Is there future for feature phones?

A lot of people think that in the future there will be only smart phones. I think that is the main reason Nokia desperately tries to make WP at all costs, despite the fact that they could just concentrate on feature phones that they do so well.

Smart Phones are winning

Cheaper devices get more powerful CPUs all of the time thanks to Moore's Law and thus are able to run more complex apps and operating systems. Cheapest Android devices are already now selling as cheap as some of the Asha phones. The other thing is the assumption of smart phones actually being better than feature phones. Obviously, successful smart phone operating systems offer more features and provide access to app ecosystems. Trends are showing that transition from feature phones to smart phones is happening. Smart phone market is booming and feature market is stable or in slight decline.

Opportunities for feature phones

Despite all of this things, I'm still not so sure about the inevitable decline of feature phones. I've got a feeling that there are a lot of people that just want a phone so that they can call or send text messages. These people are poorly serviced by our current crop of smart phone operating systems. Having all the functionality of smart phone makes the OS more complex and usability of main features is not on par with with feature phones. Also many would prefer a real keypad.

I'd also argue that most people are not really interested in apps as long as the phone includes support for the most important services and has few games. These people have a bit more complex needs than users that just want SMS and calls, but I do think that well made feature phone could also cater for a big part of this crowd as long as service integration and usability are good.

Nokia's S40 has definitely gone to right direction to offer a call, text centric devices with smarter and smarter features. If it is being developed into right direction and core benefits (like simplicity, affordability, durability, battery life) are kept in good shape, there should be a big market for it for a long time.

Maybe there is still room for revolution?

I still think that one could revolutionize the whole low-end market by coming out with completely new phone feature centric UI that is built using modern technologies but still targeted at people that find smart phones too complex and unnecessarily feature packed.

Way forward for Nokia

To me it looks like that nose dive that Nokia has been in is about to end. Latest cost cutting should be enough to cut spending so much that company no longer makes significant loss. However, I do not believe that current strategy can be hugely profitable. Nokia needs to find it's way again.

Nokia Siemens Networks and mobile phones unit do not seem to have any synergy anymore so NSN needs should be either listed or sold to a competitor. This is obvious and likely will happen.

Secondly, while Nokia Maps is a cool app and very useful, developing it and the map asset costs and is a complex operation. Location & Commerce -unit is not really producing a lot of profit. The unit made a solid 41 million euro operating profit (non-IFRS) with 283 million euro revenue in Q2/2012, but I suspect that the "profit" was mostly achieved with internal accounting. When Nokia sells a device with Maps, L&C gets "money". Also, the main competitor, TomTom is not looking good. Last year it made a loss of 434 million euros. Mapping is not a strong growth business and smaller companies like Yelp seem to be the real innovators in mapping based services.

I'd sell the whole unit and would just license the data for the phones from wherever it can be obtained the cheapest. Since map -asset clearly has value, selling the unit should be relatively easy and should help Nokia in this transition period, where running out of cash has seen as a one major threat and even Nokia's credit rating has been downgraded to junk status.

Windows Phone gave Nokia a modern OS and support payments from Microsoft. I'm sure WP8 will be a nice, but I have concerns. Android's openness and popularity practically guarantees that it enjoys way wider hardware support than any other platform can get. I think success of Samsung's Galaxy SIII shows that competing with cutting edge hardware is possible and able to create huge profits. Also, since Microsofts approach has been Qualcomm only, Nokia is in mercy of single chipset producer. Due to the tight device specifications by MS (display resolution, etc.) this makes all the phones using WP pretty same in terms of hardware. From these I conclude that on the highest end devices WP -platform devices will not be competitive for a lot of the time. Android guys and Apple are in better positions to constantly push out devices with cutting edge HW. Android guys will have edge since HW vendors target them first and Apple will survive since it designs its own system-on-chips and thus is able to control all aspects it finds relevant. This is particulary bad since obviously in the high end the margins are best. For example Apple makes 73% of mobile industry profits with just 8.8% unit share.

The other issue I have with MS partnership is the example of PC world. Windows OEMs are not making good profits. Many of the old technology giants, like IBM, have pulled off from Windows PC business or are considering in pulling out like HP. Profit margins are razor thin. There is also a risk of Microsoft coming aggressively out with its own devices like is already happening with Surface -tablet. License for WP is only cheap now and would get a lot more expensive if the platform was success.

To combat the WP situation Nokia could either drop WP exclusive deal and adopt Android as additional OS or just focus on feature phones. Developing an own OS or choosing something else is no longer an option. It would just require too much time and money. My solution for short term would be just to focus on feature phones.

