Nokia’s troubles and a lesson on software

At the beginning of this week Nokia announced a profit warning. They expect their 2nd quarter results to be substantially below their previously expected range. And, probably more significantly, they do not feel they can confidently make a 2011 annual revenue forecast.

Nokia’s problems come down to one thing. They were unable to build a market leading phone and associated ecosystem to deliver internet services to their mobile customers. In effect they stagnated as a product company over the last 5 to 10 years in this emerging market of Smartphones.

Its interesting to note that this doesnt mean they didnt sell Smartphones in high volume. They did, and had many high selling devices in this category. However their issue was people bought the phones for the reason they had bought previous Nokia phones. They were stylish, good looking, and carried the latest high end features such as cameras.

These were the attributes which differentiated Nokia from the pack in the mid-nineties. An era when mobile phones went from being plain ugly, to a stylish fashion accessory. Nokia excelled here and became the dominant player in the mobile phone market.

But despite huge investment in the Smartphone segment, Nokia failed to deliver devices which encouraged their customers to use new Internet and application based services.

This is a classic business lesson in how difficult it is for companies to change their culture. Nokia found it incredibly difficult to go from a hardware focussed engineering organisation to a company which provides an open software platform for others to deliver compelling services from. But what also stands out here is the understanding of how software can change markets and business dynamics.

Software means new, compelling services can be launched overnight. And platforms such as mobile phones which support these services well will prosper. This is where Nokia fell down. Competitors such as Apple, which also made its name in well designed, stylish consumer electronics also made computers. They helped invent the computing industry. So they understand software and how it can be used to change a market. So when Apple launched the iPhone it was packed with new, software driven features, which attracted users to do new things with their phone.

Nokia has now teamed with Microsoft to launch a new range of Smartphones using Microsoft’s Windows Mobile technology. Microsoft understands software but has struggled in the past to break into the phone market. So on paper it is a good combination. The challenge will be for both companies to show they can lead the mobile industry in new, compelling applications and services.