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“In the long run, everything is a toaster” – Nokia’s Cautionary Tale
Value investing guru and competitive strategy expert Bruce Greenwald of Columbia University has said that, “In the long run, everything is a toaster.” It is his own pithy way of summarizing the brutal realities of creative destruction and operating or investing in a business without a competitive advantage, or as Buffett famously calls it a “moat”.
Although this lesson has been learned – and re-learned – many times, Nokia once again reminds us that we neglect it at our own peril.
Today’s Wall Street Journal reports that Nokia’s CEO Stephen Elop has revealed his plan for turning around the ailing company.
“Nokia, our platform is burning,” Mr. Elop writes in the memo, reviewed by The Wall Street Journal. “It will be a huge effort to transform our company,” he adds.
Some believe that Nokia will now adopt Google’s Android platform.
It was only a few years ago that that the business press and investors were enamored with Nokia’s dominant position in the global mobile phone market. It enjoyed growing market share, nimble design and distribution resources, and a leading and growing presence in emerging markets.
What Nokia did not have was a moat.
Can they turn the company around? Maybe. But it will be very tough sledding given the prevailing competitive market.
The takeaway: add this lesson to your investing checklist – if you haven’t already – and resolve to use it as one of your fundamental filters.
2 Responses to ““In the long run, everything is a toaster” – Nokia’s Cautionary Tale”
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Nokia has made toasters for a long time. Whether they knew it or not, their moat was not platform, but scale.
The standard playbook is to defend such positions by aggressively copying potential usurpers, and driving them out with your lower costs. For this to work, you must understand how usurpers seek to compete. Nokia did not.
The problem is not the mobile platform — this is a red herring. Nokia co-owned, then later owned, its Symbian smartphone OS for a decade before the iPhone appeared. The view in the industry at that time (late 1990s) was that history would repeat itself in the Windows mold: a single dominant proprietary mobile operating system would emerge, and its moat would be proprietary APIs used by a few must-have killer apps) with very high end user switching costs (think Word and Excel. This sounded great, because of the Microsoft parallel.
But the analysis was an inch deep — history never quite repeats itself. Years went by, and no handheld killer apps arose. Instead, mobile devices were used for data replication, merely “viewers” for stuff created and maintained on PCs or servers. This lack of mobile on-device data generation was a permanent problem, because mobile devices lack the sophisticated inputs (mainly full-size keyboards) necessary for complex knowledge work.
The analysis stopped there, for all but Apple. For 10 years, Nokia/Symbian, Palm and Windows Mobile mostly watched and waited as Apple carefully pieced together an internet-based killer app (iTunes), gained distribution control over digital music, tied this to their proprietary data replication device (iPod), and then launched the 2007 attack on phones. The linchpin was iTunes. Without it, there was no reason for mass market buyers to own a smartphone. But with it, users saw iPhone as just an upgrade of iPod.
Nokia had strategists working on this problem full time, yet missed it for years. To put the scale of Nokia misstep in perspective, they could easily have purchased Apple outright when iTunes was released: NOK’s market cap was 15 times that of AAPL. Or they could have built their own iTunes Store immediately, but instead waited six years. Or they could have seamlessly integrated their phones to iTunes, and/or sued Apple on antitrust grounds for preventing them from doing so. They didn’t.
The problem seems to be that Nokia never had a clear picture of what a distribution-controlled killer app might look like on a mobile device. They never saw Apple coming with sufficient clarity to act, until it was too late.
Android is merely a textbook response to a rival’s platform control. There really is a specific textbook for this: “Information Rules,” by Hal Varian (MIT Press, 1998), says that once a rival gains digital platform control, you have no hope of winning it back, and can respond only by promoting a non-proprietary open platform. Hal Varian, not coincidentally, happened to be chief strategy officer of Google during the Android project. Assuming Varian still believes what he wrote, Google has no intention of making money with Android, but merely of preventing Apple from making money through its platform control.
But Google may have missed the same thing as Nokia: the winning platform was not a mobile OS. It was iTunes. That’s where the distribution control resides. Rivals who want to usurp Apple should start there.
Gemfinder, thanks for your insightful thoughts and perspective. Your analysis provides another great mental model for future use. I’ll also look at Hal Varian’s book.