Another Look

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By seansan
April 10, 2001

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I just read TMF Otter's article about how he allowed himself to ignore potential warning signs in investments he felt passionate about. Being overly enthusiastic about Nokia myself, this encouraged me to do a little reexamination.

Nokia manufactures communications equipment. Its strengths are currently in wireless equipment, primarily handsets, but also networks. They are in the process of expanding their product line, but nearly all of their current revenue comes from these two areas.

Nokia handsets currently hold over a third of the global market. They are the default purchase by nearly everyone if they're given a choice. One can customize these handsets to produce a unit which is not only Nokia's, but your own. These handsets are produced so efficiently, Nokia is able to maintain profit margins far above any competitor. In this area Nokia may not be a full Gorilla, but they are definitely an orangutan with a steroid problem.

But is this enough? The growth of new subscribers is already slowing. The subsidy cuts by some European providers shows they are expecting upgrades to drive revenue from now on. No need for them to pay half the price of the phone when they have the customer already. So why will people upgrade? New systems, new features, etc. Handsets do not wear out that rapidly, so customers will need a reason. GPRS & 3G will provide an impetus in the near future, but what about beyond that? Commoditization is still a ways off, but it's coming.

Will GPRS & 3G succeed? Without the success of these applications, we could be approaching a brick wall at very high speed. Nokia has gambled the future of the entire corporation on the new wireless world. This is not the first time they have played for all the marbles. Their entry into handsets in the first place was a similar all-or-nothing shot. But my money wasn't riding on them the first time. It is now.

At least they're not only handsets anymore. Only a minor player in the GSM network build out, they struck with GPRS full force. Shying away from an impending 3G network debacle, they were able to match Ericsson for GPRS contracts and to actually get more networks running. Networks, which are waiting for the not yet available Nokia GPRS phones.

The 3G debacle happened anyway, and the question now is what to do. The telecom providers are in debt, and the only way out of this debt is more revenue. The only way to increase revenue is to build and implement 3G. Ericsson and the others have little cash to spare. Only Nokia has a strong balance sheet. They could lay low with GPRS systems while much of the industry implodes, but the rebuilding would be costly and time-consuming. Or they could use their financial muscle to not only implement 3G, but grab a lion's share of the proceeds.

We know which path they have chosen. But once again, they gamble everything on the new wireless world.

They are expanding into other areas:

The multimedia home platform (MHP) is one of many innovative consumer products being released. But, while fascinating, they cannot justify Nokia's lofty price tag.

LANs are also an interesting area with a good future. But it seems to me that Nokia is one of many in this area, and the customers are plentiful. I don't see any dominance yet. Security solutions for banking, etc. also fall into this category.

Club Nokia looks to me like a Euro version of i-mode: customizing ring tones; cartoons for your display screen; basic entertainment. Seems straight out of Japan. Could be a decent revenue source in the future though. DoCoMo does pretty well. This is still tied to the new wireless world and presupposes anyone would want these applications.

Nokia building the Internet. They're up against some very strong, established players here (not for the first time). They stand an adequate chance of becoming a player, but this is far from certain. Their Rooftop system is unique(one of the few Nokia businesses acquired outside the company), but its applicability is still unproven.

So, what have I decided? Nokia is a focused company that takes a lot of chances. They are not developing "on-the-fly" as some have mentioned. They have a vision and a goal and are prepared to go to any lengths to achieve their aims. They also work without a net. Any mistake could prove to be very costly indeed. They have gambled that 3G and the new wireless world are the way things will be. They will work in cooperation with their competitors to achieve this future. It's an all-or-nothing play, again.

Nokia's potential for great rewards is immense. The risk is also very real. I've chosen to take the chance anyway. If Nokia fails, if 3G fails, if my investment fails, I'll consider myself forewarned.

It's still more fun to be a cheerleader:)