Forbes. Wireless wonderland: Not only does Nokia have stylish phones, its business model is pretty elegant as well
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By Jeffrey S. Young
Quick. What company sold the most cellular phones in the world last year? If you thought like an
American-centrist and blurted out Motorola, think again. The giant radio and cellular pioneer had
a very bad year in 1998 and, for the first time since it helped invent the wireless and radio
businesses, found itself in second place in market share. With 163 million phone handsets sold
worldwide, Nokia had an estimated 30% market share versus Motorola's slightly lower
percentage, according to the Yankee Group.
1998 Combined Digital and Analog U.S.
Mobile Phone Market Share Source: Yankee Group
The worldwide leader in the cell phone game is now Helsinki, Finland-based Nokia Corp. (nyse:
NOKa), with sales of $14.5 billion (Finnish markka 79.2 billion), total, $8.3 billion of that in
cellular phones. This is a 51% jump in total sales over the previous year and a 74% growth in
cellular phone sales alone. Worse, for both Motorola and its traditional big competitor, Swedish
LM Ericsson, the once tiny Finnish company is growing at a pace that is many times the clip of its
two colleagues. Motorola's mobile phone sales rose year to year by 5% ($12.5 billion), and
Ericsson's were up a modest 7% ($5.6 billion in 1998). Of the three, only Motorola includes
cellular infrastructure sales--towers, transmitters and switches--in its segment reporting, and once
that is backed out the company is for the first time trailing its Finnish competitor.
The worldwide leader in the cell phone game is now Helsinki, Finland-based Nokia
Corp.
Nokia concentrated on wireless beginning in the early 1980s. While it has a set of traditional
wireline phone system back-office gear--switches and the like--it has focused on the wireless
opportunity. It recognized that brand identity, along with global volume efficiency, was going to
be essential in a market where the retail price of its phones is often lower than the wholesale cost.
However, while it has stayed loyal to the European GSM (Global System for Mobile
Communications) standard in infrastructure, it has also been fast to deliver products for all other
platforms.
"We are the only company in the world selling phones that work in every major cellular
standard," says Olli-Pekka Kallasvuo, Nokia's 45-year-old chief financial officer and the
president of the company's U.S. division. "We were first to segment our product line, first to
build a brand identity, first to understand that design was essential in this business, and first to
make sure we could take advantage of the efficiency of global manufacturing in a business where
R&D costs are high and can only be recouped with worldwide volumes."
The world is its oyster
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continued from "Wireless wonderland"
Global smarts
Nokia is a company with a strong story in the two most explosive developments of our time:
wireless and the Internet. Long a power in wireless, in the last couple of years the firm has been
making a series of intriguing acquisitions in the IP high-speed world: DSL equipment maker
DiamondLane ($125 million), router enhancement maker Ipsilon ($120 million), IP-to-voice
gateway company Vienna Systems ($90 million), and wireless LAN vendor InTalk. It also spent
big on an advertising and branding strategy that nearly choked it a couple of years ago (1996:
operating profits fell, year on year) but now is paying off in a gigantic way. Think cool cell phones
today and you no longer immediately associate Motorola's StarTac. Try the Nokia 8810 instead,
created by the company's chief designer, Frank Novo, formerly of BMW.
Think that's too big? If you're like 50 million of America's 67 million subscribers still using analog
cellular services, check out the Nokia 282--a tiny full-featured unit. Or perhaps even more
startling is a just released GSM phone, the 7110. With this, the clunky data terminal style
products--introduced, ironically, by Nokia a couple of years ago in its 9110 line and owing much
of their form factor to the Hewlett-Packard 90 LXs of the recent past--are suddenly out of date.
This digital age gadget packs a microbrowser into a phone that has the sleek look of a tiny cell
phone and includes a set of advanced innovations--a predictive dictionary to guess at words as
you spell them on the keypad, a rolling mouse and (perhaps the most important feature of all in a
data-cum-voice phone) built-in Chinese language support.
