April 2014 marked the end of an era in the mobile world, one which few could have foreseen a decade earlier. In 2004, Nokia and Motorola accounted for 46% of the global handset market between them. Ten years later, Samsung and Apple command almost exactly the same combined share of the smartphone segment, while Nokia and Motorola are consigned to the ‘others’ category, outside the top five (Nokia is still, however, in second place in overall handsets, with 11.5% to Samsung’s 27.7% and Apple’s 10.7%, according to Strategy Analytics). And of course, by the end of this year, both the fallen giants will no longer be operating directly in the market they created. Microsoft has just finalized its acquisition of Nokia’s Devices & Services business, and says it will kill off the venerable brand name. Lenovo is likely to hang onto Motorola as a brand name which still has US cachet, but the company itself will cease to exist in handsets.
That leaves four companies struggling to adjust to their new roles in the mobile market. Microsoft, having gained a handset unit, and Google, having lost one, will need to recalibrate their bids for mobile platform dominance, now and in the next generation. Nokia will refocus itself on its remaining businesses, in wireless infrastructure, mapping and IPR licensing, under newly appointed CEO Rajeev Suri, formerly head of Nokia Solutions and Networking (NSN). And Lenovo, once it finalizes the purchase of Motorola Mobility, will need to ensure it exploits its new asset effectively and finally escapes the category of PC giants that are struggling to make their mark in mobile (Dell, Acer, Hewlett-Packard etc).
Nokia: Finnish firm breaks free of smartphone business at right time
Nokia kicked off its new post-handset life with plenty of ammunition to justify its exit from the business it helped create. Its first quarter results showcased a sharp contrast in profitability between continuing operations (net income of €108m, reversing last year’s €98m loss for these activities) and that of the devices business which has been offloaded to Microsoft.
With that unit still included in the figures, Nokia suffered a loss of €239m, somewhat down from last year’s €272m figure, but still a headache for Microsoft. The Devices & Services business saw a 30% year-on-year decline in revenue to €1.93bn and an operating loss which widened sharply to €306m, from €73m a year earlier.
It was not only Nokia’s own device unit problems, now someone else’s to grapple with, that suggested the Finnish firm had been right to sacrifice size and heritage for a return to profit. Even the mighty Samsung was suffering from the consolidation and price wars of the smartphone market, and pressure from the increasingly effective Chinese manufacturers. The Korean firm announced the lowest sales in its mobile division for five quarters, as Chinese rivals start to eat away at the Samsung/Apple duumvirate. In its first quarter, its largest unit fell to KRW32.4 trillion ($31bn) in sales, and saw its first decline in smartphone market share for four years.
Nokia’s new CEO ‘ NSN chief Rajeev Suri was duly anointed as the new leader ‘ cannot be too smug about escaping the travails of the handset business though. The main activity of the new Nokia, mobile broadband infrastructure, has plenty of pressures of its own, some of them also springing from Chinese competition. Even without the troublesome Devices & Services unit, Nokia still experienced a year-on-year drop in Q1 sales of 15%, down to €2.66bn, which was below analyst estimates averaging €2.85bn. And revenue at the NSN networks unit fell by 17% year-on-year to €2.33bn, blamed by the vendor on lower sales in the important services arm, as well as currency fluctuations and divestments.
The choice of Suri, a 20-year veteran of the Nokia infrastructure business and NSN’s chief since 2009, as CEO is predictable and safe. If it doesn’t quite proclaim a brave new Nokia, it fits the recent pattern of technology firms sticking with known quantities, even to steer them through massive change (Intel and Microsoft, in particular). Like the heads of those two giants, Suri is well known and well respected, and his appointment confirms that, while Nokia may want, and need, to adopt some lateral thinking in its growth plan ‘ in particular to build on the powerful Here location property and exploit its mountain of IPR creatively ‘ it will, in the short term at least, live and die by infrastructure.
The markets were generally pleased by the choice of Suri (and the dropping of the NSN brand, always an awkward acronym once it was no longer Nokia Siemens Networks). He has presided over a restructuring process at NSN which has been too protracted, starting almost as soon as the company was formed as a joint venture with Siemens in 2007, a merger outdone for mishandling and bad timing only by that of Alcatel-Lucent. But Suri is credited with building up the services business and, more recently, masterminding the refocusing of NSN onto mobile broadband alone. This contrasts with the turnaround strategy at ALU, whose own newish CEO, Michel Combes, is pursuing a broader IP platform.
