Vendor Ratings, VDR Ken Dulaney, Ben Wood

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1 Vendor Ratings, Ken Dulaney, Ben Wood Research Note 1 April 2003 Vendor Rating: Nokia s Products, Technology and Pricing Nokia dominates the Global System for Mobile Communications market, a strength that counterbalances weaknesses in other areas. Nokia faces challenges from emerging competitors and an overcapitalized market. Nokia Overall Rating: Positive What You Need to Know: What keeps Nokia ahead of its competitors is its market presence, willingness to lead the mobile community with standards initiatives and dogged support for emerging technologies, including 3G and multimedia messaging. Nokia is strong, but is being challenged by new vendors, as well as a market that is overcapitalized and under financial pressure. Nokia is a resilient company and is constantly reinventing itself. However, the challenges that it will face in the next few years will test it like never before. Analyst Comments: Nokia s core handset and infrastructure products have the most impact on its revenue and profits. Nokia is strong in GSM and its 3G follow-on UMTS and European markets, but faces threats in CDMA and Asian and North American markets. Detailed Rating: Initiative Rating Change Corporate Viability Strategy Caution No Change Financial Positive No Change Marketing Positive No Change Enterprise Initiative Caution No Change Organization Positive No Change Product/Services/ Technologies Product/Service Positive No Change Branded Phones/Fashion Phones Positive New GSM Strong Positive New UMTS Positive New CDMA Caution New TDMA Positive New Infrastructure Positive New Technology Positive No Change Pricing Promising No Change Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Customer Service/ Product Support Sales/Distribution Strong Positive No Change Support Services Positive No Change Products/Services/Technologies: Branded Phones/Fashion Phones (Rating: Positive) Nokia is the undisputed Global System for Mobile Communications (GSM) market leader in Europe, which has made it the leader in most parts of the world. However, Europe has a GSM saturation level of 80 percent; despite fuel from the replacement market, Nokia s 50 percent share is unsustainable. If Europe moves to alternative products or a downturn, Nokia s entire market could be threatened. Samsung is cherrypicking niche phone segments and is an example of the threat to Nokia. In Japan, Korea and other parts of Asia noted for technology innovation, Nokia phones can only be found in stores specialty sections. Motorola dominates the Chinese market. Therefore, to grow if not just to maintain global market share Nokia must do better in Asian and North American markets through a stronger product portfolio. The handset market, through commoditization, is where Asian vendors want it ready for vendors that can withstand high turnover of products, and for which manufacturing expertise is king. Although these are the same qualities that Nokia claims are its strengths, Asian vendors operate by different rules. Nokia believes that size and aggressive negotiations drive down costs to points unachievable by smaller vendors. However, Asian manufacturers concentrate on share gains at the expense of short-term profits, and often cross-subsidize a product line with profits from others. Nokia s pre-eminent brand and control over product launches often overshadow operators initiatives, driving operators to seek Nokia alternatives. Operators need more control to ensure return on large investments in infrastructure. Lower costs and a proliferation of products provide mobile operators the opportunity to co-brand or private-brand products. For example, Motorola recently announced that it was moving toward more customization of its products for operators, likely because it observed that this trend was inevitable. Operator brands could affect Nokia s share, especially on the low end. Operators also are concerned about loss of portal control, and they are threatened by initiatives such as Club Nokia, despite Nokia s claims to the contrary. Nokia is supporting the Open Mobile Alliance standards body, but operators are subtly pushing the GSM Association as an alternative. In 2001, Nokia s product design faltered with the 5510 but was reinvigorated with the 3650 and The 3650 will be challenged by Asian camera phones, competition that past Nokia product generations did not face. The 6800, although innovative in design, addresses Short Message Service (SMS) convenience, but not regular , which requires larger screens. Nokia s adherence to open-face designs flaunts its belief that product design is part of its image, rather than an element of user preference. This hurts Nokia in markets such as Asia and North America, where clamshell products are popular because they retain a small form factor, yet permit increased screen sizes. The N-Gage gaming console could be a brilliant move, but may be overengineered and too high-priced for the games market. Nokia s drive to increase software titles to match stalwarts such as Nintendo could drain its resources. A dedicated wireless gaming market has yet to be established. Channels are also a challenge. A new competitive battleground for Nokia will be smartphones, based on Symbian and Java 2 Platform, Micro Edition (J2ME). Competition will come primarily from vendors employing Microsoft s.net smartphone platform. J2ME s potential on enterprise clients is fragmented, with Sun Microsystems 1 April

