Briefing: The Collapse of Nokia

Main causes and learnings for today's tech giants!

Dec 03, 2024

“Nokia. Connecting People” is undoubtedly a phrase those over the age of 30 remember very well. Before the era of the iPhone and Android, Nokia, as the pioneer of mobile phones, dominated the market. In the early 2000s, few consumer electronics companies were more popular. It sold phones by the hundreds of millions, connecting people in ways never experienced before. Nokia phones were the first for millions, yours truly included.

NOKIA , Connecting People. BUT FOR HOW LONG ? | by E-Cell, IIIT Lucknow | Medium

Global domination enabled Nokia to have its best financial year in 2007, selling 437 million phones, recording €51.5B in sales and profits of €7.2B. Its iconic Nokia 1100 model became the best-selling mobile phone of all time, selling over 250 million units. At its peak, the company controlled 50% of the global mobile device market.

Coming from the small nation of Finland, Nokia became a national pride, symbolizing the country's emergence as an industrial and technological powerhouse. At one point, Nokia employed over 24 thousand people and was responsible for 5% of the country’s GDP and 20% of exports.

However, today, the company is a shadow of its former self, and its collapse is seen as a national tragedy in Finland. The rise and subsequent collapse of Nokia is one of the most extraordinary stories in business and technology of the last 3 decades.

Let’s take a look at it.

1. Early Success

It has become a bit of a cliché to say that a company has humble beginnings, but for Nokia, that most certainly is the case.

Nokia was founded in the city of Tampere, Finland, around 1865. It would be 11 years later that Alexander Graham Bell would invent the first telephone and 108 years before Martin Cooper of Motorola would make the first mobile phone call. The company began operations as a paper manufacturer and, through the years, opened many pulp mills to turn wood into paper. Before its eventual entry into electronics, the company was involved in many businesses, such as rubber, forestry, and electricity generation.

Before mobile phones, Nokia was a leading Finnish manufacturer of radios, TVs, and communications equipment. The company was instrumental in helping the budding Finnish economy grow and modernize its industry. Additionally, Nokia played a pivotal role in the defense sector, supplying important communications equipment to the Finish military during the Cold War.

In 1982, the release of a mobile phone for the car, the Nokia Mobira Senator, began Nokia’s transformation into a purely electronics manufacturer. In 1990, the company sold off its paper and rubber divisions, whilst the cable division was sold in 1999. Throughout the 1990s and 2000s, the company sold all of its divisions that were not related to communications technologies.

Mobile phones produced by year. 1990-2012

In the late 1990s and early 2000s, the release of iconic models such as the Nokia 3310, 1100, and 6600 catapulted the company into global stardom. Nokia manufactured 10 million phones in 1996, and just 3 years later, the company passed the 100 million mark. Production quadrupled in the next 7 years, reaching 400 million units in 2006, showing what a technology S curve is.

In 2006, few people could have predicted how swift and brutal Nokia’s collapse would be!

2. Road to the Grave

The collapse was slow at the beginning, and then all at once. Let’s take a look!

Apple and Samsung

9. January 2007 is one of the most consequential days in technology history. The founder and CEO of Apple, Steve Jobs, unveiled to a packed San Francisco crowd what would become the most successful product in human history.

The release of the iPhone took people into the smartphone age!

A sleek, easy-to-use device became an overnight success, selling over 6 million devices in its first year. As of mid-2024, Apple has sold over 2.4 billion iPhones, earning an estimated 2 trillion dollars.

It is not a coincidence that Nokia’s downfall began in 2009, shortly after the release of the iPhone!

iPhone was a great and innovative product that, apart from achieving massive commercial success, jolted the whole industry. It pushed competitors forward, and many of these competitors would ultimately kill Nokia. It was actually, Samsung that in April of 2012 overtook Nokia to become the world’s leading mobile phone manufacturer, ending Nokia’s 14-year dominance. Samsung used many of the same ideas the iPhone did and applied them across a wide range of products.

Unit Sales

Nokia mobile device unit sales peaked in 2008 at 468 million devices.

From 2007 to 2010, the sales fluctuated a bit but remained relatively high. In 2011, sales declined 8%, while 2012, saw sales fall off a cliff. The company sold over 80 million fewer phones, a decrease of 20% Y/Y.

The collapse was slow at the beginning, and then all at once!

