Nokia’s revenue and profit trends point to its key problem: commoditisation

Charles Arthur of the Guardian’s take on Nokia. What do you think?

Powered by article titled “Nokia’s revenue and profit trends point to its key problem: commoditisation” was written by Charles Arthur, for on Friday 10th September 2010 22.01 UTC

Here is the problem that Nokia faces: it’s getting more revenue from selling phones – but its profits are falling.

As the graph above – drawn from Nokia’s financial results going back to the start of 2002 – show, the mobile phone division (which is what these figures show; they exclude the enterprise and Nokia Siemens Networks revenues and profits) has been doing well, in money terms.

But the profits are heading south. The long-term trend actually flatters Nokia; its problems have been accentuated since the third quarter of 2008 – when Android began to become a factor in smartphone sales. If you drew the line using the past couple of years, then you’d hit zero profit before the end of 2012. That’s highly unlikely, but trends are something for executives to be aware of – and to reverse where necessary.

By the end of 2009, despite smartphone sales having increased by 24% worldwide according to Gartner, Nokia’s phone profits (which includes smartphones and “dumb” mobile phones) were – on an annualised basis – the lowest they’d been in the entire eight-year period, despite the revenues being the second-highest.

That speaks of Nokia’s product being commoditised – that the average price and profit per phone sold is dropping.

The question for the incoming chief executive Stephen Elop is whether that’s a satisfactory state of affairs.

And one other thing he might want to think about: since the beginning of 2008, those figures have included not just mobile phone sales, but “devices and services”. That excludes Nokia’s biggest acquisition, Navteq, which is broken out in the results and seems to generate a small operating profit (though the amortization of the .1bn price tag still seems to be taking its toll).

By “services” one has to assume Nokia means things like its Ovi store, launched in mid-2009 – which hasn’t set the world alight; you have to look quite hard to find any meaningful statistics (here’s some from March: about 1.5m downloads per day, compared to the iPhone App Store’s 30.5m apps per day.

It’s with apps that Nokia has its toughest challenge. Apple has it easy: there’s essentially one product that developers write to – the iPhone. Yes, there are differences between the newer and older ones, but the basic interface is the same. And every app that an iPhone user downloads ties them a little more tightly to the platform: abandoning it would mean giving those up (though of course you can switch operator and carry your number – and phone – with you).

Nokia, with its much bigger and more diverse range of phones, has more of a challenge there: it’s harder to attract developers, but more importantly for someone looking to shift to another Nokia, there’s the compatibility question – will your apps be portable? Will they work? And if you haven’t downloaded many apps (which the Ovi Store stats seem to suggest – Nokia, remember, has the biggest smartphone share, which means that Ovi apps are spread rather thinly) then it’s going to be easier to just shift to another phone.

And people aren’t being too complimentary about Elop either. “A suit”, says Business Insider, which says the company has made “the same mistake again – hiring a manager, not a product visionary”. Joe Wilcox goes further: “No disrespect intended, but Elop wouldn’t be my first choice to run Nokia, nor would he make my list of top-100 candidates. If someone handed me a list of people not to choose, Elop would be among the top five. I love Nokia. I lauded its handsets for years. But this great company has pissed away market share and bungled the most basic innovations since Apple launched iPhone in June 2007. Elop may be the greatest mistake of all and sure sign Nokia won’t effectively execute against Google’s rising Android Army or Apple’s iOS cultists.”

So welcome, Stephen Elop. You’ve got a big bundle of problems and everyone’s going to be watching you. Something tells us it’s going to be very different from running Adobe’s sales operation, Juniper Networks, or Microsoft’s Business division – the one that cranks out Office and Sharepoint.

And here are the numbers from Nokia’s financial results in a handy table. (I’ve used the “Reported” figures, which include amortization.)

Nokia mobile division results
Nokia revenue operating profit
Mobile phone division only
2002 Q1 5438 1208
2002 Q2 5398 1171
2002 Q3 5633 1249
2002 Q4 6742 1642
2003 Q1 5476 1311
2003 Q2 5513 1276
2003 Q3 5620 1257
2003 Q4 7009 1707
2004 Q1 4080 1029
2004 Q2 4050 802
2004 Q3 4520 848
2004 Q4 5871 1107
2005 Q1 4527 869
2005 Q2 4864 789
2005 Q3 5203 880
2005 Q4 6217 1060
2006 Q1 5869 1085
2006 Q2 5875 979
2006 Q3 5949 779
2006 Q4 7076 1257
2007 Q1 5583 936
2007 Q2 5931 1252
2007 Q3 6131 1388
2007 Q4 7438 1858
2008 Q1 9263 1883
2008 Q2 9090 1565
2008 Q3 8605 1602
2008 Q4 8141 766
2009 Q1 6173 547
2009 Q2 6586 763
2009 Q3 6915 785
2009 Q4 8179 1219
2010 Q1 6663 831
2010 Q2 6799 643
source: Nokia financial results
note: since 2008 Q1 figures include “devices and services”
All figures in € millions © Guardian News & Media Limited 2010

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