Low-end markets (not really?) a way out for Nokia

Image adopted from http://www.fonearena.com/blog/34403/

It is no secret that Nokia is in trouble. Since the launch of the iPhone and the subsequent entry of Android phones, Nokia market value has dropped 90% lower and its shares are now trading at less than 2GBP, from 28GBP in 2008. Nokia’s Stephen Elop has since realized that Nokia needs to listen to the market and offer the right products to the right people at the right time. The problem, however, is deciding which market to listen to.

Nokia currently has two major markets, the mid-high end smart phone market and the low end mobile market. The lack of suitable products for either market, the high costs from its scale, and the pressure from investors could force Nokia to concentrate its efforts on one of these markets.

One might think that because of the competition from Apple and Google in the high end smart phone market, Nokia should concentrate on the low-end market. After all, with Nokia’s scale and experience, it should be the 300 pound Kong in the playground. But surprisingly, Nokia has not been able to keep up with the rate this market has been evolving. In fact, there are 3 main reasons showing why Nokia may soon exit the low-end mobile market:

1.       The profit margins within this market are too low for Nokia.

Companies like China’s XiaoMi Tech have kept costs low and achieved fast cash flow-back through not having an outlet store, using local manufacturing, and adopting controlled release. Most of these techniques may not be applicable to a company the scale of Nokia. And even if Nokia could, despite its scale, reduce its cost to match that of regional competitors, the profit margins is likely to be too low for it to gain significant profit for a turnaround.

2.       Currently Nokia does not have the product the market needs.

Even if Nokia is happy on operating on low margins, it still needs to develop a product suitable for the market. Nokia has been slow in adapting to the requirements for the market. An example is its slow development of dual-SIM systems, a trend driven by the customer retention programs of monopoly network providers. The traditional advantage of their low-end feature phones is quality, but this is being undermined by both low prices and more applications from competitor products. In fact, Chinese vendors are flooding the low-end market with cheap smart phones packed with demographically designed features. Samsung now estimates that Africa, currently the world’s largest ‘feature’ phone market, will be dominated by smart phones in 5 years time. Nokia does not have a smart phone cheap enough to be loved.

3.       Resource dilution.

Resource is scarce for Nokia, and if it does not distribute what it has left wisely, it risk losing an important ally - Microsoft. The software giant made a big bet in choosing Nokia to be its partner with a specific aim to develop smart phones that will challenge Apple and Google. Up till now, this co-operation has caused Microsoft more money out than in. Selling smart phones in low-end markets could be too prohibitive because of the price set by competitors. Spending resources on creating ‘feature’ phones for this market defies the purpose of the co-operation.
 

The key point here is whether Nokia can start offering high quality and high-end specs at low prices. But even so, its current financial situation and the competition within this market may not give it the time and patience needed to regain its mindshare and market share leadership in this market. Therefore, it is very likely is for Nokia to exit regional low-end markets, especially the Chinese market. They may hang on to markets in Africa, to fund their research into the next generation smart phone. Eventually though, if things fail to improve, Nokia will exit the low-end market completely.