In just 3 years from 2010 to 2013, Nokia device sales volumes fell an astonishing 45%, selling 202 million fewer phones. At the same time, iPhone sales grew by 276% to 150 million units, whilst Samsung smartphone sales grew an astonishing 1,274% to 316 million.

Financial Collapse

Nokia’s market cap peaked on May of 2000 at €303B, by 2012 the company had lost 98% and was valued at just €5B.

At its peak in 2007, Nokia was at the top of the world with over €51B in sales and profits of €7.2B.

Just 2 years later in 2009, as unit volumes fell 8%, Nokia’s revenue decreased by 19%, whilst net income plummeted by 78%!

Pay attention to the revenues decreasing significantly more than the unit volume decrease. Pricing power is the first to go when a company is getting disrupted. This is a textbook example of how even a small volume decrease can have a huge negative effect on sales and profitability for companies with high fixed costs.

In my mind 2010 is the year that really killed the company!

In 2010, Nokia’s unit sales grew 5% to reach 453 million, enabling revenue to increase by 3.6% and profits by 96%. These results were achieved primarily thanks to Nokia’s strong performance in emerging markets and brand loyal customers giving a chance to Nokia Symbian OS smartphone models despite their lackluster reviews. Additionally, the global economy started to recover from The Great Recession of 2007-2009.

The results of 2010 gave the company a false sense of security and hope. This small recovery masked serious issues and delayed urgent strategic decisions. The mobile phone pioneer was losing traction in the high-end models and didn’t anticipate how quickly competitor innovations would trickle down to cheaper models.

By 2011 it was clear to millions of people that Nokia’s phones were a thing of the past!

Falling volumes of 8% and 20% in 2011 and 2012 led to sales falling 9% and 21%. Profits completely evaporated, with Nokia losing over €1B in 2011 and €3B the next year.

As the company employed over a hundred thousand employees in old, obsolete, money-losing factories, it was forced to fire 10s of thousands. In 2011, Nokia had 130 thousand employees, by 2013, that number had fallen to 86 thousand.

Seeing no end to losses, in 2013, Nokia made a desperate decision to sell its mobile phone business to Microsoft for €5.4B. Nokia lacked the required finances to execute a successful business turnaround. The company just fundamentally was unable to compete in a rapidly evolving smartphone market.

Microsoft would ultimately close the division just 2 years later due to disastrous sales figures and write off the acquisition!

3. Main Causes

“We didn’t do anything wrong, but somehow, we lost” is not a meme but a real quote from the former CEO of Nokia, Stephen Elop. Nokia certainly did many things wrong, and this statement encapsulates the hubris and arrogance that was at the core of their downfall.

Touchscreen

Samsung, Apple, and the broader mobile device industry embraced the touchscreen technology with open arms. While Nokia released some touchscreen phones before Apple or Samsung, the company was slow to innovate and focus purely on them. Its early touchscreen phones were weird Frankenstein versions that had both keypads and touchscreens.

The company was skeptical that people would untimely prefer a full touchscreen experience. Nokia lacked the foresight to see where the technology was moving and that the touchscreen technology would evolve to enable an infinitely better user experience than the keypad.

This hesitation wasted time, and in hindsight, it is clear that Nokia didn’t have time to waste!

Bad Software

Nokia didn’t focus as much on user experience as iOS. iPhone iOS offered great integration with Apple’s hardware and software, delivering a simple and intuitive user experience that Apple is famous for today. Most importantly, however, iOS was fast as it was designed especially to work with the iPhone. Nokia’s Symbian was slow and buggy, with different versions of Symbian for different phones offering inconsistent experiences for both users and developers.

Nokia was primarily a hardware company, not a software company!

Symbian user interface was old whilst Android and the iPhone offered a modern-looking user interface that was incredibly appealing to tech-savvy people.

Android and iOS revolutionized mobile phone software while Nokia’s Symbian OS couldn’t compete!

Microsoft Mobile

As Nokia sales were falling and its Symbian OS troubles became impossible to ignore, the company essentially had four options.

Nokia could try to fix Symbian, but they had already spent years on it, and meaningful results were nowhere to be seen. The company could try to develop a completely new operating system, but that would take time and cost billions. Another solution was to embrace Android, which was the clear leader of open mobile phone operating systems.

Ultimately, Nokia chose to ditch Symbian OS and picked Microsoft Mobile as their primary operating system.

A decision that would ultimately kill all the chances the company had to recover!

