Will Rewiring Nokia Spark Growth?CEO Ollilas plan for the phone giant: Go after both economies of scale andinnovationTero Naumi has a job any couch potato would love. The 40-year-old NokiaCorp. (NOK ) engineer watches television eight hours a day. As productmanager for Nokias mobile-TV technology, which will let handsets receivea dozen channels of digital TV on the go starting next year, Naumi spendsworkdays in his cubicle viewing the news and soap operas on a speciallyequipped Nokia 7710 phone, which features a 3-inch wide screen and sellsfor $650 before subsidies from phone carriers. Sometimes he tools aroundTurku, some 145 kilometers west of Helsinki, in a van to test reception inhard-to-reach places. It may sound like kids stuff, but Naumis work isdeadly serious. Nokia hopes mobile TV will become a multibillion-dollarbusiness by the end of the decade.Digital television on handsets is just one of the far-out schemes the worldslargest mobile-phone maker is hatching to resurrect flagging growth. At aNokia development lab near Vancouver, programmers are writing newvideo games that let thousands of players battle each other over theairwaves using Nokias N-Gage wireless game console. Engineers inBoston and Tampere, Finland, are busy weaving new e-mail readers andsecurity software into Nokias handheld Communicators -- pint-sized hybridphone-organizers aimed at corporate customers. And in factories fromGermany to China, assembly-line workers are churning out millions of sleekcamera phones that work on new third-generation mobile networks. "Nokiais a beehive of experiments these days," says John Jackson, seniorwireless analyst for telecom market researcher Yankee Group (RTRSY ) inBoston.BATTLE STATIONSThe Finnish phone giant has little choice but to wade into new waters.Although the company sold an amazing 208 million handsets last year, up16% from 2003, fierce competition and sagging prices pushed mobile-phone revenues down 3%, to $30 billion. Its not just that garden-varietyhandsets are becoming commodities. Nokia also had a wretched first halfin 2004, when a stale product portfolio and strained relationships withmobile operators cost it nearly a fifth of its hard-won 35% global market
share and pushed revenue growth into reverse. As the companysprospects dimmed and analysts cut their ratings, dismayed investorspounded Nokias stock down to a 12-month low of $11.03 in New York onAug. 13 -- 52% off its March peak. Customers werent surprised. "Theirattitude was that, given their size, they didnt need to listen to us," says anexecutive at a European mobile operator.To get Nokia back on track, chief executive Jorma Ollila has cranked up theintroduction of new phones, especially "clamshell" models that hinge at thetop -- a popular category where the Finns were missing in action. He hasalso wooed operators, agreeing to tailor phones to their specifications asnever before. And to regain lost share, Nokia slashed prices on certainmodels by up to 25%, at the expense of operating earnings, which fell 15%in 2004, to $5.6 billion. By yearend, Nokia had managed to claw backnearly all its lost market share, according to market researcher StrategyAnalytics. The company turned in fourth-quarter sales and earnings thatbeat Wall Street estimates. And its stock recovered to finish 2004 down just7%.Nokia has climbed out of its hole. But the company still faces afundamental problem -- no growth. Its top line has drifted down by anaverage of around 1% annually since 2000, hitting $38 billion last year,while net profits have fallen 18.6% in the same period. By comparison, rivalSamsung Electronics has seen mobile phone sales and profits triple overthe last five years, while Motorola endured plunging revenues and deeplosses before a turnaround last year.To get Nokias engines revving again, Ollila is halfway through a two-yearmakeover that hes convinced will launch the company into a new growthera. Hes redirecting research and development to areas where Nokiastands apart, especially radio technology and mobile-phone software, notwasting it on reinventing things the company can buy elsewhere. Nokiaspent more than $4.8 billion last year on R&D, 60% of that for software. At12.8% of revenues, Nokias R&D spending was three points higher thanMotorola and about twice the R&D ratio of Sony Corp. "Nokia can onlyretain its current position and grow through innovation," says DeclanLonergan, a Yankee Group telecom analyst in London.But the scramble to find growth through innovation carries huge risks.Nokia is racing into unfamiliar markets, where it faces competitors ranging
