A tale of two mobile telephone makers
By Tam Harbert - May 1, 2000
If Nokia Corp. were a person, it would be young, sexy, sophisticated, hip and generally "with it." Ask analysts to personify Telefon AB L.M. Ericsson-even its name is stiff-and you'd get an austere, conservative, middle-aged Swedish engineer.
That characterization, in a nutshell, may explain the difference in success that these two mobile telephony powerhouses have had in selling mobile handsets. Let's face it, cell phones are the hip, must-have gear of the new millennium. Those who don't have them are shopping for a phone, and many folks are already onto their second, third or fourth handset. Women buy them to match purses or outfits. Men-those looking for the successful, executive power-broker image-buy the sleekest and most feature-laden phones. In Japan, the fastest moving cell phone market, phone buyers replace their old technology with a new handset every six to eight months.
On the surface, Nokia and Ericsson may appear similar-both are more than 100 years old, both are symbols of Nordic industrial success and both are riding the boom in mobile telecommunications. But dig down and it becomes clear that they are direct opposites of each other.
Nokia's corporate genes include a heritage of selling basic consumer products-even toilet paper-with savvy branding. Ericsson grew up as a supplier of telecommunications equipment to government-owned phone companies. So, not surprisingly, although both companies compete in handsets and infrastructure equipment sales, Nokia has become a powerhouse in phones while Ericsson's strength is infrastructure. And Ericsson is in the process of shrinking its corporate girth, while Nokia is beefing up.
But in this age of convergence, both companies are pinning their future growth on the same potentially exploding market: mobile Internet. While each company believes it has unique strengths in winning business in this market, only time will tell who has the most muscle.
By the numbers
The financial performance of Nokia, Helsinki, Finland, has been nothing short of stellar. In February, the company reported what Nokia Chairman and CEO Jorma Ollila called the best numbers in the company's 134-year history. Shipments of mobile handsets shot up 92% year-over-year to a total of 78.5 million units in 1999. It increased its worldwide market share dominance in handsets to almost 27%-at the expense of its next two closest competitors.
For 1999's fourth quarter, profits were up 52% from fourth quarter of 1998. For the full year, net profit was up 47% to 2.58 billion euros and sales were up 48%, to 19.77 billion euros or $21.35 billion (1 euro = 1.008 U.S. dollars as of year-end 1999). Looking ahead, the company predicted in its annual report that net sales would grow an astonishing 30% to 40% this year.
Meanwhile, profits have been down for Stockholm-based Ericsson (called LM Ericsson Telephone Co. in the United States), and it has been losing market share in mobile handsets. From 1998 to 1999, its market share in handsets fell sharply from 15.1% to 10.5%, according to a study by Dataquest Inc., a San Jose, CA-based unit of Gartner Group Inc. Ericsson's handset sales increased only 3% in 1999.
Although its fourth quarter 1999 contained some good news, including a 40% increase in orders compared to the fourth quarter of 1998, income for the full year was still down 10%, to about $1.5 billion. Net sales for the year totaled 215.4 billion SEK, or about $25.2 billion, an increase of 17%. In its annual report, the company said it expects sales growth of more than 20% in 2000.
Walking and talking
Nokia is the hands-down leader in mobile handsets, and is well poised to continue to dominate this exploding market. As of February, Nokia had manufactured a total of 200 million mobile phones, up from 100 million in December 1998, according to Matti Alahuhta, president of Nokia Mobile Phones. Nokia estimates there are about 500 million mobile phone users worldwide today, and predicts this to grow to more than 1 billion by the end of 2002.