Suri’s reorganization is just about ready to be called a turnaround, having delivered some profitable quarters and become a highlight of recent Nokia results, rather than a millstone. Most importantly, he has positioned his company, more effectively than rivals, as a software firm, in areas like dynamic network management and virtualization. The momentum must be maintained, however, as Ericsson, in particular, nails its colors to the software defined networking mast and threatens to eclipse Nokia’s efforts.
Suri insisted his presence in the top chair does not mean the other Nokia businesses will be sidelined. While the former NSN is responsible for most of Nokia’s revenues, it delivered 71% of adjusted operating profit in Q1, highlighting the profits which the company will hope to milk in mapping and patent licensing, to counterbalance the squeezed margins on infrastructure.
The new CEO will have some cash to play with, even after announcing new dividends and buybacks. It will pay about €800m in ordinary dividends for last year and 2014, around 11 cents a share for both years, and plans a one-time dividend of €1bn, or 26 cents a share, to be paid on or about July 3, plus stock buybacks of €1.25bn over two years.
After those payments, there will still be money to invest, though Suri is not expected to do anything dramatic. He has said before that he will seek alliances ‘ perhaps deepening the existing partnership with Juniper, for instance ‘ rather than major M&A, and is likely to spend the Microsoft proceeds in enriching the remaining product lines through intensified R&D in key, but unspecified, areas, and perhaps in ‘small’ acquisitions to fill gaps in the range, as he put it. Nokia would have had €7.1bn in net cash at the end of March had the Microsoft deal been completed by then, and now it has been finalized, the Finnish firm says the proceeds, which include patent licensing fees, may be ‘slightly higher’ than the €5.44bn originally announced.
The start of Nokia’s new life free of handsets began as its most recent nemesis, Samsung, was facing pressures of its own. Sales and market share in the mobile business are starting to drop off just as the Korean giant becomes more dependent on that unit, amid problems in the TV and other markets. The mobile division now accounts for 76% of operating income. ‘Samsung’s heavy reliance on mobile is rising, posing persistent concern to the market,’ Oh Sang Woo, an analyst at Leading Investment & Securities, told Bloomberg. ‘The bigger-screen smartphone market is what Samsung pioneered and it enjoyed leadership in that segment, but the company now has to share that pie.’
Samsung’s share of global smartphone shipments in the first quarter fell to about 31%, down a percentage point on the year-ago period, according to research by Strategy Analytics. Apple’s share fell more sharply, from almost 18% to 15%, clearly showing how a segment which has been dominated by two firms is becoming more competitive. In particular, Huawei and Lenovo both grew to about 4.7% apiece, and we can expect another Chinese major, Xiaomi, to be in the top league soon, having announced plans to expand into 10 more countries this year, including the giant markets of India and Brazil. Xiaomi has already overtaken Apple in China.
Microsoft: Nokia will only add to Nadella’s mobile challenges
The era when Nokia was synonymous with cellphones ended on Friday after three decades, with the sale of most of its Devices & Services business to Microsoft. The acquisition will be even tougher to digest than it was to finalize, coming at a time when new Microsoft CEO Satya Nadella seems to be moving away from his predecessor’s vision of building an Apple-style hardware/software experience.
Nadella has focused heavily on mobile and cloud in his maiden speeches, but not necessarily with Windows always at the heart, and with greater willingness to support rivals’ hardware (the release of the all-touch tablet version of Office on iPad first, not Surface, for instance). So now Microsoft has to absorb a device business increasingly focused on the mass market ‘ a very different set of financial norms to those of software ‘ at a juncture when mobile platforms still generate a tiny portion of total revenues.
Whether Steve Ballmer’s gamble will be justified despite these challenges remains to be seen, but we would not be surprised to see many of the hardware assets sold on or closed down, as Microsoft learns the same lessons Google did over Motorola ‘ that there is some sense in creating cutting edge devices to showcase a user experience and drive the ecosystem, but high volume, low margin smartphones are a different matter for a software house, especially at a time when the sector is commoditizing.
Despite concerns over Nokia, Nadella’s focus on cloud and mobility is consistent and generally applauded. The company’s most recent financial results, for its fiscal third quarter, were stable, but highlighted the need for growth in these key businesses, and others such as internet of things (IoT).