3 providing little leadership. Microsoft could benefit if enterprises begin to enforce phone selection at the software platform level. Microsoft has some advantages via Exchange, but is seriously challenged due to software immaturity and lack of established handset vendor support. Global System for Mobile Communication (Rating: Strong Positive) Nokia will continue to be extremely strong in GSM where it dominates and will experience few challenges to its stature. Universal Mobile Telecommunications System (Rating: Positive) The delay of third-generation (3G) technology has affected Nokia s infrastructure revenue, but it has enabled Nokia to refine its Universal Mobile Telecommunications System (UMTS) offering, which has been under pressure. Its 3G handsets are less advanced; they re slow, lack video and other important features. Although several European operators are in UMTS trials, UMTS will not have wide European appeal prior to With increased operator cost reduction focus, Nokia will be pressured to focus on equipment pricing and efficient use of resources. Nokia also must focus on improving voice capacity, which is the driver for operators (rather than data speeds). Nokia is focusing considerable effort on its Enhanced Data Rates for Global Evolution (EDGE) offering, particularly in North America, where it has supply contracts to migrate networks to GSM and EDGE. Code Division Multiple Access (Rating: Caution) Nokia s code division multiple access (CDMA) handsets are a limited choice set of low-end devices (voice plus SMS). Although Nokia has made moves to leverage its best-selling terminal packages, the devices fail to implement the strong data vision for GSM/general packet radio service or Qualcomm s Binary Runtime Environment for Wireless initiative. Nokia wants to grow its CDMA market share, but we believe it will remain a Tier 2 player due to an onslaught of highly varied and technically diverse Korean products. Nokia s belated and less-than-impressive entry into the CDMA handset business may cost Nokia the No. 1 slot in the mobile terminals market due to the rise of CDMA worldwide. The launch of Nokia s IS-95B gray-scale display terminals in South Korea was ill-timed, given the technology and price advantages of cdma2000 1x terminals. Thousands of new Nokia devices have been given free to customers, lowering brand perceptions. The entrenched positions of Korean handset vendors Samsung and LG obstructed Nokia s penetration of the Korean market. Nokia s reluctance to work with Qualcomm suggests that Nokia will never enjoy significant success with the current generation of CDMA technology. Its decision to manufacture its own chipset will cut it off from important initiatives tied to Qualcomm worldwide. In January 2003, Nokia closed its Seoul, South Korea, CDMA R&D center, which was an understandable cost-cutting measure consolidating dispersed R&D resources to San Diego. This is not a retrenchment or downscaling of CDMA research, but it leaves Nokia less visible in the Korean market, a strong CDMA test bed for handsets, infrastructure and data services. Also, Nokia is ending its production alliance with Telson Electronics, a Korean handset maker that supplies handsets to Nokia under contract. Nokia is exiting this unproductive original equipment manufacturer relationship because of low volumes and poor longer-term prospects. These decisions suggest that Nokia is revamping its CDMA business globally, not only its Korean strategy. The Korean retrenchment undermines Nokia s prospects in the North American and China CDMA markets. Nokia is expected to re-enter the Korean market in 2003 as a supplier of wideband CDMA (WCDMA) equipment. Nokia retains its production plant in Masan City, South Korea, producing more than 30 million GSM handsets but has no local R&D resources. Nokia lacks a CDMA infrastructure business, which tends to support large-scale handset supply agreements with operators. Nokia should investigate upgrading this segment of its business, possibly through acquisition. 1 April

