequent delays to flagship models but - those are long-term systematic problems, that will only cause long-term gradual decline. None could have caused the sudden drastic fall.

If not Nokia products, what of the competition then? Ah, yes! Now we have good cause to consider. The Apple loyalist have been waiting to yell out - obviously, the timing issue for June 2010 is the iPhone 4! The most celebrated and most anticipated new phone of the year. This is perfect cause and effect. Q2 of 2010 had only a couple of days of iPhone 4 sales in the USA, the iPhone 4 had its first real quarter of sales in Q3, and the iPhone market share explosion mirrors Nokia's crash in Q3. Almost perfect parallel. This must be the reason! Apple market share shot up 4% from 14% in Q2 to 18% in Q3, while Nokia market share fell from 39% to 33%. Yes, Apple grew 4 market share points and Nokia fell six points, but at least the vast majority of the reason for Nokia's crash is Apple. Has to be!

That makes very compelling sense, for one quarter only. Now the theory breaks down in Q4. Apple market share declined from 18% to 16% - and Nokia further declined from 33% to 28%. If the two were linked, if in Q3, the sudden drop by Nokia was caused by Apple's iPhone 4, then now that the iPhone market share has declined a little, then Nokia would have to have recovered roughly as much for Q4! It cannot be the reason. Yes, probably the iPhone 4 did take some Nokia sales but it also probably took some sales from Motorola and RIM and HTC etc in Q3. Because the pattern breaks down in Q4, we know it cannot be the reason. Nokia did not crash only one quarter, it crashed for two quarters straight - and in Q4, also Apple lost market share. The cause cannot be the iPhone 4 either.

It cannot be any of the other rivals either. Blackberry has been gradually losing market share, so it cannot be the cause. HTC and Samsung are not even big enough if all of their sales were the cause - and both were selling plenty of smartphones before Q3, the growth that either HTC or Samsung has had, is nowhere near enough, so it cannot be the Galaxy series of bada for that matter. No, the competition did not cause the Nokia market share crash. The competition probably gained from the change, but did not cause it.

THE EVIL VILLAIN IS STEPHEN ELOP.. I am kidding of course

Haha, we eliminate all other alternatives and what is left must be the reason, so says the book of our master, Sherlock of the Holmes, and so say we. It was not Nokia products or services or their delays or bugs. It was not Nokia competitors. It was not an external event like an act of terrorism or say a natural disaster like a volcano in Iceland grounding European airplanes etc. No, what else happened in the summer. We did not know it at the time, but by late Q2, Nokia's Board was in the process of firing then-current CEO Olli-Pekka Kallasvuo (OPK) and in the headhunting task of finding his replacement very rapidly, which turned out to be Stephen Elop of Microsoft, who was announced on September 10, 2010. The gossip in the financial press about OPK being fired started around July. I blogged quite passionately here on this blog that I felt OPK was not really doing such a bad job, and felt he deserved a chance, but also that I understood that the Board might want to replace him.

So we have seen OPK leading Nokia for about four years, and we know now, that by the summer of 2010, probably by late Spring 2010, Nokia's Board had come to the conclusion that OPK was no longer fit to run the company. A-ha! Now we can start to dig for some possible clues. So first, to be VERY clear, I thought it was funny to label Stephen Elop as the Evil Villain, just simply because of course we want an evil villain in this Sherlock Holmes story - he is not evil and he is not the villain, but in a kind of way, he may be part cause of what we see. Understand, Stephen Elop took control in September (ie end of Q3) - the first market crash happened during Q3 - Mr Elop could not have been the cause. I just liked the headline haha, in our mystery story. Sorry Stephen Elop, I was just kidding.

But yes, the timing! OPK has been in charge, he is effectively dismissed during Q2, the Chairman and former CEO Jorma Ollila holds the reigns (behind the scenes) while the Board decides on the new CEO, and suddenly Nokia market share plummets massively. The new CEO steps in at the end of Q3 - and the market share suicide dive does not stop in Q4! The new CEO Elop must be in total agreement with what was already happening in Q3. Something happened on the inside of Nokia. This market share crash is actively self-caused by Nokia! (the mystery deepens)

