Rarely do you see a company considering jumping back in time while talking about the move as the next logical strategic step forward. Yet that is just what Nokia CEO Olli-Pekka Kallas did in an interview with Finnish reporters the other day when he announced that the company is considering entering the laptop market. No, that’s not a misprint! Olli-Pekka indicated that he sees the mobile phone and the personal computer market converging and that because millions of people have their first Internet experience on a phone, this somehow suggests that Nokia should jump into the laptop game.
While the market “convergence” vision has been flashing like neon lights on the highway ahead for quite some time, Nokia’s laptop logic eludes me. If anything the number of laptop players had been shrinking because of very difficult competitive dynamics. This trend has recently reversed somewhat with the introduction of new netbooks -- pushed primarily by Intel, which needed a platform to sell its new Atom microprocessor. Now, however, that means there are dozens of small companies in Taiwan and China who are splashing into the netbook pond. (See LG & Intel Work on 'Future' Device and Qualcomm Has New Gobi.)
However, aside from the competitive dynamics, Nokia would face a number of issues that would make a laptop venture a classic disaster. Let’s examine them.
I know some will suggest that Nokia is addressing the problem every day with their handsets, which, obviously, are specific to GSM, WCDMA, and/or CDMA. That’s true, but they’re also dealing in volumes that are north of 100 million of units each quarter. It is a lot easier to do financially at those levels than it is just starting out with laptops.
Currently, despite the depressed conditions in the handset industry, Nokia’s handset operations deliver gross margin in the mid-30 percent range and operating margin of about 17 percent. And it was a tough year! One of the reasons for these margins is size of the company’s handset operations. The company reported revenue of €35.1 billion in 2008 on sales of more than 450 million units. Adding to this advantage is the fact that Nokia has its own intellectual property (IP) in the devices in the form of software and circuitry designs for the digital baseband and applications processors. Semiconductor suppliers like Texas Instruments Inc. (NYSE: TXN), Qualcomm Inc. (Nasdaq: QCOM), and Broadcom Corp. (Nasdaq: BRCM) are willing to provide Nokia-specific solutions because of the volume potential that Nokia can deliver. Along with that comes better pricing for Nokia and pretty good margins relative to their peers, as you can see in the table below.
Table 1: Handset Operating Margin - Q4/08
|Source: Company Reports|
In the land-of-laptops, there is no Nokia IP and, as a result, there will be no margin premium. For comparison, Dell Technologies (Nasdaq: DELL) and HP Inc. (NYSE: HPQ) have mid-single-digit operating margins. Granted those figures include more than just laptops but these two companies are also pushing far greater volumes than Nokia would be. Given the fierce competition in that market, I can’t imagine Nokia’s operating margins would be significantly different from that of Dell or Hewlett.
And that’s where the investors come in. They’ll have a fit! No one wants to see a company that they have stock in commit suicide. That’s what Nokia would be doing by entering a new business in which growth is slowing, they have no competitive advantage, and the operations are going to be a drag on corporate margins. It is a prescription for how to send your stock south in a hurry.
Rather than wasting time and resources on this white elephant, Nokia should continue to concentrate its efforts on developing a credible smartphone. That is where the growth is and will continue to be, but the company’s offerings have demonstrated that it was late to the party. (See Nokia to Cut Phone Production.) As I have noted on these pages before, I think that smartphones are going to squeeze the mid-tier of the handset business to the point that it will be far smaller than it is today and that segment is Nokia’s sweet-spot. Right now, the question management needs to answer is, “Can they catch up?” (See Chaos in the Wireless World.) Positions: None — Bob Faulkner, Special to Unstrung