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Issue Date: September 2007

AnalystWatch: What is Nokia playing at?

September 2007
Martin Garner, director of Wireless Intelligence at Ovum

The week before last, Nokia announced several new moves in its Internet services strategy, including a music store, a new games service, and a portal called Ovi. Opinion has been very divided about how successful Nokia will be with this strategy and what effect it will have on the company.

The first thing to say is that it would be wrong to underestimate the importance of last week's event to Nokia. Nokia execs describe this as the first step of a large-scale transformation, not quite as fundamental as the shift from rubber boots to mobile phones, but with many similarities. Also, the company is not just dipping its toes into the waters of Internet services here, it is making serious moves and its ambitions are high.
Nokia's Internet services move is brave, partly because of the risk to its relationships with operators, partly because of the risky nature of the services themselves and partly because of the way it is going about it.
Much has been made of how Nokia's shift will sour relations with its major customers, the mobile operators, who believe they own the customer relationship and are the natural people to provide content services. And this is the single biggest risk Nokia is taking here.
However, in Ovum's view many operators do not understand users well enough, do not serve them well enough and, as a result, over-estimate their brand strength and relationship with users. This creates an opportunity for others to do better.
Nokia says it has been in constant discussion with the operators over the last 18 months about this and is taking pains to offer the operators opportunities within the business model in the new services. For example, there are many local services an operator could usefully provide within mapping and navigation. It is not yet clear how attractive those opportunities really are.
Another aspect of this is geography. Nokia says it will take its Internet services east (where it is stronger) before it goes west (the US where the operators are strongest and Nokia is weak).
Second, each of the Internet services areas Nokia has selected (except navigation) is crowded and contains several major Internet brands already often companies Nokia is already partnering with such as Yahoo and Microsoft. Within these areas, early adopters like to feel that they are discovering services and sharing them with friends, rather than having them pushed by a big brand. Nokia says it will initially rely on word-of-mouth rather than a large marketing budget, but it clearly has an eye on mass market adoption, where bigger brands can be expected to play a stronger role.
Third, Nokia's approach is magnifying the risks. Having only a few months of experience operating its mapping/navigation service and Widsets, it has now announced several other services in a very high-profile way and then raised the risk by wrapping them together. One failure could mess up the reputation of whole package.
Although we do not have details yet, it seems that further risk comes from the nature of the wrapper. Several companies are actively assembling portals of this kind but none is successful yet, and then Nokia has branded the wrapper with a completely unknown name.
To top it all, Nokia is shining a very bright light on the whole thing by putting them all together into a new business unit, which will presumably have to report separately starting April 2008.
Nokia has given no numbers on the scale of investment, the impact on margins, the likely payback period or how to value the new business areas. It needs to do this soon.
The new strategy is also affecting the internal ways of working
In an analysts' side-meeting Nokia explained that it is trying to change its processes and culture in order to speed things up and make them more responsive to customers. The full extent of this is not clear, but it is starting to be evident in the number of beta demos that were shown and in the rate of new software releases for Nokia Maps.
One key aspect of Nokia's move into Internet services is that there is likely to be a lot of common functionality across the services areas. Just as search is already a key component of most big websites, that social networking and community communications will also become key components. That means that Nokia's move is not just about content services but is also a bet on the future of communications.
Interestingly, Nokia has acquired each of the key technologies involved from a different source, so it has a large and difficult integration task to realise the potential here.
Nokia is placing a very large bet in a very high-profile way
It has done this before with spectacular success. We believe the fundamentals behind it are correct and success will completely depend on execution. We anticipate a couple of difficult years before it will be possible to assess it fully.
Ovum is a ComputerWire sister company and part of the Datamonitor Group.
Source: Computergram

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