A HOUSE OF CARDS

Lets go back to the historical comparison. This kind of event does not happen 'naturally'. The market share under normal conditions for normal companies does not shift this dramatically in global industries. It is not because of a bad product, not this rapidly. It does not even happen if a rival introduces a fantastic product - remember the original iPhone in 2007 and how much it hurt US rival Motorola - even then the damage was only half as bad as what we see now in Nokia. Cars, PCs, TV sets etc - mobile operator subscriber market shares - etc - do not fluctuate that dramatically in periods as short as six months. It doesn't happen. We need utter collapse of business - a banking scandal or bankruptcy to cause this kind of utter collapse so fast. And nothing like that happened, Nokia is a highly popular phone maker, released many good new phone products during the period - sells them profitably, on one of the widest footprints across hundreds of carriers/operators globally. No. This was a deliberate management action.

So we hunt for the clues. What else changed between Q2 and now. Average sales prices are up. Nokia profits for handsets are up. Nokia profit margins are up. A-ha. At least part of the answer is here - Nokia has been transferring high market share in smartphones vs low profit margin, to higher average sales prices and higher profits, at the cost of market share. That much is clear to any Wall Street analyst. But it does not explain the sudden catastrophic drop. Nokia's profitability did not experience a similar 'dramatic jump' in profits. The gain in profits is only modest, not nearly as big as the fall in market share. But we do have a critical clue.

A major reason why the investors were demanding OPK to step down was because Nokia's profits were dwindinling. Nokia had not followed Ericsson, Motorola, LG and others into making losses, but Nokia used to be a powerful profit factory in mobile phones. Now that was Apple, and Nokia was struggling to keep its head barely above the water. The profits were becoming razor-thin.

Now lets go back to history. From Q1 to Q2, Nokia profit margin and ASP for smartphones declined, but its market share grew! From 37% to 39%. We know after Q2, Nokia's market share has been in free-fall and its average sales price and its handset profit margin has not recovered in similar proportion. What does this tell us. I think I know the answer for the market share crash. I think the evidence is overwhelming and the pattern is perfect. OPK had been buying market share into early 2010, by propping up an un-sustainable level of market share - by heavy discounts and/or marketing support of carriers/operators.

This is what I mean. The 'real' market share for Nokia in Q1 should have been about 35%, but Nokia offered big discounts to the major carriers, said, 'sorry the N8 is delayed, please keep selling Nokia phones' and this boosted Nokia's market share artificially to 37%. But it hurt average sales prices and profit margins. Then the N8 and new Symbian OS is delayed further during Q2, and Nokia comes back to the carriers and say, wait - hold on, please keep your order levels as what they were and we'll double our discounts for you. The real market share should have been about 33%, but Nokia props up the sales with huge discounts, selling most phones effectively at zero-margin - and cause the real market share to grow to 39%. But the profitability of the handset unit is near zero.

The Board finds out about this, and decides to stop the practise and issue an edict, no more buying market share. Nokia's real market share now starts to fall. It should have been 31% in Q3, but falls to 33% (some delaying factors) and with no further massive discount actions - the market share continues to fall to 29% today. It is where Nokia's market share should have been 'naturally' and meanwhile, Nokia's handset unit is returning a reasonably healthy profit margin of 12% and the average sales prices are significantly up in the past half year.

Obviously Nokia Board is not satisfied that OPK used such means, and fires him and hires Stephen Elop to come to run the company. Stephen Elop is told the reality, he is not alarmed knowing that there was false performance in the company, and its real market share in smartphones without the 'bought market share' is somewhere in the 30% range. He is not alarmed and he continues the same rules, lets compete on real prices and real products, lets not buy market share.

There is an interesting twist to the story: T-Mobile. Remember T-Mobile USA announced it would be selling some Nokia phones, and then it suddenly withdrew that. I was very puzzled by that - it does speak to me, that there was an internal deal, Nokia promised the phones at some deep discount, or else, Nokia had bundled some big marketing campaigns sponsored by Nokia to help T-Mobile. After the new CEO came in and ended such practises, T-Mobile is upset and cancels the launch. This makes sense. But remember also, OPK had previously committed to recovering US market for Nokia, so the easiest way for Nokia to do that, would have been to try to buy market share in the USA, by discounting deeply its phones for the US market.