Nokia phones have become the icons of the whole industry by combining a fundamental understanding of the technology's evolution with general trends in fashion, says Soren Jenry Petersen, vice president of Nokia's cellular mobile telephones business unit. Because of their attention to design, Nokia phones achieve what Petersen calls "the click moment-as soon as you have it in your hand, it feels right and you understand what it is and what to do with it." But he doesn't reveal much about how Nokia manages to capture that "click," saying only "we have the world's best crew of market thinkers."
|Nokia has gained so much success by "paying attention to the softer parameters of the product." -Peter Richardson, principal analyst at Dataquest Mobile Communications|
Nokia has gained so much success by "paying attention to the softer parameters of the product," says Peter Richardson, principal analyst at Dataquest Mobile Communications in London. By that he means it has been incredibly effective in building brand value and a distinctive corporate identity that sells its product. After all, mobile phones are all based on standards. "The opportunity for product definition [in technical features] is fairly limited," he points out. "And any technology lead that a player does have is probably limited to less than six months."
Nokia's competitors, including Ericsson, until recently have failed to appreciate the importance of brand value, says Richardson. In the last year or so, Ericsson has started to develop its brand, "but the problem is the product hasn't really lived [up to] the brand values, and even when it has they've been dogged with [product] reliability problems," says Richardson. The company also has had problems ramping up production on several phones introduced within the last year.
In fact one model, the R380-which was the first Ericsson phone to incorporate the wireless application protocol (WAP) and was introduced at CeBIT in March 1999-still isn't shipping. It's supposed to be available this summer. Ericsson officials are vague and somewhat defensive about what's caused the delays. Depending on who you ask, they cite a shortage of flash components or the difficulty of integrating all the software required in a phone using WAP, a technology that allows Web content to be viewed on the small screens of mobile phones.
Although Nokia also has had problems shipping one of its WAP phones, the 7110, it doesn't seem to receive as much criticism as Ericsson. At a press conference at CeBIT 2000, an angry audience member questioned Ericsson's president, Kurt Hellström about the delays, demanding "where are the [WAP] phones?"
Hellström replied: "I have to ask you: Where is the market?" He claimed that Ericsson was capable, but not willing, to ship WAP phones to stores today because the company was waiting for the market to develop first. "If you are first to market and there are no services for it . . . it will be rather disappointing," he said. That may be a valid point, but it does little to alleviate the impression that the company isn't nimble enough to get quality products to market quickly. "If Ericsson is going to stay in handsets, I think it really has to smarten up," says Susan Anthony, an analyst at Credit Lyonnais Securities Europe in London. Consumers in Europe buy new cell phones every 18 months, and in Japan every six to eight months. (In the United States, consumers are still hanging onto their phones for two to three years). That makes it critical to get new phones to the market quickly and to inspire brand loyalty so the customer keeps buying your phone, she notes.
Although Ericsson is trying to establish a brand with its "Make yourself heard" marketing campaign, the campaign doesn't seem to reflect the company's true character. For example, the company opened its CeBIT press conference with cyberpunk music and hip, flashy advertisements. But when the music died down and the lights came up, a stiff public relations woman introduced Hellström, who looks and sounds every bit the part of a middle-aged Swedish engineer.
In contrast to the edgy ads, which trumpeted "make yourself heard," Hellström hardly commanded attention. In fact, he was downright dull, reading his speech in a monotone voice, and showing slide after dry slide of market trends, technical data and product photos
. What observers can easily miss because of such a dry communications style is the fact that Ericsson has a very healthy business-selling the infrastructure equipment for mobile telephony. Indeed, Ericsson is just about as strong on the infrastructure side as Nokia is in mobile handsets, but it doesn't get much credit for it. Perhaps because it just hasn't made itself heard.
|"We are certainly the leader on the [infrastructure] side, but that is an invisible strength to most people." -Mats Rönne, Ericsson's director of branding and marketing communications|
With more than 30% of this part of the market, "we are certainly the leader on the systems side, but that is an invisible strength to most people," admits Mats Rönne, Ericsson's director of branding and marketing communications. Companies often reflect the cultures of their countries, he notes, and Ericsson is no different. Swedes are typically masters of understatement, says Rönne. "When a Swede says, "That's not bad," he really means that it's excellent," says Rönne. "If he says, "Perhaps you'd better reconsider that idea," he really means that it's awful." Ericsson needs to shed this Swedish quality and brag about its assets more vocally.