Windows Mobile operating system was worse than Android and iOS in all the ways that mattered. Nokia should have switched to Android, but many speculate that this grave error was made due to Nokia CEO Stephen Elop having a close relationship with Microsoft, as that’s where he worked before the move to Nokia.

Windows Phone was not as customizable as Android, and less intuitive and more difficult to use than iOS, taking the worst aspects of Android and iOS. Furthermore, Windows Phone was only available in a few models, whilst Android was available in dozens of different models made by Samsung, HTC, and others.

Bad sales and worse user experience made it difficult to attract developers!

Developer Ecosystem

Google Play Store and Apple’s App Store enabled millions of developers to create new, unique, and innovative applications that brought the usefulness of mobile phones to previously unimaginable levels.

The developer ecosystem is what made mobile phones the most important device in the lives of billions of people today!

In 2011, it was apparent that the ability to incentivize developers to create apps for your mobile platform is a necessity in this new technology paradigm. The developer ecosystem for Symbian was miniscule, while there were thousands of third-party developers creating apps for iOS and Android.

I distinctly remember sitting in a math class sometime around 2012 and hearing classmates talk about this new cool photo-sharing app called Instagram. One of them sighed that they can’t download it because they have “a stupid Nokia Windows Phone” and they will ask their parents for an iPhone. This anecdotal example encapsulates the failings of the Windows Phone.

In 2011, Stephen Elop, the CEO of Nokia sent the infamous “Burning Platform” internal memo that was later leaked to the press.

“The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren't taking our market share with devices; they are taking our market share with an entire ecosystem. This means we're going to have to decide how we either build, catalyse or join an ecosystem”

By this memo, it seems that he had a full understanding of the grave situation Nokia finds themselves in, so it's puzzling to me that he chose Windows Phone over Andriod.

4. Today and the Future

After selling the mobile phone division, Nokia became a pure-play network and communications infrastructure technology business. The company is providing the technology to move the world from 3G internet to 4G and 5G. Additionally, Nokia provides various software solutions that help telecommunications and cloud companies with network management, analytics, and optimizations.

Despite various headwinds such as growing cloud adoption, improving global internet penetration rates, growth of connected internet-of-things (IoT) devices, and a shift to 5G, Nokia still struggles to find its footing.

Sales have essentially been flat throughout 2016 to 2023, while as of LTM of Q3, revenue is down 16% from 2016, with all of their main segments seeing large declines. Additionally, Nokia has struggled with fluctuating profitability and FCF.

In the future, the company hopes to benefit from the continued growth of 5G and commercial and industrial IoT devices. Furthermore, Nokia is motivated to expand in high-growth areas, such as data centers and cloud network services.

I wouldn't invest in Nokia due to its history of bad execution, failed technological shifts, and low growth.

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5. Learnings

Nokia, as the market leader grew too complacent and failed to act accordingly when changing technological shifts made their products obsolete. This is an important lesson for Apple, the company that benefited the most from the death of Nokia.

Disrupt yourself or be disrupted!

Tim Cook, the CEO of Apple, saw the collapse of Nokia with his own eyes and is surely aware that no matter how large your market leadership and how strong your “moat” is, it all can disappear quicker than it appeared. Technological shifts are quick, brutal, and painful. Nokia went from selling 468 million devices at the peak in 2008 to selling the division just 5 years later in 2013.

Additionally, I see some parallels in the Nokia story to the current transition to electric vehicles. Nokia was primarily a hardware company that failed to adapt to the simple reality that “software is eating the world”.

Famous VC investor Marc Andreessen said that to the Wall Street Journal in 2011. Today, it seems obvious, but in 2011, many struggled to see how software would transform large industries such as banking, transportation, entertainment, and manufacturing. Banking is primarily done on the phone, Uber changed the way people think of transportation, Netflix is disrupting the 100-year-old Hollywood order, and Tesla is manufacturing cars faster than any legacy auto.

Cars are no longer just mechanical hardware devices, rather they are computers on wheels. Tesla understands that the Chinese EV companies understand that, yet VW, Ford, Stellantis, and GM don’t. The legacy automotive companies should learn from Nokia’s failings and adapt before it’s too late. Nokia essentially collapsed in 3 years from 2010 to 2013.

Cars are more complicated products with longer useful life than mobile phones, so the legacy autos have more time than Nokia did, but time is running out fast!

Global Equity Briefing