I think this is the reason. I think all evidence fits the theory, and no other viable suspect can fully explain, why Nokia market share grew from Q1 to Q2, then suddenly in Q3 and again Q4, Nokia market share fell like we've never seen in the mobile industry. I think it was a house of cards that Nokia had tried to build - probably well-intentioned, thinking that as the N8 and Symbian S^3 was delayed (again) that they needed to do this. It fits perfectly with the corresponding price changes, profitability changes and the management change. I think what we now are witnessing is a 'correction'. The Nokia market share in smartphones of about 35% in 2010 was an unsustainable illusion, propped up by enormous price cuts. It was not sustainable. The real market share level is closer to 30%, perhaps 29% or less. Still biggest in the world but far less dominant. The Nokia Board saw what was happening, did not appreciate it, and fired the CEO and hired a new guy to take the company onto a more sustainable, healthy path. I am pretty confident this is what has happened, but I am very intersted in your view, what do you think?

UPDATE January 31 - I have added the final fourth piece to this set of Nokia blog stories. Many of my followers and people in the comments asked me what Nokia should do now (or kind of related, what are the real problems that caused the decline in Nokia's customer satisfaction). I wrote the last piece of this Nokia series of articles, Return of the Jedi, what Nokia should do to return to customer satisfaction and growth.

Note to all who leave comments. This was a long blog, sorry about that. Its my weekend, I volunteered my time to do this, and I am guessing no other mobile phone analyst has 'broken' this story yet, and solved the mystery. So please bear with me that its so tedious and long. I am not going to bother taking the time to edit it to shorter length. I have better things to do with my time, we have no ads on this blog, this is a hobby for me. But yes, about the comments. I will anwer the comments that are relevant to this blog - but you must demonstrate in your comment that you read the full blog. If anyone leaves any comments where my response would say 'if you had read the blog' - those will be deleted without mercy, no matter what other good points you make. And while usually we don't talk Wall Street share prices here, I will tolerate the profitability discussion here in this comment thread, please don't make it one focusing on share price comparisons, ok. I don't want to attract the speculators to chat on this blog, but yes, I will allow the discussions about profitability of Nokia and rivals - but also all Apple fans - I acknowledge openly that Apple makes more profits than Nokia, more profits than any tech company. THAT is not allowed to be discussed. I have explained why the iPhone did not cause this sudden drop in market share for Nokia, if you want to argue that, you may. If you want to argue Nokia profitability, you may, if you waste our time talking about the profitability of ANY other company than Nokia, I will delete your comments. Don't go there. This blog is the mystery of where did Nokia's market go, and who killed it. Apple is only relevant for iPhone sales Q2- Q3 and Q4 (and App Store etc) if you want to argue Apple. Fair? My blog my rules.

For those who are interested in the real numbers of the mobile phone handsets industry, including smartphones, I have released a month ago my TomiAhonen Phone Book 2010, the latest numbers and stats about the phones industry, installed bases, market shares, features, brands, customer segments, average prices etc. 98 tables and charts in 171 page ebook available for immediate download. Only 9.99 Euros and only available from this one source on my website, please take a look including table of contents etc: TomiAhonen Phone Book 2010.

Comments

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Excellent discussion.

Tomi has a good explanation but I think it is not the only reason. Reducing number of handset models was a guaranteed move to lose market share. As Tomi says in his comment, space on shelves matters.

I am somehow on the side of Steve Litchfield here, trying to say that percentage points are not always the fairest measure of performance in this industry. Nokia has enormous scale. There is no book titled "How a company delivers 500 million pieces of hardware in a year profitably. Learning by experience". This book is about to be written later. We are witnessing an important piece of modern history. It is a new territory, and I think it is a good idea to be a bit prudent when moving on. Running thin margins and this kind of scale needs some careful steering just to keep on track.

I would say Nokia has hit something like "fear of growth". If Nokia wants to sell 30% more mobile devices, the absolute sales must grow over 100 million units. It would be too risky to target this within a year.

Economics of scale does have a cap. Mobile market has enourmous opportunities, where the relatively small players can make a good money. There is no need to be huge by % to make some billions of money. Most of the businesses are happy with this fact. I am not saying that a huge scale is always a disadvantage, but from business point of view there are different opinions.

It is not always reasonable to look at the market of smartphones only, but the market of mobile phones. A mid-range featurephone is a substitute of a low-end smartphone. Many Nokia S40 featurephones are more expensive than its low-end smartphones. Both categories offer same services. And if you see your main enemy is Google, delivering services to the low-end should be your goal.
Making production decision between smartphones and featurephones is fairly easy. Make what sells and brings more money in /short/mid/long term. For business the share in smartphones is not the main goal.