For example, Ericsson should continue to profit handsomely from the growth of mobile infrastructure. But Hellström doesn't put too fine a point on that fact during his CeBIT press conference, saying only that, with mobile telephony skyrocketing, "more traffic requires bigger roads, and as an infrastructure provider this suits us very well."
Corporate heritage-toilet paper?
The relative positions of Nokia and Ericsson in the market today are the product of the two companies' divergent corporate histories. "Nokia is a consumer products company that happens to make infrastructure," says Anthony. "Ericsson is an infrastructure provider that happens to make consumer products." Nokia derives 66% of its revenue from handsets and only 29% from infrastructure equipment. Ericsson derives 70% of its revenue from infrastructure, and only 21% from handsets. In fact, Nokia focused on mobile handsets intentionally, whereas for Ericcson the business was initially incidental.
Still, no one looking at Nokia in the 1980s could have possibly predicted that it would become the leading mobile handset company in the world. It was a "Nordic department store" in the words of Arja Suominen, vice president of communications for Nokia Networks. Started as a paper mill in 1865, by the 1980s the company had grown to become an industrial conglomerate making everything from rubber boots to TVs. At one point, Nokia was the biggest toilet paper manufacturer in Europe.
Management had already decided that the company needed to divest itself of some of its mature businesses and focus on a few high-growth areas when three events in the early 1990s forced Nokia to change more quickly, according to Marianne Holmlund, communications manager for Nokia Mobile Phones. First, the Soviet Union collapsed, causing Nokia to lose a good part of its business overnight. Second, a severe recession hit Europe. And third, GSM was set as a mobile telephony standard and the first GSM digital networks started to be built.
Because it had a division that manufactured communications cabling, Nokia had become involved in Scandinavian telecom operators' efforts in the early 1980s to develop an analog cellular system called Nordic Mobile Telephony (NMT), says Holmlund. Jorma Ollila, who would be named chairman and CEO in 1992, had been involved in the NMT work and had developed a keen appreciation for the potential of mobile telephony, Holmlund says. Thus, when Ollila came into power, he could see that the GSM standard would mean a burgeoning market for digital mobile phones. He and his management team made a bold move and quickly decided to sell off all of Nokia's other businesses and concentrate on mobile telephony. Although the company didn't have that much of an electronics background, it knew how to sell consumer products-even toilet paper. This would be a tremendous advantage later on.
Ericsson got into mobile handsets accidentally. Since its founding in 1876, the company had grown to become a traditional telecommunications supplier, providing equipment to PTTs (post telephone and telegraph services, often government controlled) in Europe and around the world. In the mid-1980s, one of its customers, the German telephone company Mannesmann Mobilfunk, asked Ericsson to manufacture analog mobile handsets for it. At one point, the whole field of mobile systems and handsets was viewed by Ericsson management as a business the company should not be in, says Rönne.
|"Of all the cellular phone companies, Ericsson is the most distant. They tell you [what you need]; you don't tell them. And that's a very bad attitude in today's business world."-Ray Jodoin, senior analyst of wireless communications at Cahners In-Stat Group|
While Ericsson management has since recognized the importance of the mobile telephony market, the company has had a difficult time adjusting to the new world of telecommunications. Because of its heritage as an old-line telecom supplier, it has a bit of an attitude problem, say analysts.
In the old world, these suppliers had a captive business selling equipment to the PTTs. "In the old telecom world, the approach was, `This is what we got. You will buy it,'" says Ray Jodoin, senior analyst of wireless communications at Cahners In-Stat Group in Scottsdale, AZ. But as deregulation has swept through the telecom industry and as new independent mobile telephony operators have mushroomed, it's a whole new consumer-oriented, fiercely competitive environment. But Ericsson has remained aloof.