"Profits are hard to come by in the handset business. But Nokia has figured out how to
do it."
Wireless turned out to be a very smart choice. Nokia's cellular phone business grew revenues by
74% in 1998 to $9.5 billion, and the company's net profits climbed 66% to $2.1 billion. Better
yet, in one of the most ruthlessly competitive consumer electronics markets there is--the
wholesale prices of handsets are higher than retail--Nokia's investor relations spokesman William
Seymour says, "net operating margins in the cell phone business are 19%." Very healthy. For
example, Ericsson's net operating margin declined slightly, from 11% to 10%, according to the
company's annual report. Gross margins for Nokia: not too shabby at 37%.
"Nokia is a company taking full advantage of the global economy, taking a few designs, then
producing them in all formats all over the world," says Phillip Redman of the Yankee Group.
"Profits are hard to come by in the handset business. But Nokia has figured out how to do it by
amortizing design costs over a lot of countries and distinguishing itself with sleek design." Another
crucial part of the answer is GSM, which is by far the most widely deployed digital cellular
standard in the world. A global orientation is essential to a company from a relatively isolated
place like Finland.
Last year there were an estimated 306 million wireless subscribers. Projections for a few years
from now--a billion more worldwide. GSM is already the biggest market--160 million
subscribers, the rest still mostly analog cellular--and growing far faster than any other. Nokia is
the leading vendor of these phones and second in selling infrastructure equipment with the
standard. CDMA (code division multiple access) has a far distant "4 million subscribers," says
Redman, "and is only significant in the U.S. and Japan. GSM is growing fast, really fast.
Everywhere but the U.S. where CDMA and TDMA (time division multiple access) systems are
putting up a fight. But even here the big news is multimode phones. Nokia has done one for the
AT&T world, which combines analog and digital services. Motorola had trouble getting its
product to market." These multimode phones allow subscribers to get cellular services in virtually
all parts of the U.S., switching between different systems depending on network coverage.
Calling all cellular standards
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continued from "Wireless wonderland"
Tires, trees and telecom
Nokia was early into the portable radio phone business in the 1970s, and in at the birth of
worldwide cellular standards in the early 1980s. Finland has the world's highest percentage of
Internet users, as well as the highest penetration of wireless subscribers. Maybe it has something
to do with the long, cold, dark winter nights, when the sun shows for only an hour or so a day.
Or perhaps it is a digital form of chauvinism: "Finns are willing to support us, a homegrown
company, in both wireless and Internet usage," says Kallasvuo.
Nokia became a conglomerate in 1967, merging rubber, timber and electronic cable companies.
As a telecommuications equipment maker in a small country, Nokia never pursued the worldwide
wireline telecommunications markets in a major way or made big voice circuit switches. This is
where Lucent Technologies (nyse: LU) and Nortel Networks (nyse: NT) and Ericsson and
Siemens and Alcatel came from, and that business is dragging down all those companies as the
assault from the IP telephony forces, led by Cisco Systems (nasdaq: CSCO), continues to take
its toll. But Motorola simply guessed wrong, sticking with the older analog cellular equipment
market too long, being too American-centric in looking to CDMA and TDMA for digital
standards, and missing out on the GSM world as it has mushroomed.
The secret: great design and a near religious belief that wireless will replace traditional
voice, and all will be IP soon.
To put all this growth into perspective, Ericsson's 1998 sales and revenues grew 10% to $22.8
billion (Swedish krona 184.4 billion). Lucent's 1998 revenues grew 14.3% to $30.15 billion, but
first-quarter '99 rose only a measly 6% to $9.2 billion. Alcatel's sales rose 6% to $23.2 billion
(French franc 139.5 billion). Motorola was down a percent, posting a loss of $1.61 a share.
Meanwhile, since 1993 Nokia sales have quadrupled and net profits have grown tenfold. Lucent
and Philips recently threw in the towel and dissolved their cellular phone partnership. It is tough
being in the throes of the data voice IP convergence battle, but this Finnish company has shown
all the rest of the big telecommunications vendors the road forward: no traditional voice gear
anymore. All wireless, all IP and high-speed data, and Nokia is tearing up the track. The secret:
great design and a near religious belief that wireless will replace traditional voice, and all will be
IP soon.