Market space is moving. There is more room to breath for Samsung and Nokia because LG must retreat. This can be tens of millions devices more for Samsung and Nokia this year. It was not a part of smarphone bloodpath, but a mobile phone bloodpath. This "LG space" will be filled with a mix of featurephones and low end smartphones made by Nokia, Samsung and "Other". Who is best positioned for this?

[Nikhil Pai]

A few points from my side:

1. I may be wrong here since I have no stats but I think a very small proportion of Nokia's sales happen to operators. A majority of Nokia's sales are unsubsidised & direct to the customer. So how could Nokia have sold such a large number of handsets to operators in Q1 & Q2 at low prices?

2. It isn't the iPhone but Android which has taken away Nokia's market share. Though Android was launched in 2008 it became usable for many only with version 2.1 Eclair. Hence Android stole Nokia's market share.

3. Nokia also suffered since they didn't have *any* high end handset to sell, whether good or bad, for a large portion of 2010. After N97 & N97 mini were launched in 2009, the next flagship Symbian arrived only in October 2010 with Nokia N8. Any Nokia fan wanting to replace their N97 with a new Nokia had no phone to look upto. The lack of a N900 successor also made things worse.

4. Most users were expecting a lot of UI changes in Symbian^3 though that was never on the cards even officially. When these segment of users saw a similar Symbian in Nokia N8, they turned their backs towards Symbian & Nokia

5. Ovi Store is still the same as it was. It has nowhere near the number of apps that Apple App Store or Android Market has and is definitely one of the reasons for Nokia's decline

[Bharadwaj]

Excellent post,Tomi !!

It seemed like everything fell into place, great build up by eliminating some obvious reasons, others(crazy buggers who call themselves analysts) would have said so... All of them eliminated quite nicely :)

I am satisfied beyond anything that, buying market share is the reason.

Of course market share reduces when you have huge competitors, like Apple,Google.And of course, Android is a threat to market share but seriously, it WILL not cause such a huge drop, because sales alone show that Nokia has done enough, more than others.

So, Tomi, here's my question : Is Nokia the GREECE of the Mobile union ?

[MeeGoUser]

One big mistake was when Nokia was trolled by 'analysts' and 'experts' into reducing the amount of handsets they produced. Samsung and the like took advamtage of that gap to flood the market with tons of variants of the same device.

The N8 should have had 4 different variants at the same size with hardware keyboard and other variants. I hope they reverse this idiotic move. You are correct about Nokia needing to be on a few rows in a phone shop display.

I love my N8 and N900.They are far more powerful than anyhig the competition is coming out with. As Elop said, there are a lot of rough diamonds at Nokia. They need to build on their strengths as they are doing with Qt and MeeGo. I just hope they speed up delivery.

[Phil W]

I saw Kevin's response on the ASPs on the other thread and thought he had a point, but didn't stitch the rest of the evidence together to arrive at your conclusion, but it seems a reasonable one.

Very good analysis. That suggests the underlying decline in marketshare has been slower than the apparent car crash we saw on Thursday and that makes me a bit more optimistic as the faster the decline the harder it is to arrest it.

I do agree that the anti-Nokia diatribe coming from some quarters must have an effect. If you throw enough mud, some of it will surely stick. In this case the mud that doesn't stick is picked up by others and thrown again it seems to me! Just because in some people's eyes the N8 and C7 do not compete adaquately with the iphones and top Androids, doesn't make them terrible products, just products that have a lower value.

I'm a bit confused about the Nokia's profits for Q4(even though I work for Nokia), as in some reports the profits were down and in others they were reported as up. I probably haven't paid enough attention as to what profits are being talked about and what they are being compared to in each case!

[Mark]

A good theory, Tomi.

One question though: if Nokia aren't buying marketshare anyomore than why does the guidance for Q1 have a single figure margin for handsets and devices? Wouldn't one expect sales to go down but margins to be the same or up?

[Rafe]

Interesting article. I'm not sure I entirely agree with the buying market share argument, though there may be an element of this. Looking at margins in the devices and services division: Q4 09:, Q1 10: 12.1%, Q2 10: 9.5% , Q3 10: 10.5% , Q4 10: 11.3% doesn't really give strong evidence for this. If phones were being sold for 'zero-margin' in Q2 / Q3 as you suggest this would be reflected in the figures.

