Like most Finns, Perttu Iso-Markku always bought mobile phones made by his country's biggest company, Nokia Oyj. Then in February, he invested in an Apple Inc iPhone and started loading it with applications.Nokia is unlikely to win him back anytime soon. "If I just wanted a phone, I’d buy a Nokia," said Iso- Markku, a 34-year-old officer at OneWorld Finland, a non-government organization. "I wanted something more like a small computer."
Iso-Markku’s switch shows how Espoo-based Nokia, the world’s largest maker of mobile phones, is struggling against application-rich competitors such as Apple as customers increasingly want their handsets to be catch-all devices. As more and more of the industry’s battles are fought on content, Nokia’s piece of the $50 billion market for smartphones, the industry’s fastest-growing segment, is shrinking.
Failure to capitalise
"The Apple store provided a very simple path for developers to create stuff and get it into the hands of users, and there’s no question they’ve done it more effectively than anyone else," said Nick Jones, a Egham, UK-based analyst with industry researcher Gartner Inc. "Now everyone’s playing catch- up to Apple."
The irony is that Nokia should have been way ahead of rivals on software. It had the first Internet-enabled mobile device in 1996, even before mobile broadband was available. Its Nokia Communicator was a narrow handset the size of a paperback book with customizable applications and a full Web browser.
Falling or Flat marketshare
The failings on software are costing Nokia some market share even as it ramps up its own Ovi Store for applications. Nokia’s share of worldwide smartphone sales fell to 41.2 percent in the first quarter from 45.1 percent in the year-earlier period, according to Gartner, while Apple’s doubled to 10.8 percent. Smart phones run sophisticated applications and can handle large amounts of data. They accounted for about 13 percent of Nokia’s total sales of 468 million handsets in 2008.
Most phones Nokia sells are medium and low-end mobile phones, while Apple only makes the iPhone. Nokia faces other rivals in this segment, including Palm Inc, which this month started selling its newest model, Pre, and opened its App Catalog with 18 applications. Research In Motion Inc, maker of the Blackberry smartphones, and Samsung Electronics Co have also opened applications stores.
Flaws in Execution
Nokia's weakness has been one of execution rather than of technology. It courted software developers for years, registering more than four million of them on its Forum Nokia service in the last decade. It hasn’t done as well at getting software add-ons to customers.
"Software distribution didn’t have top management attention or marketing power," said Ari Hakkarainen, a former Nokia manager and author of `Behind the Screen', a history of the company published this year by Finland’s Readme.Fi.
Developer support
Nokia’s multiple devices with different configurations make designing more difficult, time consuming and expensive, developers said. The company’s software efforts included Club Nokia for images and ringtones, N-Gage for games, Mosh for content sharing, WidSets, Software Market, and Download! Most are now folded into Nokia’s Ovi, which offers maps, e-mail, file sharing, games and backup of phone information.
Software downloads now have management attention. Ovi is central to Chief Executive Officer Olli-Pekka Kallasvuo’s vision of Nokia becoming a software provider that gets revenue from customers continuously, and not just every few years when they buy a new mobile phone.
Nokia has seen `double-digit daily growth' in users and downloads on Ovi, Marco Argenti, the vice president responsible for Ovi Store, said in a phone interview. He’s encouraging users to flag problems in the service, which is complicated by having to cater to dozens of handset types, carriers and countries.
Service experience
The Finnish company is hiring more managers to improve the services experience, said Argenti, who joined six months ago from Italian Internet services company Dada SpA to head Nokia’s entertainment and game offerings. "There’s nobody in Nokia today who thinks only about devices," he said.
By 2012 the company aims to have 300 million active users, who will keep in touch with Nokia, downloading upgrades and providing feedback, Chief Financial Officer Rick Simonson told investors at a Barclay’s conference last month.
"The strategy makes sense for future revenues, because if you can scale it up, you can sell the same software over and over for zero marginal cost," said Mikko Ervasti, a Helsinki- based analyst with Evli Bank, who has a "buy" rating on Nokia.
Nokia’s 5800 music phone accounts for 20 percent of touch- screen devices worldwide, the company said in April. The Ovi Store Web site listed 239 applications on June 16 -- 50 more than the previous week. It had 831 available items in all, including 155 audio and video pieces, 123 games and 314 wallpapers and ringtones when accessed in English from Finland.
Disbelief
"Nokia’s not the most creative handset company, but they seem to be making a concerted effort," said Wendy Trevisani, who helps manage $22 billion including Nokia stock at Thornburg Investment Management in Santa Fe, New Mexico. "They're putting some money into it and they’ve got bright and ambitious people and a decent track record of making things work."
Nokia targeted 20,000 separate items for the early days of the Ovi store, which opened on May 25, including versions for different languages and phone models. Some items are for specific countries and aren't available for others.
Still, there’s skepticism. "When they say software and services will be a 2 billion-euro business by 2012, I don’t take that as said," said Evli Bank's Ervasti. "I try to be cautious."
In 2008, the company had revenue from software and services of 476 million euros ($665 million), or less than 1 percent of total sales of 50.7 billion euros. For Thornburg Investment's Trevisani, even an incremental increase is "pure upside."
Apple apps
Nokia has a network of games users and its acquisition of Navteq helped it build a maps service based on GPS locations. Apple is ahead in categories including e-book readers, personal productivity tools, education and science software, and hobby applications such as birding guides and knitting calculators.
Apple has more than 50,000 applications available for all iPhone and iPod Touch models after less than a year of operation. The company says there have been more than 1 billion downloads at a 30 percent commission on an average application, with most applications costing a few dollars or nothing. It doesn’t disclose applications revenue figures.
More significant is the effect on phone sales from being the first application store with products such as the Shazam song identifier. Apple says the application flood has far exceeded expectations.
Comfortness in using
"People are already using their iPhones in ways no one could have imagined less than a year ago, thanks to the runaway success of the App Store with over 50,000 apps available and more than 1 billion downloaded," said Apple spokeswoman Natalie Kerris.
Many iPhone applications come from developers who’ve already worked with Apple on the Macintosh. Life Balance, a personal task-list product followed its desktop users to the iPhone so they could update their lists on the go. Catherine White and Stuart Malone, the founders of Franklin, Mass.-based Llamagraphics Inc, don’t plan to develop for Nokia. "Nokia had so many handsets and operating system variants, compared to iPhone or Palm where you write things just once," Malone said.
The Ovi Store may expand faster if the London-based Symbian Foundation succeeds in making Nokia's basic phone software easier to work with. Symbian, which Nokia converted to a freestanding non-profit entity last year from a joint venture with other handset makers, resembles a small software company, with doodle pads and whiteboards on the walls and titles such as "futurist" on its business cards.
`Growing complexity'
Still, Nokia’s services strategy is not there yet for users such as Aleksi Bardy, 38, a Helsinki-based film producer, who tried and failed to get a maps application on his Nokia E90 device for a trip to Paris.
"I consider myself technically oriented but I found them difficult to install," he said. "It was really a bad experience."
He’s switched to an iPhone, and was able to download naval maps for Nordic countries for 10 euros, letting him plan vacations while trapped in meetings and use the phone as a backup navigation system when he’s sailing.
Nokia was "very good at the beginning of the mobile era, when the interface was just characters, but now with the complexity and graphical nature of phones, they’ve lost the game," he said.
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