Nokia's Key to Long-Term Relevance : Emerging Markets

A version of this post appeared first in VentureBeat


Cellphone maker Nokia may not get as much love (or press) in the US as Apple does, but internationally, it's putting on quite a show. The company has 39% of the global smartphone market, according to a new report from market researcher Strategy Analytics.But put the smartphone market to the side for a moment, and take a look at some other markets Nokia's currently building out -- markets most other device makers have largely ignored. The company has been rolling specialized services out to emerging markets in Brazil, China, India, and parts of Africa where there's a high demand for affordable, practical mobile services.

Yesterday, the company announced its latest progress on this front. It has already offered English-language services on Nokia phones and via mobile portals in China since 2007 (a service called MobileEdu), but now it's partnered with international education firm Pearson to bring other types of educational content to phones in China in a joint venture called Beijing MobileEdu Technologies.

The MobileEdu service to date has over 20 million subscribers in China, according to Nokia, with over 1.5 million active users every month. The site offers downloadable courseware that appears to be typically priced at 2 Yuan (~$0.3). The new venture will obviously seek to expand that market.

Services such as these, coupled with a strong presence in low-cost handsets, have resulted in Nokia gaining a significant leg-up on competition in emerging markets across the world, including two of the biggest -- China and India. Be it in terms of coming up with highly cost-competitive, yet utilitarian, phones (think of the 1100 series), or in terms of carefully building up a brand that endears itself to the bottom of the pyramid, Nokia has demonstrated that its understanding of emerging markets is next to none. While other vendors such as LG/Samsung/Motorola have traditionally focussed on LC (Low-Cost) and ULC (Ultra Low-Cost) handsets to drive sales, Nokia is probably the only handset vendor taking an active interest in services that it can bundle along with its low-cost phones.

One of these services, similar in intent to the MobilEdu initiative, Nokia Life Tools (currently available in India and Indonesia), is offered through partnerships with content providers such as Reuters and forms a key part of this services thrust. The SMS-based service offers agriculture, education, and entertainment services through an on-demand or a subscription model. The service has been available in India at prices of Rs.30 - Rs.60 ($0.65 - $1.3) since mid last-year. It is targeted at rural consumers, for whom the mobile phone is the primary means of connectivity to the external world. The agriculture services enable farmers to get market rates directly on their mobile, without having to travel to distant towns. That means they can accurately identify the right price and right market for their produce. And it means those farmers no longer have to go through a middleman to conclude a sale. Nokia promotes this service with its strong existing distribution channels and with its innovative "Nokia Vans" with which it reaches into the hinterland. The service is currently available in over 10 languages. And with India's adult literacy rate of ~66%, the company indeed has a sizeable target market for the service. While Nokia hasn't disclosed any uptake numbers in India thus far, I assume they're good, since the company extended the service to Indonesia and has announced plans to introduce it in Africa too.

Life Tools is only one example of Nokia's push into emerging markets through unique phone/service bundles. Others services include money-transfer solutions such as Nokia Money, a basic service that provides banking services to the unbanked, and Nokia Tej, a mobile order and supply chain management solution.

A focus on these markets is also likely to help the company over the long-term. These are markets where subscribers wouldn't be able to afford $30+ monthly data plans and where literacy levels aren't high enough to justify deployment of complicated mobile applications. And that's precisely why Nokia is going behind these subscribers with a two-pronged strategy of low-cost phones + highly relevant services. While the margins may be slim on the actual phones, the volumes are significant. And so is the opportunity. For instance, India just added over 19 million mobile subscribers in December 2009, and this is a country in which Nokia holds a 50% market share.

It also greatly helps that the company has built a solid brand that is valued high for reliability. The company was voted the most trusted brand for the second year running in the annual brand survey conducted by India's Economic Times business newspaper.

Nokia certainly has to figure out how to deal with North American carriers and sort out how to create phones that appeal to a North American audience. However, in the meantime, it's putting up a strong show in the global smartphone market. And whether its hold on that market is sustainable or not, one thing that it can safely lay claim to is an understanding of consumer behavior and needs in emerging markets. And these markets are the reason Nokia is not going to vanish anytime soon.

Functional Ecosystems: The Need of the Hour?

In recent times there has been a lot of noise around ecosystems, and how open ecosystems, given Google's flashy entry, are now here to stay. In the mobile space, the transition to open mobile ecosystems appears to be happening rapidly, with traditionally open Symbian, having had to re-position itself, and older consortiums such as LiMo trying hard to tell people that they've been around for a while. Android in particular is increasingly being touted as the platform of the future. With reports coming in of Android deployment not just on smartphones, but on netbooks/set-top-boxes and what not, the clamour around the potential of these open ecosystems appears all set to rise further.