The reason for the ASP increase is the introduction of the Symbian^3 devices. This meant there were a greater proportion of higher priced devices sold. There's also a bit of this in mobile phones (C3 and X3 being the more expensive devices here).

I would suggest the market share changes are as much about the rise of Android, which has been the major engine for smartphone sales growth this year (just under 50% of it - see below). This from a position of almost nothing in 2009. And the biggest impact was felt in Q4. At least some of this is some of the traditional mobile manufactures finally getting on the smartphone bandwagon in a respectable way (Motorola, Samsung in particular).

Roughly 60m Android phones have been sold in 2010, compared to around 5 m in 2009 (so +55m). For Nokia this was 68m to 100 (so +32m). For RIM this was 35m to 49m (so +14m). For Apple 25m to 47m (so +22m). Overall smartphone sales increased from 174 m to 295m (so +119m).

Note all figures rough / approx.

Not saying Nokia's Q4 smartphone share drop is not serious. Clearly it is difficult timess for Nokia.

[Jouko Ahvenainen]

Tomi, it is excellent analysis and I can believe it is a or the reason for Q4. At the same time we must think the long-term trend, and why Nokia had to buy market share. It is probably also very long story, but then I believe Symbian, poor capability to innovate, and the bean-counting culture have influence on that. And when the question is, how to improve, they must especially find answers to those longer-term issues. I think this Q4 thing is not a very big surprise to people who have followed the market and seen, how the mobile market is encountering a disruption point. For example, compared to the automobile industry, the mobile business is really going thru many changes and it opens an opportunity to win market share with new products. I would say that when the electric cars really start to come, we can also see fast and significant changes in the market shares in car sales.

[Carlos]

Hello Tomi

Great article! Reading your posts is becoming a full-time job!! :)

I also think that the influence of tech blogs is very important. They also influence other media and newspapers. For example I remember national newspapers here in Spain following Apple keynotes but they mostly ignore Nokia. I can tell you anecdotes like the sister of one of my friends asking me for advice for a phone (I work programming mobile phones, so I have used a lot and my friends ask me about this questions) asking about the N8 but decided to buy an iPhone4 because "it's an iPhone".

I think that the Nokia brand is somewhat devalued. If it's cheaper then people will buy it, but if it's about the same money then general people will buy an iPhone and more technical people will buy an Android.

Also, one question, if you are earning money, why it's a bad strategy to buy market share? If you achieve to significantly outsell the competitors you may end with the market for yourself.

[Ola]

Nice thinking, love reading your blogg becuse you turn stones and don´t fall in the mainstreame run-with-the pack writing.
To know that 2010 mainfocus in mobil is growing soo daam fast may once again take away focus from enviroment frendly handsets, open comunitys to use without creditcard, healty battles in offering better handsets for people that don´t use it becuse of lack of love ;-)
I do belive that trashing Nokia-brand is biting back soon, you can´t love or hate anymore when you dont got responce..... And i know there are clever people who dont just follow the easy road. Us is built by those people, some come from europe...
I myself love company with visions and belive Nokia needed this punch to take of to next level :-)

The future influences the present just as much as the past/Nietzsche

[Percentages]

You said, "If the market shrunk 5%, and you simultaneously grew unit sales by 5%, that means your market share actually picked up 10%."

Really? You cannot add "percentages". You need to apply percentages to real values to get a new value, which you can then use as a comparison to another real value (and get a new percentage of that). So, 5% of what size market? And 5% of what unit sales last year?

Let's pick numbers to give an example, say original market size is "500" units, and your original unit sales is 40.

New market size (NMS) = original market size - (original market size * 5%)
e.g. NMS = 500 - (500*0.05), which gives NMS = 475

New unit sales (NUS) = original unit sales + (original unit sales * 5%)
e.g. NUS = 40 + (40*0.05), which gives NUS = 42

Thus,

Your original market share (YOMS) = 40 / 500 = 0.08 (or 8%)
Your new market share (YNMS) = 42 / 475 = 0.08421 (or 8.421%)
Change in market share = 8.421% - 8%, which gives 0.421%

That's a far cry from the 10% you state.