"Of all the cellular phone companies, Ericsson is the most distant," says Jodoin. "They tell you [what you need]; you don't tell them. And that's a very bad attitude in today's business world."
The company is trying to become more responsive. However, it's not easy to make an organization with more than 100,000 employees respond quickly to changes in the market, says Rönne. "How do you make a supertanker respond like a speedboat?" he asks.
In mid-1998, the current Chairman and CEO Lars Ramqvist appointed his handpicked successor, Sven-Christer Nilsson as president and CEO of the company. In January 1999, Nilsson launched a restructuring aimed at streamlining operations and reducing headcount at Ericsson by more than 11,000 worldwide over two years.
Ericsson started to outsource much of its low-end manufacturing operations to contractors such as Flextronics International Ltd., San Jose, CA, and Solectron Corp., Milpitas, CA. But Nilsson's attempts to push other aspects of the restructuring through the entrenched bureaucracy failed, and he resigned in mid-1999. Ramqvist returned as CEO and named Hellström as his new president. Although analysts give Ramqvist credit for speeding up some of the restructuring, Ericsson still has a long way to go. The goal had been to shed at least 5,000 jobs by the end of 1999. But on December 31, the company still had 103,290 employees, only 377 less than the previous year.
And the management shuffling hasn't ended yet. After it reported its lackluster 1999 financial results in February, Ericsson announced more executive changes, replacing its head of North American handset sales.
While Ericsson's energies are focused inward on restructuring and downsizing, Nokia is hiring aggressively and launching new efforts to stay on the cutting edge, such as launching a venture capital arm and a new division to develop e-commerce solutions for corporate customers. Its head count swelled last year by 24%, growing to 55,260. And with an average age of 32, Nokia's employees reflect the same young, hip attitude that its marketing campaign "Nokia: connecting people" inspires. (The average age of Ericsson employees is 35.)
Young and restless
Petersen, who at age 36 has been in charge of Nokia's global mobile handset product line for four years, thinks the youth of the company helps to propel its success. "Our absorption speed is fast, and we click onto new trends even faster," he notes. Nokia also motivates its employees with performance-based pay programs. At the management level, it offers a stock-option program to some 5,000 employees. Those employees who don't qualify for the stock-option program are enrolled in a bonus program. It rewards them with a payment of 2.5% of their annual salary if Nokia's share price rises 25% in a year. They receive a 5% bonus if the share price is up 35% or more, according to Holmlund of Nokia Mobile Phones. In addition, employees receive personal bonuses if they meet certain performance targets they've set with their managers, she adds.
Ericsson had no stock-option program, even for senior management, until 1999, according to Rönne. The company is planning to launch another stock-option plan targeted to U.S.-based employees, he says. As for other incentive-based pay, Rönne cites a convertible debenture program that Ericsson launched in 1998. Under this program, employees could loan money to the company at a guaranteed interest rate, says Rönne. At any time during the program, employees could convert the loan into Ericsson stock at a set stock price.
Nokia also is trying to maintain a more outward-oriented culture. In 1998, it formed a new division, Nokia Ventures Organization, to foster and grow new business ideas from within the company that don't necessarily fit within the mobile handset or the infrastructure business, as well as to seek out new business ideas from outside the company. As part of the latter effort, Nokia has set up a $100-million fund that has invested in 15 U.S. start-ups. "This is a way to see what's happening outside the company," says Jyrki Rosenberg, communications manager for Nokia Ventures Organization. "It keeps us from being insulated." Although headquartered in Silicon Valley, the fund also recently opened a London office to seek out European start-ups as well.
Ericsson has no venture unit, says Rönne. Rather, its new and special operations unit incubates new ideas within the company that don't fit into one of Ericsson's traditional lines of business. In late March, however, the company announced that it was teaming with Sweden's largest holding company, Investor A.B., and a Hong-Kong-based multinational corporation called Hutchison Whampoa to acquire a controlling interest in Guoco Land Limited, which is starting a venture capital operation to focus on the mobile Internet industry in Asia.