However, amidst this cacophony, it will be pertinent to take a step back and see what lessons existing systems have for us. Arguably, one of the most successful ecosystems in recent years has been the iPod-iPhone-iTunes combo. Apple has successfully created a completely vertically integrated system that made the user-experience a stroll in the park. Consumers were offered a simple way of downloading content/apps with billing tightly integrated. On the supply side, Apple maintained a stranglehold on pricing, availability and distribution. It stood up to content majors in deciding the pricing of single tracks, and it made the app store proposition attractive to mobile developers by keeping only a flat 30% retainer. The results are out for everyone to see. The iPod has become one of the best selling portable devices of all time, while the iPhone has set the cat amongst the device manufacturers aflutter.

The other successful ecosystem example in recent times has been the Amazon Kindle. The Kindle, in both its iterations, has consistently been sold-out, with varying sales estimates. Again, the Kindle too offers a vertically integrated ecosystem with mobile connectivity built into the cost of the device, and content availability driven by Amazon. Despite the high price tag, the simplicity of the offering, is attracting customers in droves. And like the Apple ecosystem, Amazon too exercises tight control over what can and cannot be viewed. And it is to Amazon's credit that by limiting, rather inconveniencing, usage of the Kindle, they can even charge for pulling RSS feeds !

In both these cases, consumers have shown a clear preference towards a simplified usage-experience, and one that is devoid of roundabouts. Consumers do not want to be bothered about confusing options around content discovery or billing. And this is something that device vendors, telcos and content players alike need to imbibe in future offerings. While early adopters will always be willing to go through a couple of hoops, however, hitting the mainstream will require players to bring elegant integrated and transparent solutions. Players along the value chain will increasingly need to collaborate in driving uptake. Traditional models that have worked in the past will not work in the future. For instance, while telcos have been able to get away with high revenue share for any third-party service in the past, increasingly, they will have to come to terms with the changed reality and accordingly price their role in a ecosystem. A delay in doing so will hurt everyone involved in the process. Amazon's attempts at launching Kindle in Europe have apparently been stalled due to breakdown of talks with telcos on revenue-share and pricing of connectivity. Likewise, Nokia's attempts at easing consumer hassles by having integrated carrier billing are slowing up their rollout of Ovi Store, giving its competitors strong headway.

It is indeed true that advent of digital media has had a strong impact on existing business models, however, the true benefits of digital media can only be achieved if and when competency-based collaboration kicks in the industry. End of day, as the Kindle and iPod/iPhone examples have shown, consumers are least bothered with the question of an open or closed ecosystem, all they crave for is a functional ecosystem which meets their needs!

The App Store Gold Rush

Describing the current flurry of announcements around app stores as anything but a gold rush would be an understatement. Driven by the wild (?) success that the Apple app store has seen, operators, online players, and device manufacturers are making a beeline to courting developers with promises of riches unseen ! With majors such as Nokia, Microsoft, RIM, Vodafone, Verizon, France Telecom, and China Mobile committing to either launch app stores and/or greater co-operation with developers, competition for the consumer's discretionary spending on mobile apps/content is only set to increase. And not to forget, the ubiquitous Google, with its Android Market, which appears to be seeing strong traction with the first wave of customers. However, lost in all this cacophony is the increasing fragmentation that is likely to set in once all these app stores are launched. While Apple has had a strong success with its version, however, a large portion of that success can be easily traced to the limited portfolio of its devices (all of two-iphone and ipod touch), however, the same cannot be said for other app store operators. Numbers are being bandied about on how Apple's store crossed, in two years, the number of apps that Microsoft took over 9 years to build. What is clearly overlooked in this apples and oranges comparison is how apps built for a windows Mobile platform are meant to work on a much wider range of handset portfolio. Ensuring mass customization by using a narrow range of devices, as in the case of Apple, significantly reduces development, porting, and testing costs for a developer.

While development costs are one aspect of the complexity that having multiple platforms entails, a larger problem would be to encourage adoption beyond the early adopters and uber geeks, for creating an efficient billing platform is certainly no stroll in the park. Most of these app stores have exhibited an intention of cutting off the mobile operator from the picture, thereby complicating the billing mechanisms, and consequently risk alienating significant portion of the user base that would prefer the convenience of tying all mobile-based purchases to the carrier bill. And this is where mobile operators believe they can drive home their advantage. The announcements from China Mobile and Verizon need to be seen in this light. AT&T as well appears to be taking early steps with its App Beta program. In Europe, Orange too appears to be hitching the app store bandwagon.

The success that Apple has seen can be clearly traced to the virtually complete control that it has of the value chain; right from the device to the software, to the iTunes interface, to the payment mechanism, and in some cases, down to the operator (thro' exclusive agreements) ! However, the same is not really viable/practicable for any of the other new entrants. Fragmentation is a reality that they have to adapt to. And consequently, they might never be in the same league of the Apple app store. And more importantly, whether they like it or not, it will indeed be very challenging for either content companies or device vendors to create alternate mobile payment gateways bypassing the carrier billing.

The app store phenomenon will likely act as the final nail in the coffin for operator walled gardens. It remains to be seen how operators ensure they can find their collective bearings and work towards creating an ecosystem that offers value to the customer and monies to their pockets !