Has Europe Lost Its Mobile Mojo?

Gate-crashing U.S. tech giants Apple and Google have been so successful at grabbing market and mindshare from Nokia, the world’s largest handset maker, and Symbian, the long-time market leader of operating system software for advanced mobile phones, that the Finnish phonemaker realized it had to take drastic action. It announced February 11 that it is forging a sweeping strategic partnership with another long-time rival, Microsoft, aligning its destiny with that of the US software giant in the burgeoning smartphone market.

 

"Nokia and Microsoft will combine our strengths to deliver an ecosystem with unrivalled global reach and scale,” Nokia CEO Stephen Elop, a former Microsoft executive, said at a February 11 press conference in London. “ It's now a three-horse race."

 

 With such a sizeable and early lead in the market, why did Nokia end up having to turn to Microsoft, a US player that is still considered an underdog after more than a decade of trying to penetrate the mobile sector? 
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Nokia had the vision, seeing itself transform from a hardware into a software company as far back as 2000, eight years before the first iPhone hit the streets. And industry observers have long credited the Finnish phone maker with being a master at supply chain logistics. But it made major mistakes in the U.S., missing clamshells, qwerty keyboards and touchtone screens, say analysts.

Downplaying the U.S. wasn’t an issue when that country was a mobile backwater. But the American market is currently the centre of the universe for everything having to do with mobile convergence and Nokia continues to trail there. It now has just 2 percent of the U.S. market, according to technology consultancy Strategy Analytics, and its share price has dipped 70 percent since the introduction of the iPhone in 2007.

Nokia’s woes don’t stop there.  Although1.3 billion people use Nokia phones and the company remains the leading handset maker, with 31 percent of the global market, according to Strategy Analytics, its market share has plummeted over the last year in both China and India, due to increased competition from local players and failure to satisfy demand in India for phones that can handle dual Sim chips to allow consumers to easily switch between operators to get the cheapest price for calls.

“We are standing on a "burning platform", Elop saidin a leaked internal memo that appeared widely on the Internet.“While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. We thought we were making the right decisions; but we now find ourselves years behind.”

The new strategic partnership goes further than industry observers were anticipating.  But it is still unclear whether it will be enough to turn the tide. “There is no silver bullet for either company,” says Ben Wood, director of research at UK mobile consultancy CCS Insight. “They are facing significant competition.”

Nokia and a crop of rivals both old and new are in the midst of a high-stakes struggle. The complexion of the industry is changing and the outcome could shape the future of mobile communication — and by extension, of the internet – as a growing number of consumers around the world access the web from handheld devices.

“It is all about ecosystem now,” says Stuart Orr, who heads the EMEA communication and high-tech practice for Accenture in London. “That is thekey to sustained revenue growth and what Apple and Google have done to create the market rather than to use the legacy handset-driven value chain.”

 

Combining Forces

 

The proposed partnership is much wider than anticipated, says Wood. Nokia said it will adopt Windows Phone as its principal smartphone strategy, innovating on top of the platform in areas such as imaging, and contributing its expertise on hardware design and language support, while helping expand Windows Phone’s geographical reach. Bing, Microsoft’s search engine, will power Nokia's search services across Nokia devices and services. Microsoft adCenter will provide search advertising services on Nokia's line of devices and services.Microsoft development tools will be used to create applications to run on Nokia Windows Phones, allowing developers to leverage the ecosystem's global reach.  And Nokia's content and application store will be integrated with Microsoft Marketplace. Analysts expect Symbian to transition to being the operating system for lower-end phones, competing with platforms like Samsung’s Bada and Google’s Android.

 

Falling Behind

 

Nokia and Microsoft had strong motivation to team up. Google’s mobile operating system, Android, grew 600 percent year-on-year, and according to UK technology consultancy Canalys, managed to surpass Symbian’s market share in the three months running up to December, knocking it out of first place. Manufacturers shipped 33.3 million cellphones running Android, Google’s mobile phone operating system, in the fourth quarter of last year, up from 4.7 million a year earlier, according to Canalys, the research firm in Reading, England. (See chart.) Shipments of phones running the Symbian operating system rose 31 percent to 31 million during the quarter, Canalys said.

 

Figures from other analysts placed Symbian slightly in the lead over Android in the fourth quarter but they say it is likely only a matter of time before Google’s operating system surpasses Symbian.

 

Symbian, which has no brand recognition outside of the technical community, also lacks buzz in the U.S. and its once hefty slice of the global market is slipping.  Until 2009, Symbian was owned by a consortium of rivals that included Nokia, Sony Ericsson, Panasonic, Siemens, and Samsung. The company was set up a decade ago to develop an independent software platform for smartphones. Nokia has always dominated Symbian –limiting take-up by other handset makers – and in 2008 the Finnish handset maker bought the 52.1 per cent of the Symbian shares it didn't already own in the London-based consortium.

 

Nokia merged the company with parts of its own organization and then created an open-source foundation, intending to give away the resulting software for free to other handset makers.  The idea was that by opening up Symbian to the industry and making it free, the software would become more robust and widely used.

 

That strategy didn’t work and Symbian was folded back into the mother ship, leaving Elop under intense pressure to come up with a new strategy when he took the helm.

Looking Ahead

Nokia has to have software platforms that are on the shortlist of developers. At present, the three on the list are Apple, Android and Rim or Microsoft.  It must figure out how to gain mindshare and market share in the U.S. Finally, Nokia needs to better leverage the strong maps, music and messaging services it has developed.

The new relationship with Microsoft could do all that. There is much at stake. To be sure, Europehas other strengths in mobile: it is home to two of the world’s largest telecom equipment makers, Alcatel-Lucent and Nokia Siemens; to handset maker Sony Ericsson; to strong players in the infrastructure and chipset design spaces, such as ARM and Cambridge Silicon Radio; to gaming start-ups that have managed to capture global consumer audiences such as Playfish and Rovio Mobile; and to pioneers like Layar and Metaio in new areas like augmented reality, says industry veteran Ken Blakeslee, founder of UK-based Web Mobility Ventures, a consultancy which advises and invests  in mobile sector start-ups.

 

But gone are the days when Europe set the tone. Right now, the market is moving faster than ever and the U.S. is driving innovation in both smartphones and applications. Nokia and Symbian have already lost their edge, say analysts, and were coming dangerously close to losing their lead. Teaming with Microsoft gives them a shot at being a part of the winner’s circle but not a guarantee.

 

 

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