Nokia outlines strategy for expansion, even in infrastructure
Published: Thursday 27 November, 2003
Nokia has offered its first mid-quarter update covering its new business divisions, Enterprise and Multimedia, and confirmed its fourth quarter guidance of 21-23 eurocents per share. In a capital markets day in Texas, it outlined some plans for its new units and hinted at expansion routes for its ailing Networks operation.
Its focus was very much on its enterprise ambitions, with the appointment of a head for the unit – Mary McDowell, formerly senior vice president of corporate strategy and development at Hewlett Packard, who becomes the second non-Finnish member of Nokia’s board.
As usual, Nokia could do little right as far as analysts were concerned. They managed to accuse the Finnish giant both of being over optimistic and of disappointing investors by revealing that its two new companies are loss making.
In fact, Nokia confirmed its guidance; predicted that its mobile phone unit – even minus the high end models that are now in the Multimedia company – would increase its revenues ahead of the overall market growth of 10% next year; and said that the Enterprise unit would have higher margins than the company in its current form, and would break even early in 2005. Multimedia would expect margins at around the level that Nokia has enjoyed for mobile phones this year, around 23% – though those in the rump handsets division are likely to fall as Nokia goes after price sensitive developing nations and puts its most profitable products into the two new units. Multimedia should break even by the end of next year, said Nokia CEO Jorma Ollila.
None of this sounds particularly depressing. It shows clearly how Nokia plans to diversify into new businesses whose growth and margin potential can compensate for the likely decline on both fronts in the global handset industry. It is making these moves while still at the height of its powers, and simultaneously plans to increase market share in lower value phones to 40% by year end. Only infrastructure remains highly uncertain, though Ollila believes the market has stabilized and will be flat next year, which should enable Nokia to make some revenue growth and a small profit in this business in 2004.
But the analysts preferred to focus on the fact that Enterprise and Multimedia are currently in the red. This is hardly surprising, given that these units are only weeks old and have most of the investment in development of advanced technologies, and in marketing to new customer bases, included in their cost bases.
In the fourth quarter, Nokia expects Mobile Phones to account for 65% of sales, Multimedia for just over 10%, Enterprise for 5% and Networks just below 20%.
One thing that is clear – Nokia has no intentions of quitting the troubled mobile infrastructure market, despite rumors to that effect over the past, difficult two years. It makes much of the advantage of offering operators both their networks and the phones to work effectively with those networks. Indeed, it has often been accused of using its power on both sides of the network to bring undue pressure on carriers to stick with its technology. This advantage is shared with fewer and fewer rivals. Alcatel is likely to get out of handsets, and Ericsson may well follow if it exits its joint venture with Sony in the coming year or so. Meanwhile, there are question marks over whether Motorola will stay in mobile infrastructure.
Nokia, for its part, plans to expand this business by moving into new markets, from IP-based technologies such as WiMAX to, potentially, CDMA. Analysts who attended the company’s capital markets meeting this week said that Nokia said that it would consider entering the CDMA infrastructure space through acquisition. The company has stepped up its CDMA handset and chip efforts this year through a partnership with Texas Instruments and STMicroelectronics, designed to take on Qualcomm in its heartland and particularly in the developing Chinese market. On the infrastructure side, Nokia would be up against market leader Lucent, which has over 40% share, followed by Nortel, Motorola, Ericsson and Samsung. The presence of all these powerful vendors could make it difficult for Nokia to make a serious impact, and the effort involved would damage the fragile profits outlook for the Networks division.
It would almost certainly have to make a major acquisition in order to have any success. Most of the market leaders are unlikely to sell their CDMA business – even Ericsson, which after a rocky start has made significant headway this year to gain about 8% market share. The best prospect might be Motorola’s CDMA business, which could conceivably be sold off once new management is installed, but it is unlikely that the arch-rivals could come to agreement.
Nokia’s interest in CDMA will focus – as in the IP world – on next generation data networks. It has been an ardent supporter of the emerging EV-DV third generation version of CDMA2000, which supports data and voice. This will not be widely deployed for at least three years, and the scale of its uptake is in doubt, but Samsung recently carried out the first working demonstration of the network and this would be the right time for an initial step into this market.
Another possibility for Nokia, with its strength in Europe, is that the region’s operators may start to adopt CDMA450. This variant of CDMA, which operates in the 450MHz spectrum, is of limited functionality but it may be the first entry point for non-GSM systems into Europe, with Sweden’s operators already showing interest as the country’s regulator plans to auction off 450MHz spectrum.
Nokia is also looking to more traditional areas for a recovery in its Networks division, notably the hoped-for upturn in investment in W-CDMA 3G equipment next year. Nokia and Ericsson both claim market lead in the nascent W-CDMA sector.
Enterprise Solutions may be only 5% of Nokia’s revenues now, but it is the unit targeted for the greatest expansion in 2004. The company believes, with some justification, that it has a small window in which to present itself as the only vendor with “end to end thinking” rather than just attractive applications. The operators are still struggling to gain enterprise presence, while Nokia has taken care to sign influential partners such as IBM Global Services, and to launch products that hit key enterprise sweet spots, such as mobile security and wireless email servers.
The analysts who snipe at the temporary drain on margins that may come from the move into new markets continually miss the key point – that if Nokia does not make some brave moves, its core voice handset market will inevitably decline in profitability over the medium term. Ollila is in a parallel situation, in this sense, to his counterpart at Intel – dominant in what has become a commodity hardware market, and facing the decline of a technology that has been used to ubiquity, the PC or the simple phone. In such a situation, small steps are not enough, and both Ollila and Intel’s Craig Barrett have demonstrated sufficient vision to reinvent their companies for the new technology generation, the world of convergence, any time/anywhere communications and digital media.
Vision does not always sit happily with mass market hardware companies, which have to be obsessed with supply chain efficiencies and market share, but Ollila has demonstrated it before, when he joined Nokia in 1991 and turned it from a diversified Finnish conglomerate selling bedroom slippers and tires to an international company focused on just one market, mobile communications. In an interview this week with The Wall Street Journal, he said: “I think we have a big belief that we need to be a bit different. We have a lot of courage to do what we feel is right and fits our bill, in terms of organization and way of operating.” Investors will have to put a lot of faith in the “bit different” moves Nokia is now making, but they will surely be well rewarded in the medium term.
Ollila is a long term thinker, considering the sector he is in, and constantly chafes against the short termism of the markets. He says Nokia managers are never judged on the performance of a quarter or even, often, a single year and, while observers try to write off the N-Gage after a few weeks, he says it will not be assessed seriously within the company until 2005, when it will have had two Christmas seasons. Nokia has now scrapped its traditional mid-quarter updates, which he believes encourage obsession with quarterly results at the expense of strategy.
Ollila says Nokia’s total addressable market is now worth $235bn and that its long term target is to achieve average annual net sales growth of at least 10% at constant currency. “We have the concepts to make it happen,” he told the capital markets day. That is certainly true, but executing those concepts may be a bigger challenge.
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