[Eero]

What a great blog Tomi.

Nokia is traditionally praised for it's phenomenal production logistics and purchases operations. Do you think there has been a shift here, as Nokia again complains component shortages going to Q1 ? Losing market share naturally makes Nokia relatively less dominant from supplier point of view.

What do you think of the situation (going forward) that Nokia's "real enemy" (as you have pointed out) i.e Samsung is one of the key component suppliers of the industry ?

[Yves S.]

Hello!

First of all, I would like to thank for this great article. It have been a pleasure to read thus of his length. I have a question which come originally when I read your previous blog regarding Nokia and smartphone market.
You talk about 28% market share for Q4 vs 33% for Q3 vs 39% for Q20. But when I read the Nokia report, it is indicate :

"Nokia’s preliminary estimated share of the converged mobile device market was 31% in the fourth quarter 2010, compared with an estimated 40% in the fourth quarter 2009 and an estimated 38% in the third quarter 2010."

Which is a little bit difference and the big fall I would say, is between Q3 and Q4 where Nokia have lost 7% of market share which is definitely a big loss. That could be explain partly with what you have said, but I will be more agree with the explanation by Rafe which indicate that the drop of Nokia's market share is mostly due to Android well improvement during 2010.

Also, even if you have talked about smartphone all along your article, is also a good things to see the entire "Devices & Services" proportion. And in that case, for all year comparison, Nokia have "only" (which is quite important anyway) 2% between 2009 and 2010 (according to their report "Based on Nokia’s preliminary market estimate, Nokia’s mobile device volume market share decreased to 32% in 2010, compared to 34% in 2009").

Anyway, I am happy to have read your analysis as it add some valuable explanation of what might happen to Nokia this year.

PS : sorry, I hope my English isn't too bad.

[Troed Sångberg]

(Others have alluded to something similar above, but I'll post anyway since I've been talking about this shift for quite some time now)

There are three, not two, segments to this market:

1) Featurephones
2) Smartphones
3) Mobile Internet Devices

Nokia competes in #1 and #2. iPhone and Androids are in #3. The "smartphone bloodbath" Tomi describes is actually a disruptive shift in the market where consumers are making the (one-way) shift from phones to mobiles (e.g, moving to #3 from whatever they had before).

The divider is not (purely) technical but more in the complete eco system. If you analyze the market from this perspective there were no surprises in the recent numbers from RIM and Nokia. On the contrary, it was expected.

http://blogs.sonyericsson.com/troedsangberg/its-not-about-smartphones/

We live in interesting times.

[svensson]

Seriously Sångberg, part of what makes a smartphone is mobile internet capabilities. How is Symbian3 and the N8 that uses it not a mobile internet device? How is upcoming Meego not part of a bigger ecosystem? Ecosystem? There's a word 99% of iphone and android users don't even know the meaning of.

[Troed Sångberg]

@svensson I'm well aware of what a smartphone is. Symbian does not have anywhere near the eco system of iPhone and Android, and while Meego might very well become competitive that's not currently the case.

I agree users don't think "eco system". What they do care about is being able to do "the same thing" as their friends are doing, and that is currently a major driver behind the iPhone and Android sales.

In addition to my linked blog post above there's a slightly different take I made when we announced our first Android mobile: http://blogs.sonyericsson.com/troedsangberg/speed-of-innovation/

This is not about "mobile Internet". This is about the device being much less a phone and much more a window to the Internet. That includes me taking for granted that all Internet services I use have corresponding apps, and that's only true on two platforms currently. Technical specifications are in this case only a start, not the goal.

[Mikael Rautanen]

Great discussion. I would like to make my contribution on a few points about ASP and profit margins that often seem to be omitted.

First, Nokia's ASP increased rapidly from Q2->Q4 (61 to 69 euros) mainly because of plummeting sales of cheaper phones. If shipments of lower priced devices fall while shipments of higher priced smartphone increase, it is quite obvious that the overall ASP increases (even if prices of them both were decreasing). There's nothing like increased pricing power or good things like that for Nokia in this, it's more like cutting your arm off to lose weight.

Look at the numbers, smartphone shipments -% of Nokia's shipments:

Q1'10: 19.9%
Q2'10: 21.6 %
Q3'10: 24.0 %
Q4'10: 22.9 %

Yes, Q4 was catastrophic for both smartphones and basic phones.