That does not stop some analysts worrying that the new CEO may try to move too quickly, at the expense of established revenue streams. ‘For all Microsoft’s talk about mobile and cloud, those two categories likely generate under 10% of its revenue today,’ blogged Jan Dawson of Jackdaw Research. Windows and non-cloud Office revenue are calculated to be about half of the total revenue and 90% of operating profit, compared to less than $bn for Office365 and $700m for Enterprise Cloud Services.
Nadella, nonetheless, reiterated the themes that he hopes will define his CEOship, claiming that cloud momentum was the high spot of the Q3 figures, and pointing to the ‘opportunities we see in a mobile-first, cloud-first world’.
The company reported revenue of $20.4bn for the quarter ended March 31, down slightly year-on-year, and net income was also down, to $5.66bn, from $6.06bn the year before. However, the cloud-based Office 365 suite boosted its revenue contribution by 100% year-on-year, while the Azure cloud platform was up 150%.
By contrast, the Devices & Consumer division, into which Nokia’s devices will be folded, grew by a more modest 12% to $8.3bn, although Ballmer will be able to do some gloating over his hardware push, since the Surface tablets increased their sales by over 50%. That will be a worrying detail for Apple, given the 16% slump in its iPad sales in the same period, but Surface’s revenues are hardly going to keep the iPhone maker awake at night, at $500m. Jackdaw estimates that the company pulls in just less than $400m in revenue related to Windows Phone and Android licensing each quarter, though this could fall by between $100m and $200m per quarter now that Microsoft is axing licensing fees for Windows Phone on smaller gadgets.
Nadella commented on Nokia, saying: ‘With the addition of Nokia’s talented people, and their deep expertise in mobile technologies, we will enhance our device capabilities’, which gives clues to what he will value most in the acquisition ‘ design and technology skills, rather than the handsets themselves, perhaps pointing to a similar line to that taken by Google, with the key experts from the new unit becoming the hub of an R&D effort focused on next generation device/user experience.
CFO Amy Hood commented: ‘For Q4, we will clearly show the impact of the ending of the commercial agreement, Nokia’s ongoing operations, and any one-time integration and severance costs.’
Meanwhile, the remains of Nokia will announce results tomorrow, and the company, now focused on wireless infrastructure, location services and IPR licensing, is expected to announce that Rajeev Suri, head of NSN, will become overall CEO.
Lenovo: Motorola is its key to avoid fate of other PC escapees
Even without Motorola, Lenovo took fourth place in the global smartphone market in the first quarter of 2014, with 13.3% by Strategy Analytics calculations, just narrowly behind Huawei on 13.4%. This shows how the Chinese majors are starting to eat into the Apple-Samsung dominance, harnessing mid-tier pricing and China’s own growth, in the same way that those two giants ate away at Nokia/Motorola with touch interfaces and apps stores.
However, Lenovo will not be able to rely on keen pricing and its home market alone. It has several key challenges before it can dream of usurping Samsung’s crown. These include gaining better brand recognition as a mobile, not PC, maker in western markets; creating a clearly differentiated mobile experience rather than being stuck as a ‘me-too’ Android provider; and minimizing the negative impact of its PC operations, as their segment declines. The former IBM PC unit has helped make Lenovo a household name outside China, but the dangers of depending for too long on a sector in freefall are clearly seen in Sony’s most recent quarters, and the financial pain of exiting the space.
Motorola will be Lenovo’s key to all three of its main challenges, despite the US firm’s own challenges in market share, which Google failed to address. But it will bring its Chinese parent a venerable brand, especially in the US; and ‘ this is partly thanks to Google ‘ an increasingly interesting range of devices and user experience, epotimized by the affordable but distinctive Moto X, and with a new launch due this month. Google may have held onto the more cutting edge activities, such as Project Ara, but some of its cloud-oriented thinking may well have percolated into Google during their brief marriage. And of course, if Lenovo can build on the momentum of its recent mobile progress, it will be better able to survive the transition away from PCs.
This has become increasingly urgent for PC vendors, and their key suppliers, like Intel. But Acer, HP, Dell and others have signally failed to make much impact on the smartphone world, despite advantages such as established enterprise bases. They have serially launched low-impact models and, in HP’s case, acquired a whole platform, via Palm, before shutting it down. Unlikely to become handset majors now, they have a second chance to create a replacement for their PC businesses, in the form of ‘post-PC’ form factors such as tablets and cloudbooks, and also in wearables.
