Nokia's dilemma: operator friend or foe?
One of the interesting questions in our online survey on the future of broadband is "who will own the network?". The current results for cellular-style networks look something like this:
The points of note are that a lot of people think the mobile operators need to increase their efforts at sharing networks; and Openreach-style regulated structures from the fixed side aren't so popular for wireless. (If you've not done the survey yet, you'd better click here quick and contribute your opinion too -- and you'll be on the mailing list to get the free summary results, which you won't otherwise get.)
However, one respondent came back and asked me why I didn't offer the handset providers or network equipment makers as an option (at least we had an "other" box!). Which set me thinking -- why would someone vertically integrate the different parts of the mobile value chain? This is distinctly topical since Nokia has been busy entering the services space with its Ovi music and entertainment store (which potentially competes with operators, even if not intended to). They've also just bought Navteq, which offers an opportunity to bypass operators by baking the mapping data into the device.
We've done extensive work in the past for the mobile handset vendors on the co-opetition they have with network operators and how to manage that in an all-IP world. So let's ponder Nokia's situation and what their "Telco 2.0" strategy ought to be. Despite their protestations of being an Internet multimedia services company, they're still a mobile phone maker at heart, and their destiny surely depends on how the core voice and messaging experience evolves. (This will also be the focus of our debate at the Digital Product Innovation Summit at the Telco 2.0 event next week.)
You are old, Father William
Despite the pace of change and the uncertainty of who the winners are, technology revolutions follow predictable cycles. Geoffrey Moore documented this in Crossing the Chasm, where new business models and value configurations (products, supply chains and sales channels) take time to catch up with the possibilities the underlying potential of the technology offers. The economist Carlota Perez has also extensively documented the consistent cycles of technology revolutions and is a recommended read.
Nokia is in the position today where maybe the Ford Motor Company was in the 1950s or 1960s. The product has revolutionized society, penetrated the whole market base outside the developing world, and become part of life's invisible backdrop. Whole secondary industries have grown in its wake. It is a mature industry. And you're the best.
The next, predictable, phase is upon us. The design focus moves away from features that exploit the underlying technology. Instead, the winning strategy is economy -- not just of money, but also user time and effort. That means focus on what the user really wants. For example, lots of handsets might take great photos; the one that gets them into the hands of my friends with the least effort on my behalf is the winner. This is not easy for Nokia to supply with their existing organization, products or distribution channels. Luckily for them, nobody else has all the puzzle parts worked out either.
The problem is that the core handset product is also remarkably similar to a 1950s American car: appealing to the eye, laden with gadgets, but fragile and difficult to use. Furthermore, the design effort is going into the secondary features of the device. For the mobile phone, the core personal communications experience remains mired in the 1980s (if not the 1880s, with added direct-dial and no cord).
Nokia is vulnerable to a Toyota of telephony that focuses on the core user requirement and discards the chromed tail fins. And having stood in an Apple store and played with every icon on the iPhone, I think that moment has arrived. Google might just come along for the party and play the role of Honda too.
The way Ovi has been positioned at its announcement could prove to be a mistake. It will confound Nokia's efforts to address and bring to market answers the most important unmet user needs. Ovi annoys Nokia's most important go-to-market partners for any new and better personal communications services. It is an attempt to verticalise Nokia into the services business, but picks precisely the wrong place to do it. It's Club Nokia 2.0, only worse.
Content is still not king
As someone involved in conceiving the Nokia blogger relations program, I've been passed many N series handsets. They are all wonders of consumer electronics. Almost all the memories of my childrens' early years were captured on an N90, because that was the device right with me every day. Lifeblog is a godsend. (Although why E-series users are excommunicated is a mystery.) No longer do I have a dozen folders of pictured uploaded with names like "March 2006 TO SORT".
The multimedia features have been a necessary step in the evolution of the device. Beating the technology constraints of converged devices keeps Nokia in a small class of elite vendors, and margins high.
But it's not solving the real user crisis, just as the electric heated front seats and retractable sunroof weren't the answers to the problems of Detroit. More megapixels won't make Nokia the king of the hill in future either. What the iPhone does is cuts the crap, and makes the rest really easy to use. Just go look at the email application. Are you with Google, Yahoo, AOL or MSN? Then just enter your username and password, we'll do the rest. None of the above? Only then are you confronted with the POP3 and IMAP buzzwords. (Apparently Sony Ericsson have this sorted too.)
Contrast this with Google Mail on my E60 where I'm asked every time if I really want to access the network and how I want to do it. Without the carriers' acquiescence, the user experience is likely to remain broken. The "over-the-top" experience of running applications on Nokia phones leaves a lot of sharp edges and visible seams. It simply isn't ready to go up against operators' own baked-in packaged experiences, much as we like to throw stones at their portal and product efforts.
Communication is king and presence is a prince
At Nokia's own internal thought leadership conference in Helsinki nearly two years ago they had Andrew Odlyzko, mathematician and Internet philosopher, explain the future dynamics of the Internet and broadband. One central part of his thesis is that communication is king; content is secondary. When I take a photo of my kids at the zoo, and share it with my parents, that's communication, not content.
