Original URL: http://www.theregister.co.uk/2009/07/22/smartphone_profits/

Apple, RIM trouser smartphone profits

A race to the bottom for everyone else?

By Andrew Orlowski

Posted in Mobile, 22nd July 2009 20:00 GMT

If you'd staked money on a US company and a Canadian company leading the world smartphone market ten years ago, I would have said you were mad - or under the influence. The global standard GSM was a European invention, and the Europeans and Japanese had been plotting their course for years. But the iPhone and the Blackberry are now returning the lion's share of profits in the mobile phone business to their creators, giving the old guard an unenviable choice.

According to Deutsche Bank analyst Brian Modoff, Apple and RIM will pocket 58 per cent of the profits in the handset business this year - with just 5 per cent of the market share. The two will take a whisker under a third of the smaller but profitable smartphone segment.

And it's going to get grimmer for Nokia, who ought to be so far ahead by now that the competition are dead pixels in the rear-view LCD.

In Q2, Nokia CEO Olli-Pekka Kallasvuo told investors, "smartphone volumes were 16.9 million and we estimate that our share increased to 41 per cent". [transcript]. Yet Apple knows how to move inventory, too. It shifted 5.2m iPhones in Q2, and the new model didn't reach the stores until June 19. The 3GS received yawns for failing to wow the market with new designs and features. What will the comparative numbers be once Apple starts to diversify its range?

Nokia explained how it's going to counter the threat.

"We’re going to democratize the Smartphone market", promised CFO Rick Simonen last week. He then offered a stick with which Nokia investors beat up the company later that day, wiping almost $9bn off the company's value:

"People are trading down to a certain extent. We can capture them as they trade down, unlike some others who might lose them as they move from one category down to others. "

That sounds like a race for the bottom.

There's a paradox here, because when you look at Nokia's portfolio, there isn't really a dog in there. Phones like the N79 or E71 are fine examples of good engineering and integration - and it's hard to imagine somebody being unhappy with one. But it's RIM and Apple who are creating the excitement and reaping the premium.

In fact, it's all about groovy products. As I wrote here, the newcomers have an advantage the incumbents don't. Apple's trick has been to tell the carriers to get stuffed - and charge the consumer for the privilege of owning one of its gadgets. But to get away with that, you need something that's really quite desirable. Why weren't Sony Ericsson or Nokia capable of delivering such a device? At various times, they've had the phone that's the most desirable in the phone shop - the T68 for example, or the N95. But nothing so attractive that it would make somebody leave home and visit the shop specifically.

Unfortunately, Nokia's leadership is still attached to management theory and abstractions. Kallasvuo talked about the "ecosystem", and - imagine Lincoln Gettysburg Address - "we will accelerate the adoption of innovative solutions much more quickly than companies that work alone". He's supposed to be the inspiring CEO.

Put the two statements together and you can sort of see the logic. Nokia can commoditize high-end features such as capacitive touch UIs and push email, roll them into a "platform", and make it all available to anyone who wants to make a handset. It's really the same strategy that has been tried for almost a decade - and failed, largely because Nokia's rivals don't want to be seen as Nokia clones. And the more bland and undifferentiated the "platform" is, the more bland and dull it is for Nokia's designers to work with.

Nokia needs insanely great products, but its product managers aren't allowed to make an insanely great Nokia phone (it will upset somebody, somewhere), and the product marketers aren't allowed to risk their jobs selling it. Playing it safe is how you keep your job.

It would be great to see Nokia come out fighting with compelling phones once again - rather than Management Theory 2.0.®