from Microsoft (MSFT ) and Apple Computer (AAPL ) to Samsung andSony (SNE ). Despite its strong brand and global reach, some efforts arenot panning out. Nokias Communicator, for instance, has never enjoyedthe popular success of Palm and PocketPC PDAs, though the newestmodels are getting a warmer response. Nokias N-Gage wireless gameconsole has sold 1.3 million units, far below expectations. "Innovation, inand of itself, isnt the cure," says analyst Per Lindberg of brokerageDresdner Kleinwort Wasserstein. "You have to make products peoplewant."Misfires are part of the price Nokia must pay to keep ahead. As basicmobile phones become more cookie-cutter and barriers to entry fall,particularly for Chinese newcomers such as TCL and ZTE, Nokia and otherestablished phonemakers have to pile on more features. Thats why Ollilahas created two new business units that require higher levels of R&D andmarket development. One handles multimedia devices -- camera phones,game machines, and mobile TVs -- and the other sells devices aimed atbusinesses. Ollila has farmed out basic cell phones to a division whosemain job is to deliver mass-market units at the lowest possible price. Thatgroup still represents 63% of revenues and 87% of operating profits, but itscontribution is expected to decline as new initiatives catch on. Anotherdivision, accounting for 22% of revenues, sells wireless networks tooperators.The new structure better reflects the changing industry. Because of marketsaturation in the developed world, analysts expect total handset shipmentsto grow only in the single digits for the next few years, reaching about 750million units in 2006. Meanwhile, price-cutting could keep industry revenuesnearly flat. In search of growth, Nokia is diving deep into developingcountries like China, India, Brazil, and Russia. They demand less-expensive phones but are growing much faster than Europe or NorthAmerica. Equity analyst Jari Honko of Helsinki brokerage eQBank saysNokias goal is to profit from the companys huge volumes in purchasingand manufacturing. "They want a situation where competitors cannot keepup on price," Honko says.At the other end of the scale, Ollila is casting a wide net for high-marginopportunities outside conventional handsets, especially in the hotlycontested "convergence" arena. Nokias new multimedia group, forinstance, offers gadgets that take pictures, play games and music, and will
eventually show digital TV. The group booked revenues of $4.7 billion lastyear, up 46%, and earned its first operating profit of $232 million.To court corporate users, Ollila has also established an "enterprisesolutions" group. The goal: persuading companies to outfit their workerswith voice-and-data gizmos such as the $1000 Nokia Communicator, whichlooks like a phone when folded shut but opens up to reveal a keyboard andwide color screen. The enterprise group topped $1 billion in revenues lastyear, up 57%, but will likely continue losing money through 2005.Brokerage Credit Suisse First Boston (CSR ) figures the new units willboost Nokias top line by $2.6 billion this year, enough to make up for a$1.7 billion decline in conventional handset revenues. "I am moreconvinced than ever that the reorganization was right," Ollila says. The nextstep in his plan is to exploit Nokias technology assets to revamp the way itbuilds phones. The idea is to turn the handset from hardware into software.Already, phones can be built by snapping together modules of chips andradios to accommodate different wireless standards and feature sets. Ontop of that Nokia wants to add its secret sauce: flexible, easily customizedsoftware that the company has spent the last decade developing.The foundation comes from Symbian Ltd., a British consortium Nokiahelped launch with a half-dozen other mobile phonemakers. Symbians"smartphone" software is as sophisticated as Microsoft Windows or Linuxbut was designed from the beginning for mobile devices. It alreadycommands 82% market share among smartphones, thanks mostly to the15 million Symbian-based devices Nokia has already sold. On top of that,Nokia adds its Series-60 user interface, which it now makes available forlicense to other phonemakers. The shift to standard software marks a seachange for the mobile industry. Until now, Nokias older phones, as well asthose of rivals, had to be painstakingly reworked to accommodate asoftware change as simple as moving the photo messaging feature fromthe main menu to a special section devoted to imaging. Now, with Symbianand Series-60, engineers can make the change in a matter of days -- andsend the modification to the factory floor to be burned into thousands ofcustomized phones.HIGH-SPEED CUSTOMIZATIONSuch ease of reconfiguration will revolutionize Nokias production model.Until last year, it was oriented mostly around building huge runs of mass-
produced handsets. To keep costs to a minimum, Nokia held off addingnew features such as better color screens or higher-resolution camerasuntil the components were available in big volumes.Nokias new modular hardware and flexible software make it easier for thecompany to customize products faster. With its new 6630 3G phone, forinstance, Nokia created entirely different menus and screens for VodafoneGroup PLC (VOD ) and Orange (FTE ). Nokia also aims to speed the latesttechnology to market by creating smaller batches of some new phones.That will allow it, for instance, to produce limited numbers of its new 7280phone, which resembles an Art Deco lipstick case. "We need to take newfeatures to market more aggressively," says Olli-Pekka Kallasvuo, head ofmobile phones.Having made its fortune in "candy bar" handsets, Nokia now aims for 50%of its product line to sport alternative designs -- clamshells, sliders, swivels-- by the end of this year. Within three years, it figures a quarter of itsmodels will be smartphones that sport advanced software and runprograms just like a computer. Faster. Smarter. More flexible. Its the newNokia. But those gadgets better be what customers want.