I have been researching Nokia (NOK) lately and while I wait for the annual reports to be mailed, I have been thinking about their competition. Anyone that has looked at history knows that new industries start off with many competitors and within 10 years, many of them fall off the earth, including some of the early pioneers. I suspect that is what is happening in the mobile phone industry.
Mobile Phone Industry
It's hard to correctly interpret the shift in the market that is unfolding in the background, let alone try to predict the future. Nevertheless, if one is considering investments in companies like Nokia, I think it's important to think about the industry (this incidentally is one reason Graham-oriented value investors stick to stable industries.) My guess at this point in time is that the losers are Palm and Motorola. These two companies were pioneers in the mobile phone industry—in fact, I may be wrong but I believe Motorola invented the modern wireless networking technology and architecture (of course everything has advanced since then)—but I have a feeling their castles have been over-run—the moat just wasn't strong enough.
The question for anyone looking at Nokia is whether it's the next one to fall. Investors have been selling off Nokia recently due to the fear that it is on the way to joining Palm and Motorola as a has-been. I find it surprising that the market has re-priced Nokia so quickly. As you can see from the following chart, it lost around $50 billion in market cap within 3 months with little news other than a profit warning:
Admittedly, Nokia has a higher beta and is more sensitive to earnings but even then, the markdown is very large. Companies don't lose $50 billion in market cap very easily. Typically you need some big disaster to cause that much wealth destruction.
So I decided to take a quick look at Google Insights, a free tool that lets you evaluate the popularity of various keywords (there is another similar one called Google Trends.)
Interest Over Time
Google Insights is simple on the surface but I find it quite interesting (thanks to Google for making it freely available.) I like to use Google Insights to ascertain the popularity of some brand, product, or company. This is especially useful if you are a newbie and not familiar with the industry/product/company/brand. Obviously, this analysis can be misleading and isn't a replacement for primary research or detailed secondary research. I should point out that this data is backward-looking and the impact of issues such as language differences are not clear to me.
Although popularity doesn't necessarily indicate profitability or attractiveness of an investment, it does provide some clues about the competitive strength of a company (especially for consumer companies.) I remember using it compare Expedia (EXPE) to Priceline (PCLN) when I was researching a while ago. Since I don't travel much, looking at the popularity of those brands was quite helpful (especially since I never even heard of Priceline before I started looking at Expedia.)
Nokia's market position is very tough for me to figure out. I am not into mobile phones and neither follow them nor buy the latest. On top of that, Nokia, especially their smart phones and higher-end phones, are not popular in North America. If one went with their experience in North America, they might conclude that Nokia is a minor player, when in fact Nokia is the largest mobile phone manufacturer.
I decided to look at key competitors. As usual with Google Insights, the comparison, which is based on keywords, isn't perfect. Some companies are pure-play mobile phone companies (e.g. Nokia) while others aren't (e.g. Motorola.) Some have one brand associated with their mobile phone (e.g. iPhone) while others don't (e.g. Nokia.) So, the keywords that are compared may alter the results. In any case, I went with some obvious ones as shown in the results below.
The picture above largely parallels the mobile phone industry. Motorola (orange line) used to be dominant in the early 2000's but started declining after their revolutionary Razr phones started losing market share (do note that "Motorola" would include many other non-mobile-phone products by Motorola but I doubt they have much impact on popularity.) The chart above seems to indicate that Motorola started trending down in 2005. Following an opposite trend, we see that the iPhone, which didn't exist in the early 2000's, has been gaining popularity over the last 3 years. According to this chart, it seems that the iPhone has the strongest interest right now. RIM's blackberry phones have also been gaining interest but not quite as strong as some of the competitors.
As for Nokia, the chart does largely reflect its state of affairs. It used to be dominant—still is—but it has been trending down, ever so slightly, since the peak in 2007. The collapse hasn't been as severe as Motorola but it does indicate that it isn't the leading brand anymore.
One major conclusion I make from this chart is that Nokia's brand erosion isn't that bad. Sure, it can still fall off a cliff (especialy if it can't introduce competitive next-gen products), but it doesn't seem as dire.
Popularity by Region
Since we are dealing with a global industry, it is worth looking at popularity by region. Perhaps it will shed some light on the industry. The following charts illustrate the popularity of Nokia, Blackberry, and iPhone.
Consistent with my understanding of Nokia, it is way more popular in developing countries (Eastern Europe, Middle East, India, Pacific Rim) than developed countries. RIM's Blackberry appears to be concentrated in a few countries, while the iPhone has high popularity throughout the world, with a tilt towards the developed world.
If the popularity displayed on these charts is anywhere near the truth, I am surprised to see that the Blackberry is so weak outside a few key markets. Yes, it is a business-oriented product but you would think that the consumer, whom probably influences this Google Insights measure, would have quite a bit of interest in the Blackberry but nope. RIM's market research department—I applied for a job there and never got it :(—has a lot of work ahead of them. Of the few companies I looked at here, I have a feeling that Blackberry would be the hardest brand to leverage world-wide.
The iPhone clearly has the popularity crown but there are a couple of things to keep in mind, with respect to Nokia.
Many feel that the iPhone is a big threat to Nokia but I don't feel that's the case. Although it's hard to say for sure, I don't believe the mobile phone market is a winner-takes-all market like most Internet services (however, I will change my view if mobile phones become a service rather than a product.) I can see Nokia carving out a niche near the bottom of the scale—lower margins, higher volumes—while Apple concentrates on the high-end. Based on Apple's marketing strategy, I just don't see them satisfying the whole market. For instance, Apple tends to release a few products whereas the mobile phone market really requires upwards of 30 or 40 products.
Furthermore, the vast majority of consumers near the bottom of the market likely will never be able to afford higher-end products that Apple tends to sell. It'll be similar to how nearly everyone who buys an Apple computer pays above-average prices and rarely ever includes the lower-income bracket (there are exceptions of course; also the situation is a bit different with the iPod because there is a service element (iTunes) involved.)
Even if Apple can introduce lower-end products, it likely wouldn't make it a priority. The stock market is pricing Apple with a very high multiple and management is unlikely to lower margins by going after the lower-end (historically Steve Jobs has almost always pursued a strategy of high margins & low volume.)
So I think Apple isn't as big of a threat to Nokia as some analysts and investors say. Yes, it will always be a competitor (especially at the higher-end) but I doubt it will determine Nokia's fate.
Instead, I think Nokia's greatest threat comes from low-end manufacturers. This ranges from upstart companies like Samsung and LG, to no-name companies from China, Taiwan, and who-knows-where-in-5-years. Mobile phones are becoming commodities, at least at the lower-end of the market, and it's not clear how Nokia is going to compete (I'll be spending more time thinking about this.)
(Just to be clear...The iPhone was a big threat to Nokia a few years ago when it beat out Nokia's smart phones. But my point is that it isn't as big of a threat anymore and in the long run.)
It appears that Nokia's popularity has been declining in the last few years but it isn't quite that bad. Apple's iPhone has been skyrocketing on the popularity scale but I don't believe it's as big of a threat to Nokia as it seems. My interpretation of Google Insights data is that RIM has a big job ahead if it is to turn Blackberry into a global brand. Blackberry just doesn't seem that popular (do note that it is business-oriented and the data here is likely based on the consumer.) Overall, there is some good news for Nokia and some bad news. Tags: Nokia (NOK)