Nokia is the only company in the world that makes telephones in all three digital cellular
standards: CDMA, TDMA, and GSM. Sales of mobile phones at the company were up from
$5.5 billion to $9.5 billion in the year. Now the company is going after the high-speed access line
market, buying IP companies. "The plan might look a little unclear right now," explains Nokia's
Kallasvuo, "but it will all make sense in a few years." For now, results, and the company's stylish
design, are working.
Besides Ericsson, both Qualcomm (the CDMA champion) and Sony Cellular (which has made
noises about taking a run at the business) are working on next generation products, as well as
new data phones that allow web surfing and various messaging options. But for the moment,
Nokia has the edge on all of them. Play this out in China and Brazil, two countries with big
populations and a nonexistent wireline infrastructure, where Nokia has factories and where GSM
systems have made big infrastructure wins, and the company looks poised for much more
growth.
Talk gets cheaper
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continued from "Wireless wonderland"
Motorola calling
However, for all its success, Yankee Group's Redman is cautious about overplaying the
company's advantages. "Nokia stumbled with the design of its TDMA chipset. Suffering from
some kind of not-invented-here problem, they went off on the their own and had troubles. But
those problems are behind them now."
On the other hand, Motorola is "roaring back," Redman adds, explaining that Ericsson has
decided to drop out of the U.S. CDMA cellular market, leaving the field open to Nokia and
Motorola. There are currently 67 million American cellular subscribers, "a penetration of one in
four, but that will grow to one in three in the next few years, and as the current pricing premium
for wireless drops in coming years as competition intensifies, it could easily get to one in two.
This is still a very lucrative market," says Redman.
Nokia has stolen the standard from the $30 billion U.S. leader, but Motorola has seen the light.
The bigger American company is now readying phones based on multiple cellular standards and
is going to introduce the V-Series, a new top of the line phone series that will displace the
StarTacs. These are also multiservice phones, capable of navigating between areas of traditional
analog cellular coverage (called AMPS) and both the 800 and 1900 megahertz bands for digital
systems--the former the traditional cellular digital range, the latter used by new PCS systems.
TDMA, CDMA, and GSM are all methods of delivering digital cellular traffic over these bands.
But it won't make a dent in Nokia's acceleration this year.
Motorola is "roaring back."
Better yet, the impact of AT&T's (nyse: T) one-rate plan is expanding the field as a whole so
there is plenty of room for all vendors, and the wireless wave seems to be just starting to gather
steam. According to Yankee Group numbers, average landline phone usage is about 400 minutes
per month and only growing as a result of Internet connectivity. A couple of years ago wireless
usage averaged 100 minutes per month. Today that number is closer to 300 minutes, largely due
to widespread competition, falling prices, and one-rate deals. And this is in the U.S., where
cheap wireline phone service is ubiquitous. The effect will be even more pronounced in other
parts of the world, where Nokia and its GSM core business will continue to be hard to beat as
quicker-to-deploy cellular leapfrog the nonexistent wireline infrastructure in developing countries.
Add a wireless premium that the Redman Group's Redman thinks will drop to nearer parity in a
couple of years, and the growth rate on the wireless side could turn hockey stick. Now Nokia
has launched a big effort to create a standard for microbrowsers that run on cellular phones,
called WAP (Wireless Access Protocol). The idea is to make phones interoperate with data
services so simple web browsing and data can be delivered wirelessly. "Part of the reason we're
buying IP companies," concludes Nokia's Kallasvuo, "is to get the skills and knowledge in-house
that can help us make wireless data, as well as voice, a big winner."
The way it looks, Nokia is likely to be the big winner in both places.
External link:
Nokia
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This story, published by Forbes Digital Tool (www.forbes.com) on March 25, 1999, was
brought to you by Oracle.
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