Douglas Galbi (an FCC economist) takes the model one step further, with three basic modes of communication: presence (the sensuous sense of the other person being with you, as social bonding); storytelling (which includes the narrative of a game, the lyrics and emotions of a song, or the scenes of a movie); and pure information transfer (I want a taxi! What's tomorrow's weather?).
"Presence" (which here includes gossiping on the phone as you drive home, not just smiley on/off icons) is what users have historically been most willing to pay for. We're still just hairless apes with a tribal grooming instinct.
The media industry is small. Game software, movies and music globally don't add up to SMS revenues alone. Nokia is betting that this storytelling mode of communication is going to be a winning proposition, and wants to insert itself into the deeply troubled value chain of media content delivery. This misses out on huge opportunities to fix the user experience in the other ways we communicate.
It's a monkey business
Retailed mass media content has proven successful when consumed as a social signal - like ringtones and callback tones. This is a form of social grooming, and a subset of presence - you're getting a distilled extract of the other person's character or self-image. But most media trinkets are packaged and sold for individual consumption as narratives. This is not the business Nokia should be in. Nokia is in the business of -- guess? -- Connecting People. This is foremost a presence business. The most compelling content is "I love you" and a little flutter of the memory of a kiss and your lover's scent. That's not available as a download. (Hint: mobiles are popular because they have an affirmative answer to "will this help me get laid?")
Remember the day at the zoo? Nobody makes a satisfactory product yet for me to share the experience. It's sure not MMS. I should be going round the zoo, snapping away, and each picture should become the new backdrop on both Nana and Grandad's phones, as well as being downloaded to their digital picture frame at home. Yet who is going to integrate, retail and support such a product? Who will distribute it? Who do you depend on to embed 3G or WiMax or CDMA into each new connected appliance?
What is remarkable is how little we know about why people make phone calls or send messages. Yes, there are studies which look at the outer layer of the onion and classify them into "keeping in touch with family", "meeting up with someone", etc. But the underlying user needs are poorly understood. Re-thinking the personal communication experience will take a lot more than the bland assurances of the unified messaging industry. Nokia has better customer insight than the competition. If you're a mobile phone company, you're in the business of delivering better telephony.
If it is broke, fix it
It isn't hard to think of ways in which the current core functions of a mobile handset are horribly broken in the eyes of users. Forget the idea of these being little multimedia computers. You're chroming the tailfins again. Nokia has to yet to build an acceptable telephone. And it's taken Apple to come along, release a cruddy 2G phone with zero "computer" features (download an app? nope!), and fix one of the deep problems of standard telephony: the voicemail user interface.
Some of these needs are mass-market and horizontal. For example, we'd all like to know if the person we're calling is already in a call, so we don't interrupt. Many of the calls that do get through are (if we're stealing from the Toyota metaphor) muda or waste. Manual transfers of location, status and availability data. "I'll be there in five minutes." "Is Bobby there with you?" "Is this a good time to interrupt?". Rather than five-nines of success, telephony offers no-nines as perceived by the user. Many of the phone calls performing information transfer should be eliminated.
The "presence" and "information" features described earlier are weakly supported or absent. I can't send my wife an "I'm thinking of you" vibrate buzz of her phone - only if she's wearing the device. I have to send an SMS, which makes the phone beep loudly whilst charging up in the hallway, wakes the kids from their afternoon nap, and has her rushing from making dinner to see who is trying to get hold of her.
Everyone is familiar with the frustration of dictating basic personal and payment data to bored call centre operators who then frequently mis-transcribe those details. Why are we still insecurely encoding this data through the humans at either end using voice?
In summary, a mobile phone is an adequate "social presence" device with lots of room to grow; a weak information transfer device, with lots of potential; a fantastic device for capturing personal narrative; but only average at enabling the consumption of personal narrative. It will eat the iPod, but nobody will care much as there's no money in music compared to the previous use cases.
Learn to love the network operators
Many of the features needed are niche. It would be a useful feature for my phone service to intercept incoming calls in the night (if the device isn't being worn on my person) and announce "the local time of the person you've called is 4.23am. If you wish to ring the phone, press 1. To leave a voice message, press 2." But for someone who is a shift worker, and works in the day, such a feature is far more attractive. Yet how can you reach such an audience? How can you market such a service?
Vertical integration in the telecoms industry is dissolving. Our own Telco 2.0 analysis is that the outcome is likely to be a variety of horizontally focused companies in the operator value chain. There are five basic telco strategies in the portfolio:
- Pipe: Managed infrastructure services, such as Ericsson have successfully pioneered, with economies of scale.
- Product: Companies with economies of speed (through processes that rapidly productise new technology). Few telcos are placed to do this - even Vodafone shut down their future products lab.
- Protection: "Legacy" (though vast) voice and telephony business whose lives are extended through gentle feature and commercial innovation.
- Platform: Companies that act as the IT integration glue and offer the business services to enable external third party innovation to get to market.