This was clear in Acer’s latest launch event. The Taiwanese firm has made multiple attempts to shine in the mobile market, with little success, but it hopes to make a bigger impact on the ‘post-PC’ world. The company is responding to Lenovo’s mobile push with a multipronged product attack ‘ a much expanded tablet play; Chromebooks running both Intel and ARM processors; various hybrid form factors; and the inevitable new additions to the armory, a smartwatch and a cloud platform.
The company’s CEO, Jason Chen, told a New York launch event this week that the refreshed product line-up comes at a ‘critical moment’ for the PC maker, and for once this is not chief executive hyperbole. Acer has suffered years of decline, and like all PC majors, needs to act urgently to fill the gap left by the decline of the conventional desktop and notebook. Now it is tapping into the trend to include touchscreens in every form factor, and to go online, work and consume content on multiple gadgets and screens, with a cloud platform to store everything and unify the user experience.
Chen echoed the mantras of many rivals and partners, including Microsoft’s new CEO Satya Nadella, that the company must put the cloud at the heart of its post-PC strategy. The Acer device should become a ‘data center’ to link many platforms, including non-Acer products and multiple mobile OSs, in order to create a private store of data.
In other words, despite the importance of the cloud, Acer recognizes that most users still store at least some of their data, applications and content locally, and will continue to do so. He said: ‘We want users to ‘build-your-own-cloud’. We have a technology platform where you can access your data, documents and photos, in your local hard drive, from devices you carry with you, like smartphones and tablets.’
The focus on the cloud is hardly new, even if the language of the hype changes almost monthly. Over two years ago, Lenovo and Acer were in the forefront of the move to personal cloud offerings to support smartphones and tablets. ‘Acer is back on the right track,’ proclaimed company chairman JT Wang at the time, as the firm showed off its new ultrabook, backed by the AcerCloud service for syncing files across multiple Acer devices.
And also at the Consumer Electronics Show of 2012, Lenovo said it wanted to be seen as a ‘personal cloud solution provider’ rather than a PC manufacturer. It unveiled a platform which could bridge four screens including TVs, smartphones, tablets and PCs, though initially just for China. Hardware companies have to move beyond ‘toaster-like’ commodity devices and present solutions, the firm said, claiming to be ‘breaking down the barriers of device differentiation and weaving together hardware, software and cloud services that are connected, experiential and dynamic.’
These are big visions, but they require significant changes in user behavior, which take time, And in the meantime, of course, all this cloud talk is still about shifting those gadgets and carving out a role for PC makers, not just smartphone specialists, in the hybrid world. Acer launched some devices this week and others will follow through the year, all linked to the cloud platform. Even the more traditional offerings, like Acer’s signature notebooks, will be evolved with better always-on connectivity, touchscreens and a high degree of customization.
The company’s first wearable is a 17-millimeter band for activity and lifestyle tracking, as well as messaging, which is likely to ship in conjunction with the upcoming Liquid Jade, Acer’s latest attempt to have a high-impact smartphone. This is expected in late July with a 5-inch display and, according to the vendor, ‘no flat surface’.
Acer’s more mainstream launches were the Aspire Switch 10, a four-position tablet/laptop hybrid with 10.1-inch display, Windows 8.1 and a detachable hinge design; the Iconia One 7 thin Windows 8.1 tablet; Iconia Tab 7, a 3G-connected tablet; Aspire U 5 all-in-one, a 23-inch model with hefty multimedia capabilities; three Aspire models (15-inch, 14-inch and 11-inch) with Intel or AMD chips, and with touch or non-touch interfaces: and the latest Acer Chromebook, claiming to be the fastest available, and the first to run an Intel Core i3 processor.
Google: after Motorola failure, a new approach to Android control
The motivation for Google to buy Motorola Mobility ‘ similar to Microsoft’s in acquiring Nokia ‘ was to enable it to create an integrated hardware/software platform, which would be optimized to show Android at its best (as defined by Google). However, that attempt does not end with the recognition that a mass market handset maker has no place in Google’s economics. The search firm still has several programs to develop future mobile experiences around Android, with efforts like Project Ara; and it has its Nexus initiative, also primarily designed to show off a ‘superior’ Android implementation revolving around Google services.
