Business, Hardware

Nokia Remains Dominant, But the Gap is Closing

Nokia total phones [dumbphones + smartphones] unit sales were down 1% from Q2 while the world phone sales grew, but Nokia is still by far the biggest phone maker in the world. Their total mobile phone market share [counting both dumbphones and smartphones] is down to about 32%, but Nokia are still bigger than nearest three rivals Samsung, LG and Apple put together. That’s market dominance.

Market shift
The phone market is in a process of shifting from dumbphones to smartphones. Less than a year ago Research In Motion, a pure smartphone maker, crashed into the Top 5 of all phone makers. Now Apple has done that jumping in at number 4, and relegated either RIM or ZTE from the top 5. It’s possible we now have two pure smartphone makers in the Top 5. Regardless, it was Nokia who invented the smartphone, and who have utterly dominated the smartphones space. Nokia has also been far more successful than any of its classic Top 5 dumbphone maker rivals [Motorola, Samsung, SonyEricsson and LG] in shifting its customer base from dumbphones to smartphones. Nokia’s market share has always been better in smartphones than in dumbphones, and that pattern holds again for Q3 of 2010.

But the gap is closing. The classic competitors in dumbphones are either retreating from many markets in dumbphones [Motorola, SonyEricsson] or shifting strongly the focus away from dumbphones to smartphones [Samsung, Motorola]. And this year three of the four classic dumbphone maker rivals have found the handset market to be so competitive, that they’ve reported losses in their handset business at least for one quarter this year [Motorola, LG, SonyEricsson]. So the competition is clearly shifting to smartphones and while the US based pundits talk about everybody aiming for Apple, the real contest is not in the top end of smartphones where Apple rules. The real race is for the mid-range and low-cost smartphones that are the bread-and-butter for Nokia’s smartphones business.

And while the experts were proclaiming Nokia dead on its so-claimed ‘obsolete’ Symbian operating system, Nokia knows this market better than most. The spoil of victory go neither to the maker with the best phone [a technology focus] nor to the maker with the best operating system [also a technology focus] but to the manufacturer who best understands and serves the customer [a marketing focus]. And the handset business is not like most consumer electronics, in most markets i.e. countries, the actual decision-making customer is not the "end-user", it is the mobile operator/carrier. And Nokia’s carrier relationships are in a class of its own, in all markets except the USA [and those countries where several domestic makers rule the market, i.e. Japan, South Korea].

So Nokia’s market share in both dumbphones and smartphones is remarkably stable over time [compare with say Motorola or SonyEricsson or Palm]. And what of those markets where the operator/carrier is not the decisive customer, i.e. markets where there are no handset subsidies, then the end-user decides and that means the phones have to be priced competitively. None of that "600 dollar real price hidden in a 2 year AT&T contract, fooling the customer into thinking the price is 199 dollars" – nonsense. When customers are exposed to the real price – in all markets where customers pay non-subsidized prices, Nokia’s market share is 50% or better.

So is it a surprise that even as its newest ‘iPhone killer’ flagship smartphone model, the N8, was further delayed and shipped on the last day of the quarter, and by most analyst views Nokia’s product line was obsolescent, Nokia grew sales in smartphones again? If the analysts had been right and Nokia ‘in trouble’ then Nokia should have lost smartphone unit sales! But no, for intelligent readers here at Bright Side of News* it is no surprise. This race is not about who makes the best phone, or who has the best OS or the best app store with the most apps. It’s about who has the best carrier relationships in markets with handset subsidies, or who sells the best value in phones to markets where there are no subsidies. And that is Nokia in all major markets except three markets: USA, Japan and South Korea.

Nokia outships #2 Apple and #3 RIM Combined
So how did Nokia do? 26.5 million Unit sales of smartphones [vs. 14.1 million by number 2 Apple and 12.1 million by number three RIM]. In smartphones Nokia is still the big gorilla, selling more than number 2 and 3 combined. But the competition is catching up. Nokia is bleeding market share, although slowly. Nokia’s market share is now down by three whole percentage points to 38% by Nokia’s own numbers, or if we go by Strategy Analytics numbers, Nokia’s market share is down six percentage points to 34%. No matter how you slice it, the market grew faster than Nokia’s smartphones this past quarter, and thus Nokia’s market share has fallen.

As to its migration of customers from dumbphones to smartphones, that is well under way for the world’s biggest handset maker. These numbers tell us that Nokia has already migrated 24% of its total dumbphone customer base to smartphones. And done it while never losing profitability of its handset unit. That is textbook execution of the migration, something that Motorola, SonyEricsson and LG have been spectacularly weak at achieving, and only Samsung doing a reasonably good job now. But of the classic dumbphone makers, Nokia is the benchmark of how to smoothly migrate your customer base from the cheap low-margin dumbphones to more expensive higher margin smartphones. To illustrate how well that has been done, if we exclude all dumbphone sales by Nokia, and only count its smartphones, Nokia’s smartphones unit alone would still be the world’s third biggest phone maker.

Regionally [don’t you wish all phone makers gave this detailed reports of what they do in the world? – I’d love to see Apple or RIM or Samsung break down their regional performance etc…] – Nokia has gained unit sales in North America and Europe, while losing sales in Middle East and Asia-Pacific. The North American share was the smallest of the six regions that Nokia reports, so its impact was quite modest. The resurgence of European sales should do well in the battle with Samsung for who is biggest in Europe – Samsung has been catching up on Nokia very strongly in the past few years in Europe. The Asia-Pacific share drop is probably mostly due to the new cheap brand phones especially in India but in many APAC region countries. The Middle Eastern drop is more of a mystery to me what is happening there. Maybe spill-over from India etc.

The Nokia smartphone ASP [average sales price] has declined a little again when accounted for in Euro, down to 136 Euro per smartphone. In US dollars the average sales price is now 188 dollars for Nokia branded smartphones. This reflects both the general growth in the lowest price segments, and the fact that Nokia’s flagship was delayed by almost a full quarter [the N8 has roughly a 500 Euro price when not subsidized by carrier/operator]. I would think this was a low moment in Nokia ASP, and for the Christmas period the ASP will grow now that the N8 is actually seen in the wild…

On the profitability side, Nokia’s downward trend in mobile phone unit profitability has been turned, and the company reported a modest growth in net profits for the handset unit, but the networks unit [NokiaSiemens Networks] was once again producing losses. As the company announced layoffs of 1,800 people,
many of those out of Finland, this should impact the company’s profitability in a positive way, going forward.

Mind the Gap Between the [Smartphone] Train and the [Symbian] Platform
There are dark clouds also in Nokia-land relating to Symbian. The past quarter brought unwelcome news to the Symbian smartphone OS environment, as the last major branded global phone makers in the Symbian family, SonyEricsson and Samsung, announced plans to end their association with Symbian. Note, this still will not make Symbian a Nokia-only OS, Symbian powers half of all smartphones sold in Japan, as its the preferred smartphone OS for NTT DoCoMo, Japan’s biggest operator/carrier. But it does mean that Symbian could be renamed N&N as its now only relevantly on Nokia and NTT DoCoMo smartphones.

Obviously in the past quarter Nokia changed its CEO. It has now started to ship the N8, its new flagship, which has been getting reasonably strong reviews, suggesting it will likely end up a big selling hit smartphone. Nokia would need that for the Christmas period of 2010, especially with the strong sales by the iPhone 4 and Samsung’s Galaxy.

A good quarter by Nokia, considering a relatively weak product offering and delays especially to the N8. Now Nokia would need what it typically also delivers, a strong Christmas quarter to end the full year on a strong note.