- Packaging: Customer-intimacy companies that assemble user propositions which include devices, connectivity, content and application services. These have economies of scope (such as how Tesco uses grocery retail to target financial services).
Today's operators try to be all of these at once. It won't last. Nokia and Nokia-Siemens Networks have an opportunity to use the unbundling of the operator business model to drive home a fundamentally better core communications experience. Many operators are going to mutate into platform (and pipe) businesses as internally-driven innovation proves inadequate. Is Nokia going to supply that platform? Because you're unlikely to operate it. There are just too many good ideas around to be able to implement them all.
Goodbye handsets, hello user experience
It's already a cliché, but the job of Nokia is to create fantastic user experiences. I personally believe that the biggest unmet needs are in the core voice and messaging franchise. There are stiff technical challenges, which means an opportunity for vertical integration. You may need to create a tight integration between the RAN, application service and handsets. Flarion's OFDM network was a step in this direction: support the chatty, bursty presence data of IP, not peak download speeds like CDMA or UMTS optimize for. To keep battery life up, the SIP server might bunch up presence updates to be sent to the phone; a pure "Internet" approach assumes all edge devices have infinite processing power.
For Nokia's handset business, together with Nokia-Siemens Networks, this should be a golden opportunity. Who else has the core and edge assets, the scale, the engineering capability and the brand to do it? Furthermore, by embracing "open" as a platform play for the core voice and messaging products, Nokia can outflank Apple's control culture.
The rub is that you can't do this by disintermediating the network operators. The future does not solely belong to "over the top" applications like Skype. They are going to be large and powerful, but the ability of operators to put together a fully packaged offering to users that integrated pipe, platform, product, and the protected legacy services is too potent. You need to work with them to create the next-generation of freephone 800 number, the "smart" premium SMS service that also integrates identity, profile and preferences, and so on. It's going to be a team effort, requiring help from players like Acision on the messaging front.
You aren't in the multimedia computer business
Nokia has the best supply chain and engineering in the mobile handset space. But going forwards, Nokia needs to become a different beast: an original services manufacturer. It's the services that the users value most, well above the budget for a sexy new handset. The iPhone has up-ended the economics of handset subsidies by tying a superior service into the device. Nokia must respond: it's a life-or-death challenge.
At first sight, Nokia is heading this way. The problem is that Nokia is operating the platform and also creating a rival consumer (rather than B2B) brand that competes with that of the operator. It might be aimed at tier 2/3 operators who don't want an in-house portal, but that's not how the tier 1 operators will see it.
There is already a precedent to building a white-label service. Which operator (until recently) had the highest ARPU and customer satisfaction? Answer is.... Nextel. Motorola built a custom push-to-talk service, where the handset, network and software worked together perfectly to solve a core communications need. The era of that particular product is past, but the lesson lives on. Amp'd and Helio have shown there's revenue (and a ton of bad debt!) in better integration of device and service. Why not rise to the challenge?
The opportunity for Nokia is to build the "white label" services that the market-focused operator or distributor can then customize, segment and sell on. The most important of these are the ones that improve the core voice product. Nokia will win this race because the platform has increasing returns to scale. You can start somewhere like India where you have majority market share, and roll out a de facto next-generation personal communications experience. All the ingredients are already out there in the raft of "2.0" voice and messaging start-ups.
Many of these white label services might even be given away or deeply subsidised. Music stores, enhanced voicemail systems, smarter messaging servers are all complementary goods to mobile handsets. Do what IBM did with Linux, and scorch the software earth that rivals stand on by giving away their part of the puzzle. The handsets are the razor blades, the network service the handles.
If it's a fight, then fight to the death
If you're serious about Ovi, and want to re-verticalise into Nokia-operated services, you're going to have to fight smarter and better against the carriers. Why doesn't PC Suite sync the Wi-Fi settings from my laptop to my phone? Why can't I provision Wi-Fi from my laptop, rather than having to triple-tap passwords? Why doesn't my E60 work with my Netgear MIMO access point? Why don't you just give away a pre-provisioned Wi-Fi access point with every N series phone?
Bypassing the operators is going to be hard. You'd have to merge with Google, buy up spectrum, and in-source the core operator capabilities from some tier 2 operator who needs the dosh. It would be audacious, and probably wrong.
At the moment Ovi leaves you caught between the two options of fight or flight -- and that won't work.
The alternative is to win together with the operators. Re-examine the user interface to see where it can more easily up-sell a phone call from a message or a calendar reminder. Work to see what causes customer care calls, and how they can be mitigated or eliminated in the handset. Where's the handset that shows your low pre-pay balance and makes it a one-click to top up?
Make love and war -- together
That means working with the operators to overcome their structural issues; producing products that align with the horizontal industry structure; and not undermining the operators to gain pyrrhic wins in secondary markets such as music distribution. The value is in the data and the customer relationship, and the operator controls that.
Unless, of course, you actually want Apple or Google to mediate all phone conversations the same way iTunes is the nexus of music distribution...