The iPhone is a pain the APPS for Nokia
From The Sunday Times
October 25, 2009
Dominic Rushe and James Ashton
At a conference in Paris this month, Olli-Pekka Kallasvuo, Nokia’s chief executive, shrug-ged off what outsiders see as the increasing threat to his business from the iPhone and the BlackBerry.
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The company looked a little less casual last week when it launched a lawsuit against Apple alleging it had breached its patents on a raft of technologies including security, speech coding, encryption and wireless data technology.
It wants a share of what Apple has received for the roughly 34m iPhones sold since 2007. Apple gained an unfair advantage in the mobile market by not paying to license patents owned by Nokia, according to the suit. Because it did not pay those costs, Nokia’s products suffered “a competitive disadvantage to ‘free-riders’ such as Apple”, Nokia said in the suit. Apple is not commenting.
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Nokia, too, has suffered its share of legal action and even if it loses the case, analysts doubt that Apple will be materially damaged. But Nokia does face a serious challenge from Apple — and it is bigger than not paying licensing fees, they said.
“I think Nokia has a lot to be worried about,” said Avi Greengart, an analyst who covers consumer devices for Current Analysis, the research group. “Nokia is still leading, but the competition is stronger and more intense than it has ever been and they are starting to lose share,” he said.
Nokia’s share of the smartphone segment, which it refers to as “converged devices”, slipped to 35% in the third quarter of 2009 from 41% the previous quarter, the company said this month. Its recent slide was blamed by analysts on a slowing global economy, ferocious price competition and a weak portfolio of smartphone handsets.
The group remains the dominant player, but as mobile devices grow ever-more capable, Nokia cannot afford to relax. Moore’s Law means that today’s expensive smartphones will be cheap and commonplace soon enough. Last week, Apple reported its most profitable quarter, with iPhone sales up 7% from a year ago.
Meanwhile, Nokia’s attempt to match the iPhone, with the N97 launched in June, have failed to impress. It is a serious blow to Nokia, whose easy-to-use “candybar” phones took the world by storm 15 years ago.
Observers joke that Nokia is really a slick logistics business that just happens to distribute mobile phones. Its economies of scale mean Nokia has been able to work out how to make a margin from selling handsets at £20 apiece.
That is crucial for entering new markets such as Africa, where vast regions never had landline phones. But new rivals like Apple just asked themselves, why bother?
The Finnish giant has a long way to fall. In its last quarterly report, Gartner, the consultant, found that Nokia still commands 36.8% of the global handset market, compared with 1.8% for Apple. Rick Simonson, the newly-promoted head of Nokia’s mobile phone division, paved the way for more market share falls when he said that boosting margins and cashflow was more important.
Even in the smartphone category, Nokia has a 45% share, with Apple at 13.3% compared with 5.2% little more than a year ago. That is because the smartphone segment, which Gartner forecasts will grow at 29% this year, is splintering.
Nokia has made strides in selling low-end mobile computers, such as the 5800 and 5230 models. What it lacks is a flagship handset, like the iPhone, BlackBerry Curve or Palm Pre, that can create some buzz around the brand. It annoucned last week that its latest smartphone, the N900, would reach the shops a month late.
In the latest corporate reshuffle, which saw its phone business split into three, it went outside for some inspiration, recruiting John Martin from Apple to become head of its mobile computers division. Insiders say it is placing more emphasis on services because handsets are so easy to copy.
Even there, it could do with a sprinkling of magic. Comes With Music, a phone that was preloaded with free songs for users, has failed to dent the success of Apple’s iTunes and iPod artillery. Leaked figures show it had signed up just 107,000 customers globally and 33,000 in the UK a full year after launch.
Insiders blame weak marketing for failing to get across the message — not something Apple could be accused of. With its iPhone, it has cracked how to squeeze further revenues from customers after they have bought a handset. Its app store, that lets users download thousands of software services, has been a roaring success.
However, analysts think the latest spat is more prosaic. “As more competitors come into the mobile market, Apple will probably be the first of many that find themselves in this position,” said Carolina Milanesi, research director for mobile devices at Gartner.
Established mobile players have licensing agreements with each other under Frand (Fair, Reasonable, And Non-Discriminatory) guidelines that rarely mean they are net payers for each other’s technology. Newcomers such as Apple and Acer, the laptop maker, are more likely to have to pay to use intellectual property.
Ilkka Rahnasto, Nokia vice-president for intellectual property, said: “By refusing to agree terms for Nokia’s intellectual property, Apple is attempting to get a free ride on the back of Nokia’s innovation.”
Neither is Nokia afraid of a fight. Only last year it settled a long-running patent dispute with chipmaker Qualcomm that involved Nokia making a $2.5 billion (£1.5 billion) upfront payment to its rival.
Long-term, however, Apple may not be Nokia’s biggest threat. Nokia holds a commanding share of the global smartphone operating system market — about double that of second place contender BlackBerry’s owner RIM. Apple is a distant third with the iPhone and analysts believe it could soon drop to fourth with the explosion of devices based on the Android operating system.
Rumour has it that Dell and Google are working on an iPhone rival, the so-far unnamed G-Phone, which will run Android. Microsoft, too, is said to be looking at phones but has quashed rumours of a device based on Zune, its iPod also-ran player.
Nokia’s traditional rivals are also on the attack. Motorola is preparing to launch its Droid smartphone, which will also run Android. So far, just 2% of smartphones run Android, but by 2012 Gartner is predicting that Android will run on 18%. “The balance is changing,” said Greengart. “Nokia has done a very good job isolating itself from its classic competitors. But it’s looking vulnerable to attacks from the side. I think Nokia acknowledges that competitive threat but it is still focused on playing to its existing customer base.”
He said Nokia needed to branch out and embrace the new smartphone technologies. “I think they are worried about cannibalising their own customer base but if they don’t, somebody else will.”
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