Saturday, 8 November 2008

An Apple eating into Nokia

We are re-visiting this note following a note we read on the drop in Nokia market share from q3 2007 (51.4%) to q3 2008 (38.9%).

Apple in the meanwhile grew from 3.6% to 17.3%. (note below)

Its just a good time to repeat: No brand in marketing history has maintained high profit margins and market share simultaneously over a long period. A choice has to be made.
We believe Nokia has missed this.

We believe Apple will soon be seduced by volume market share.

There is value at the top of the consumer pyramid. LVMH demonstrates the success focusing on this segment. (but yes, we are seeing them salivate after the “entry level” products as well.

Mass market products require a mindset very different from premium products. No company has mastered these two skills simultaneously.
Premium products may offer extra-ordinary profits that need to be re-invested in the extra-ordinary consumer base. A consumer base that requires innovation and a superior product and service experience.

Mass market products require a marketing mix that invariably leads to a company focusing on maximising value for the masses of consumers. This invariably leads the premium consumer’s experience to be compromised.

The market of the “low cost” phones has grown a lot more than the overall market for cell phones. Nokia has chosen to sell in this segment. Unless it is then able to find a cost structure that allows it to have the same profitability as for its more “upmarket phones”, its capacity for investing in innovation will fall.

Exposing it to innovators such as Apple. Apple's move to price down its phones will expose it to the next innovator in the market.

As the mobile phone gets more and more “commoditised”, it is likely that cheaper manufacturers in China will be able to deliver phones at $25 without having a high cost structure due to lower investment in R&D, manufacturing costs etc.

Would Nokia be able to match this? Should it?

As an industry matures, many consumer segments emerge. Satisfying each segment well requires specific business models. Working and synchronising among these different models different skills in a company and eventually proves impossible.

Ritu and Venkat

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