But I think ASP did not increase because of Elop stopped what OPK was doing. It increased due to higher proportion of smarphone sales, and in Q4, N8 gave a significant contribution to it.

On profit margins, I think we should not forget gross margin in the analysis. It has much more infomation value on Nokia's pricing power.

Nokia D&S Gross margin:
Q1'10: 32.4%
Q2'10: 30.2%
Q3'10: 29.0%
Q4'10: 29.2%

What has been not taken in to account here is that the gradual improvement in EBIT margin in 2010 was mainly due to decrease in non-ifrs operating expenses. Nokia D&S operating expenses stood at 5.6 bEUR for 2010 while they were 5.8 bEUR in 2009. That makes a 0.7 percentage point contribution in D&S EBIT margin for full year and this has little to do with discounts for operators.

Low gross margin level for Q3 and Q4 could be contradicting with your argument that Elop stopped giving heavy discounts to keep up profitability. However, component shortages (something often ignored when looking Nokia's H2'10) have probably curbed Q3 and Q4 margins by a figure we will never know which makes the analysis even more difficult.

Why Nokia's gross margin has been falling at an alarming pace? I argue it's because of lack of pricing power. Compared with those of competitors', Nokia's products provide less value for consumer than they did some years ago. Nokia has not that strong competitive advantage anymore. Until Nokia has more competitive products out, it needs to compete with prices and that's a difficult task against the Chinese low cost etc manufacturers.

I think one important aspect in loss of market share was Android entering the entry-level segment that had been strong for Nokia so far.

[Vulcan S.]

I think your conclusion covers half of the truth, the second part is the lack of AMOLED screens (used in Symbian^3 devices, made by Samsung that itself grew strongly) and other key components like the camera lenses in the new range of smartphones. This is known fact, only the strength of that effect can be debated. I feel that the decision to use only AMOLED screens and only very high quality optics has been playing a big role here. Nokia did not understand how big the growth for 2010 could be, and that they could never ever get enough components for those devices.

With that high market growth YoY the biggest player will have biggest problems keeping up with components. Samsung makes its own displays, so does LG. Nokia would have needed all the panels that Samsung used in H2/2010 to keep the market share. But with the AMOLED panels, not even enough was made in H2 to keep up with that market growth. If all the AMOLED screens made in H2 that Nokia did not use were used in Nokia devices, that would have made barely it. Apple uses different panels, so that can not be the case here. Nokia could maybe have sold more Symbian^1 devices that do not have AMOLED, but they sold about 23,5 million of those in Q4 2010. They could not have bought >11 million more of those screens to be used in Q4. There is no such a manufacturer. Yet.

In 2011 we have learned that Nokia has bough high percentage of the new higher resolution screens that LG will make in its new production lines. Those will be used for MeeGo devices. We also know that Samsung started building new AMOLED Fab back in summer 2010, and in summer 2011 the capacity of Samsung´s AMOLED production will be 10x what it is until then. And Nokia has said that this AMOLED problem will last at some level during H1 2011 too.

The other known problematic component has been the camera lenses for Nokia. The C7, C6-01 and E7 use a 8 MP camera that has a lens that needs a much higher precision than any typical lens for smartphones. (Seek the Nokia Conversations blog and replies by the key designer Damien Dinning if you did not know this already). The N8 has high quality optics too, but I do not know if that lens needs as special production line as the previous models do.

Nokia has stated that the new models, especially the N8 has been component and capacity constrained (AMOLED). They likely made a poor decision with too high specs for the camera lens, as well as for using only AMOLED screens in new models. You have to remember, that back in the end of 2009 when those component decisions were made, AMOLED has severe problems to get any manufacturer to use those. No demand at all. Samsung was already said to have failed with AMOLED in the end of 2009. 6-8 months later many manufacturers were changing out of AMOLED because the demand had rapidly become too high and the delaying factor for manufacturing. The E7 uses 4,0" screens, and they could not even use those panels for N8 or C7 when the E7 was delayed (now has been a week or two on preorder in Scandinavia, delivery in February).