4 Nokia can t afford to exit the CDMA market entirely, but it is minimizing its exposure in a business that offers it limited margins. However, Nokia must make the CDMA business grow and become competitive, or it should plan to exit the market. Time Division Multiple Access (Rating: Positive) Nokia has a solid time division multiple access (TDMA) share through AT&T in the United States and Latin America. It also has combination products (TDMA/GSM) that can help customers migrate client bases to GSM networks. However, these devices don t offer color and other technical features that Nokia deems important in other markets. Nokia s TDMA business is strong, but because TDMA is a dead-end technology, this business is shrinking. Infrastructure (Rating: Positive) Nokia has risen to the No. 2 position in the infrastructure business. Nokia has focused on GSM and the technology migration paths leading to UMTS. It also recently has focused on application platforms, rather than only core network equipment. Successful applications will not only generate platform-based revenue, but also will drive the requirement for further base-station equipment. This strategy is producing early successes, with Nokia winning several multimedia messaging contracts. Network pull-through contracts will take longer to materialize. Mobile network contracts have been more carefully awarded, and revenue from 3G equipment appears to be slipping as operators cut capital spending and slow down 3G implementation plans. In 4Q02, Nokia had close to 20 percent of its revenue from WCDMA. This is good growth from previous quarters, but it is not near the estimate of 60 percent to 70 percent from 4Q00. Recent announcements from Nokia concerning its early outlook for 2003 are far from positive, cutting year-on-year estimates. Large operators are optimizing their supply chains and considering negotiating global purchasing agreements. Nokia must ensure that it continues to increases its exposure to top-tier international operators in their home markets, as well as their subsidiaries, something that Gartner has historically considered a concern for Nokia. Unlike many of its competitors in the infrastructure market, such as Ericsson and Lucent Technologies, Nokia has not had to announce large-scale reductions in staffing. Nokia will need to focus on efficiency programs, and see increased sales and revenue from its network equipment business, to avoid similar actions. Nokia seems to understand this and has reduced head count in its infrastructure business, despite the profitability of that segment. Nokia has a limited enterprise infrastructure business with virtual private network, wireless LAN, firewall and detection appliance equipment. Greater strength is needed here to support Nokia s drive toward the enterprise. Acquisitions are an obvious path to bring credibility to this segment. Pricing and Licensing (Rating: Promising) Nokia s pricing and licensing strategy is designed to create and expand markets. Series 60 has succeeded and become the mainstay profile within the Symbian platform. Series 60 will deliver revenue and industry prestige benefits, and indicates that Nokia can t continue to maintain its previous level of proprietary control of software. However, Series 60 faces difficulties. Sony/Ericsson and Motorola are reluctant to support Series 60. Manufacturers such as Motorola also have been aggressive in their licensing strategies, as exemplified by the Digital DNA brand, and especially in China. Motorola is supporting Linux for Chinese markets. In the near term, Nokia will enjoy a time-to-market advantage compared to its Series 60 licensed vendors. This advantage will diminish in the midterm and as licensees develop more-competitive offerings. Ironically, Series 60 could turn out to be a threat to Nokia if its competitors react more quickly to changing 1 April

5 market conditions and enjoy improved margins by being first to market with new featured devices. Also, Series 60 is controlled by Nokia, yet its underlying operating system is controlled by Symbian. Although this dual-source strategy is working, the platform could fragment as Nokia competitors change peripheral technologies through Symbian, while leaving Series 60 intact. Series 60 certification may not be rigid and broad enough to prevent fragmentation. The broader question regarding licensing relates to the direction of the cellular handset industry and the shift of mobile phones from specialized wireless devices to the status generic consumer electronics. This is akin to the growth and evolution of the IBM PC clone in the 1980s that caused huge vendor strategy shifts to survive. Such shifts are not bad news for big brands like Nokia, even considering the huge internal turmoil and restructuring that may arise. Nokia has begun restructuring, but it likely will have to change further to match the breadth of industrywide changes. Related Research and Ratings: Vendor Rating: Nokia Faces New Threats in the Mobile Age Rating Definition: Strong Positive Positive Promising Caution Strong Negative Solid provider of strategic products, services or solutions. Customers: Continue investments. Potential customers: Consider this vendor a strong strategic choice. Demonstrates strength in specific areas, but is largely opportunistic. Customers: Continue incremental investments. Potential customers: Put this vendor on a short list of tactical alternatives. Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured. Customers: Watch for a change in status and consider scenarios for short- and long-term impact. Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor. Faces challenges in one or more areas. Customers: Understand challenges in relevant areas; assess short and long term benefit/risk to determine if contingency plans are needed. Potential customers: Note the vendor s challenges as part of due diligence. Difficulty responding to problems in multiple areas. Customers: Exit immediately. Potential customers: Consider this vendor only if there are no alternatives. Acronym Key 1 April

6 3G CDMA EDGE GSM J2ME SMS TDMA UMTS WCDMA Third generation Code division multiple access Enhanced Data Rates for Global Evolution Global System for Mobile Communications Java2Platform, Micro Edition Short Message Service Time division multiple access Universal Mobile Telecommunications System Wideband code division multiple access Core Topic Mobile Infrastructure, Technologies and Markets ~ Wireless and Mobile Nokia 1 April