And Ericsson is taking several strategic steps to position itself to attack the mobile Internet market. Within four years, mobile access to the Net will be as common as fixed access, predicts Hellström. To prepare for that day, Ericsson has broadened its mobile infrastructure line. Formerly antagonistic toward code division multiple access (CDMA)-it had a long-running patent dispute with Qualcomm Inc., San Diego-last year it gave up and actually purchased Qualcomm's CDMA infrastructure business. The company also has struck deals with VISA International to develop ways to purchase goods over the `Net using mobile phones. In terms of content, Ericsson recently forged an agreement with Lycos Inc. to deliver information via mobile phones. And in December, Microsoft Corp. and Ericsson announced they would form a joint venture to develop wireless Internet applications. The deal involves Ericsson phones using a microbrowser version of Microsoft's Internet Explorer. The first application is expected to be mobile e-mail. Ericsson also recently contracted with Intel Corp. for the chip maker to supply it with $1.5 billion in flash-memory chips over three years, which should help ease component shortage problems that have plagued the phone maker in the past.
Nokia also is pinning its future on the mobile Internet. Ollila in fact calls the mobile Internet the single most important technology advancement since Alexander Graham Bell's telephone. The company has been busy forging new relationships with financial institutions, application providers and content providers. It also has an agreement with VISA International, and has teamed with several companies, including Hewlett-Packard Co. and IBM Corp., to develop access to mobile commerce sites via WAP phones. In February, Nokia and Amazon.com Inc. announced an agreement to provide mobile commerce services to users of WAP phones. It will initially be launched in the United Kingdom and later extended around the world.
Nokia also has branched out beyond the consumer market, creating a new division called Nokia Internet Communications that offers virtual private networks and e-business solutions to corporate customers. "Our focus on mobility and Internet security will bring down the last barriers to the Internet," says Ollila.
The company also intends to keep up a rapid rate of product introductions. It brought out 18 new phones in 1999, and expects to continue that pace this year, says Ollila. With the company projecting 1 billion mobile phone users worldwide by 2002, product introductions in the next 18 months are going to be critical, he notes.
And both companies are aiming to hit the mobile Internet ground running later this year when global packet radio service (GPRS) hits the market. While GSM delivers data at only 9.6 kilobits per second-very slow for all but short text messages-GPRS will speed that up by more than 10 times. What's more, while GSM is a circuit-switched technology, GPRS uses packet switching, which will mean that phone users can leave their phones on and will only be charged by the amount of packet usage.
"We see the introduction of packet services by GPRS to be the first step to the mobile Internet," says Ollila. "That is the real revolution we see approaching," agrees Hellström. Ericsson claims that it has already captured more than 50% of the GPRS infrastructure contracts from mobile phone operators.
While the two European giants wrestle, some observers say a newcomer might see a way into the mobile market. Tony Milbourn, managing director of TTP Communications Ltd., a supplier of GSM technology in Cambridge, U.K., says even mighty Nokia might just be vulnerable to an up-and-coming company in the mobile handset business, such as Korea's Samsung Electronics Co. Ltd. Although Nokia handsets are flashy on the outside, technically "a Nokia phone is pedestrian-it's boring," says Milbourn.
What's more, Nokia is not particularly innovative in the two areas that count the most in mobile phones, he says: the bill of materials and the number of components. This means that Nokia's phones are rather costly to make. And because Nokia has so thoroughly dominated the mobile handset market, it has not been squeezed much on price, he notes. Other companies that can make lower cost phones, such as Samsung, which jumped significantly in market share last year (see table, page TK), could ultimately prove a threat to both Nokia and Ericsson, he says.
But Nokia's Petersen doesn't sound worried about price competition. "Yes, you can make a simple, black, cheap phone," he says. "No, I don't think a lot of people will buy it."
Tam Harbert is Electronic Business' national editor in Washington, DC. She can be reached by e-mail at firstname.lastname@example.org.