So far Nokia has done a really good job in Asha -series. They are selling in high volumes. In Q2/2012 almost 90% of phones Nokia sold are feature phones and compared to year over year Nokia even managed to increase sales of feature phones by 2%. In feature phones Nokia made 98 million Euros of operating profit and the latest cost cuts should improve that significantly. My educated guess is that after the latest cuts are in full effect in 2013 the profit will be between 150-200 million per quarter. In smart devices Nokia made operating loss and number of shipped devices shrunk by 39%. To me it makes more sense to focus now on the feature phone business that is low-margin, but sustainable, instead of making huge bets to high-risk smart phones business, where competition is fierce and Nokia's business is still in rapid decline while making huge losses.

Like everybody knows overall market of smart phones market is growing and feature market is either shrinking or stable at best. However, Nokia has been increasing its share in the feature phones. With its efficient logistics and own manufacturing capability I'm sure that Nokia could remain extremely competitive in feature phones also in future.

For the future, Nokia needs to make its feature phones smarter and nicer to use, while at the same time keeping them affordable. In reality there are a lot of people that do not need a smart phone as such, they just want a bit more service integration, internet capabilities, and nicer user interface than traditional feature phones have offered. This is already happening in Nokia's Asha -series. The devices are connected to the internet services we find most important.

What to do with smart phone unit then? "Sell it!" is my answer. MS probably would want to buy it. A lot of the Nokia Design has to be included in the deal. MS needs to create more desirable HW than it has done so far. Along with Smart Phones, MS may be interested in buying location and commerce.

My feature phone only Nokia would be a lot leaner company. Creating smart phones and services has been a distraction for the company and has required huge R&D resources and a lot of focus from the leadership. People have forgotten that one of the Nokia's biggest competitive edges has always been in logistics and operational efficiency. In practice these have meant that Nokia is almost only company that has been able to make profits in the cheapest phone segments. Ashas have already somewhat revitalized the feature phone business after what seemed like few years of neglect.

These would be only the first steps. After the company is clearly profitable, a new growth strategy is needed.

Couple of words about RIM

RIM is in a lot of trouble. The situation is a bit similar than Nokia had. Their own old OS is not competitive anymore against iOS and Android, and their own new OS is not ready yet. The new modern OS will utilize Qt heavily and will be hopefully be shipping soon.

Today's Qt announcement (Digia acquires Qt asset and core personal from Nokia) should be good news for RIM in two ways. Firstly the news means that Qt will have a future. Digia has been doing successful business with it already and it has clear motivation to expand the business and improve Qt. Second thing is that now RIM can utilize Digia better. Previously, Digia was mostly involved with non-mobile clients, probably due to contractual reasons with Nokia. After the deal Digia and the brightest trolls it employes can support RIM's efforts of building a Qt based OS a lot more. This could bring a big boost in what the OS can do and how it performs.

Industry Analysts and business people are eager to give advice to RIM's leadership. The most popular suggestions are 1) Start making WP8 devices 2) Start making Android devices and 3) Licence your new OS to others. I think all of those are bad ideas. Major strategy changes are really painful and could only solve the problem in long-run and thus would probably burn all the cash RIM has and thus lead to bankrupt, unless there would be big monetary support from somewhere (for example MS). Nokia's WP choice shows how rocky road that is. Also in the Android camp there only seems to be two players that are profiting: Samsung and Google.

Licensing out the new OS initially sounds like a nice idea. It should expand the ecosystem and help in cash flow as license income should help paying R&D bills. The reason I do not like this approach either is because of two major downsides.

The first one is that licensees will very likely cannibalize the most lucrative part of the market. When Apple started licensing Mac OS, licensees focused most of their efforts on high end where Apple had its highest profit margins. So instead of expanding market, the licensees mostly just ate away Apple's profits. It's likely that this would happen also to RIM.

Second issue is that when you license a mobile OS to an OEM, the contracts are very complicated. Since mobile operating systems are much more tightly bound to device hardware than traditional computer operating system, the operating system vendor and device manufacturer will have a quite intimate relationship. This would not be a problem for a pure operating system vendor, but it is a problem when vendor like RIM that develops its own devices and then licenses the OS out to others. The problem comes from licensees requiring similar kind of treatment as the internal device development teams.

In practice, one solution is to establish firewall between the OS development team and device development teams or separate the OS development to separate company. The problem is that this leads to bloated organization and makes communication a lot harder. Nokia's S60 licensing business was one example of this. Having the licensees meant that Nokia had to have quite complex organization in building S60 and S60 based devices. This led to a lot of inefficiencies. Since RIM is already behind in features and desirability of its major competitors, becoming a more complex organization is unacceptable. The need to reduce complexity in their operation, not increase it.

If I led RIM, I would just continue on the current path. I would definitely try to avoid major reorgs or strategy changes. Those are the quickest ways to doom. Instead, I'd focus on operational excellence and R&D efficiency. I'd prefer to keep R&D teams small, smart, agile and hungry, instead of big bloated armies of outsourced and offsite engineers as seen in so many corporations nowadays.