One other point that you made a mistake with: You wrote that Nokia lost 1/4 of it´s customers in Q4 compared to 6 months earlier, in market share figures. That was ONLY in smartphone market share, not overall market share. There is a migration into smartphones going on, and in 2011 Nokia needs to get products that can be manufactured in HIGH numbers, and that are still desirable. Too high specifications are hard when components are on short supply and growth figures even at the Nokia +36% per year level. And biggest previous market share is also hard to keep with such a rapid growth.

[KPOM]

Tomi,

You have answered the question of what happened (i.e. Nokia purchased market share through the end of the OPK era), but in dismissing the other explanations (iPhone 4, Symbian, N8 delay, etc.) you seem to be ignoring the fundamental question, which is "why did Nokia have to purchase market share?". In my opinion, Nokia was caught flatfooted by Apple and then Google. They made it to the top of the world and assumed they could stay there through inertia. 2007 could have been their wake-up call. They could have nipped the iPhone/Android threat in the bud, but they miscalculated and stumbled badly with the failed Symbian Foundation experiment and the much-delayed, much-criticized Symbian^1/N97 release.

However, to maintain appearances, OPK embarked on a strategy of reducing ARPU to boost market share. It started out a bit slowly, but as it became clear that Apple and Google weren't going away, it accelerated to the point where it reached ridiculous levels in Q2 of last year before Nokia's board got wise and brought in a CEO who could face reality.

In other words, Nokia engaged in the ultimate form short-term thinking, but a bit like the housing market in the US in the 1990s and 2000s, Nokia had so much capital built up from its previous successes that it masked what was happening until a disaster hit, making it that much worse.

Now they are stuck at a crossroads. Maybe 28% is their "natural market share." Maybe it still has further to fall. But they have let other competitors become entrenched, and squandered valuable resources in the process. For all that, they still are on the outside looking in to profitable markets like the US and Japan, and while they still have a good position in some emerging markets like India and China, they have let others establish a solid presence.

I think Nokia's "dual OS" strategy may ultimately be MeeGo/"something else" with that something else being Android or WP7. QT positions MeeGo to ultimately take over for Symbian in those markets where Ovi has established itself. Plus, if early products are good, MeeGo could be a credible alternative even in the US to Android tablets and the iPad.

That doesn't mean Symbian will go away. It will likely hang around for quite a while at the low end until even $30-50 emerging market phones have the horsepower to run MeeGo, but the distinction between MeeGo and Symbian will be blurred. Heck, Nokia might even market "Qt" as a "clean break" and ignore the underlying OS, much the same way that Apple quite seamlessly transitioned from PowerPC to x86/x64 CPUs in less than 2 years. For Macs, OS X was the common thread that essentially enabled people to ignore the processor underneath it. Qt could be the common thread that enables people to ignore the OS actually running on their phones, at least in markets where Symbian is strong.

It isn't a perfect fit, since because of iOS and Android more consumers are aware of the OS running on their phones. That's where the "something else" comes in. Android/WP7 (more so Android) would make them more credible to carriers in the US, and let Nokia worry less about breaking into the market and more about delivering quality hardware, which they are good at. If Qt picks up traction in the rest of the world, it can be ported to Android/WP7, and Nokia phones could be marketed the same way Macs were during the "switchers" era as the best of both worlds. Want to try something new? Buy a Nokia phone with Qt (emphasize "cute"). Still need to run your favorite Android/WP7 apps? They work, too! (Even more seamlessly than Windows runs on Intel Macs, as an aside).

[Bob Shaw]

I think we are focusing too much on smart phone OS specifications rather than how it satisfies customer needs. As Prof. Clayton Christiansen from Harvard Business School famously says “Customers want to "hire" a product to do a job”, or, as legendary Harvard Business School marketing professor Theodore Levitt put it, "People don't want to buy a quarter-inch drill. They want a quarter-inch hole!".
Even after 4 years of buzz about smart phones, the fact is that less than 30% of the mobile phones in the world are smart phones. This says that majority people do not see a great utility of smart phones that they need to rush and significantly increase their expenditure on mobile communication. Remember it is not just about the high comparative cost of the smart phone versus dumb phone, it is also about the additional cost due to bandwith usage. So if majority do not see that type of utility to switch from dumb phones to smart phones in a hurry, I don’t know how much they would split hairs about the latest and greatest OS on smart phones as long as the price is right and the product does the job that they want to get it done. Ultimately it is all about the intersection of value proposition (which takes into consideration both the price of the product and its utility/performance) with the needs of the customers.