Post-Motorola, that role for Nexus is set to become more explicit and aggressive, as Google prepares to replace the current Nexus strategy with one called Android Silver, which will deliver high end devices designed to wow the developer and consumer communities, and fight off Apple. However, in seeking greater control over the Android UE again, Google risks returning to the same conflicts of interest that beset its Motorola flirtation ‘ competing directly with key Android supporters like Samsung. Nexus just about navigated these muddy waters by involving partners, including Samsung itself, in making the devices, and in confining itself to a role as a showcase rather than a mass vendor. However, in its bid for control, Google may overstep the mark with Silver.
Google has always struggled to balance the open source nature of Android, which powered its rapid expansion, with its desire to control the user experience. For its mobile operating system to deliver direct revenues, rather than just influence, it needs its services at the heart of most Android user interfaces. It also needs to ensure a certain level of quality of experience to keep the most lucrative users loyal, which points to greater unity than the fragmented system has enoyed.
Instead, despite its runaway success, the OS has always been something of a double-edged sword for Google. It encourages users to shift from PC to mobile usage, and drives considerable advertising revenue, but these mobile ads are less profitable than PC-based equivalents. Worse, there are many Android suppliers which manage to bypass Google’s services altogether, leaving the search giant with most of the cost of developing the operating system and supporting the ecosystem, without the resulting benefits. With Yandex, the ‘Russian Google’, helping Android vendors create a Google-free experience and Chinese web giants going their own way too, the OS’s old problem of fragmentation is set to get worse, adding to its owner’s difficulties. At home, there is even the prospect of Microsoft emulating Amazon and supporting and Android ‘fork’, even as the new breed of HTML5-based mobile platforms threaten to take off in high growth emerging markets.
These pressures have led the search giant to engage in various attempts to assert control over the Android experience ‘ most blatantly with the Honeycomb release for tablets, when Google flouted its open source principles and restricted initial access to a few partners it could ‘trust’ to deliver a quality experience. It also put paid to Acer’s plan to launch a device running the Chinese OS, AMOS, on the basis it contained elements of Android and infringed the rules of the Open Handset Alliance, the trade group supporting the Google OS. And the European Union may probe the search giant’s agreements with Android OEMs which want to use key Google apps such as Search, Maps and YouTube. These must sign a ‘Mobile Application Distribution Agreement’ which can require them to make Google the default search engine, to preinstall certain apps, and to place them in a particular place.
Now Android Silver will add to the criticisms that Google is a control freak around its supposedly open platform, and that it aims to compete with its own hardware partners. According to sources who spoke to The Information, Silver devices should launch next year in the US and other large markets such as Germany and Japan, initially targeting the high end smartphone segment. Google will not be returning to the strategy that marred its initial Nexus launches in 2010, of looking to minimize the operators’ role and sell directly to consumers. Instead, it is said to be negotiating carrier deals with Sprint, T-Mobile, Telstra, Softbank and others, a change from the mainly online route to market of Nexus, and a sign of the continuing power of cellcos ‘ however Google may regret that ‘ in making or breaking a new device. The search company will spend large sums on advertising and promotions, which would reduce the spend required from operators to launch the products.
A conventional carrier launch with massive promotion will clearly compete with Android partners like Samsung in a way that the co-branded, online-focused Nexus models did not. However, Google is still expected to source the handsets from branded partners, rather than just getting them made by a contract manufacturer, and the company might still work with Motorola in this way, as well as LG, which provided the recent Nexus 4 and 5 models. However, Samsung, Sony and HTC are expected to steer clear and focus their efforts on differentiating their own high end handsets and user experiences.
And Silver also sees Google tightening its grip on the Android experience. The Silver devices will ‘sharply limit’ the number of non-Google apps that can be pre-installed, the report says.
‘Google really is turning into the pigs in Animal Farm,’ one handset maker told The Register. ‘There’s more and more resemblance to Microsoft in the way it controls the PC experience every day.’
This is a huge gamble. While Google may have a chance of creating its own platform for new markets like wearables and cloudbooks, and imposing some form of unity from the start, in Android the power lies with companies which have created their own implementations, like Samsung, or even complete forks, like Amazon and Nokia. The danger is that Samsung, which is already asserting its independence from Google as well as flirting with other OSs like Tizen, will emulate Amazon and create a ‘de-Googled’ experience, setting a precedent that others, even Lenovo, could follow.