How Nokia was disrupted. Part 1

Back in 2007 Nokia was riding high. They owned well over a third of the mobile phone market, and about every second smartphone sold in the world had Nokia name on it. They set the directions for the rest of the industry, leaving competitors scrambling to catch up with every new product launch.

The latest device – Nokia N95 – was a masterpiece of technology. It took more then a year for Nokia’s biggest competitor – Samsung – to launch anything remotely competitive. Most of the hardware feature set that Nokia introduced with N95 way back in September 2006, is still more or less the same standard feature set even for the top smartphones today. 5 megapixel camera, Wi-Fi connectivity, GPS navigation, accelerometer, hardware graphics acceleration your shiny new iPhone 4 sports today? Nokia N95 had them back then.

Fast forward 4 years. Nokia has been out of trend setting business since 2007. Their overall sales are starting to decline, Nokia’s smartphone sales and market share is in a free fall and has been for almost nine months now. The margins have thinned, profits evaporated, and we are now seriously discussing the possibility that Nokia may not survive 2011 as an independent company.

What happened?

To those familiar with Clayton Christensen’s disruptive innovation theory, the answer should be pretty obvious. Nokia was disrupted

How great companies get disrupted

Every industry goes through 2 different development/change cycles. The period of sustaining innovation/growth and a period of disruptive innovation/change.

During the period of sustaining innovation, players in existing markets innovate by adding features to the products that makes them better and more attractive to the ever growing number of users. Eventually those products reach the level where they are already good enough for most users and use cases. Incremental improvement of existing features only gives diminishing returns. 8 megapixel camera vs 5 megapixels in my current phone? Ok. But what’s the point? Wi-Fi N connectivity vs B/G I already have? 2.8” display instead of 2.6” on the next T9 candybar? 64GB of storage vs 32GB, most of it unfilled, on my current phone?

But that’s not what incumbent will hear from it’s best customers, or their traditional market research efforts. Fans and early adopters, buying the newest, most expensive, high margin devices will always look at that 3 megapixel camera sensor bump as a good reason to get one. Ask any focus group whether they prefer 5 or 8 megapixel camera, I’ll bet most will say 8. And hardcore fans will happily replace their Nokia N95 8GB with Nokia N86, just as they happily traded N95-1 for the same phone with a bit of a memory bump. So the incumbent players listen to their best customers, and do “the right thing” – focus on improving the stuff they know works and their customers ask them to.

Meanwhile, some new player, a market outsider, comes along, takes a hard look at how the products with current technology work, what they are used for and sees a lot of redundancy and waste. He also has the idea how by trimming this waste, and focusing on some unappreciated before set of features, he can create a product with a new, entirely different value proposition. The new entrant effectively creates a new product category, which may look pretty similar to the old one, but has some key differences in how the new product is used and bought. It starts as a small niche, with limited customer appeal and sales potential.

Incumbents dismiss the new development as a fad, too insignificant, or not profitable enough. They compare the features of their own offerings and see that the new entrant product is inferior in almost every way. And incumbents think that if they ever want or need to, they can crush the new competitor/product in a heart beat, with their own tweaked offering. But other industry outsiders now see the new value proposition, recognize the emerging new category and jump in with their own products, focused around the newly important feature set. A cycle of disruptive innovation starts, with new entrants rapidly improving their own products around the new value proposition, and slowly adding the missing bits and pieces from the incumbent’s product feature list. With each new iteration, the products in the new category become good enough and accessible to a wider and wider market, taking over the ever increasing share of the market previously owned by incumbent. Eventually, the products in the new category reach effective feature parity with incumbent offerings in every way that is important to most customers. At the same time, the new entrant products are much better at their own core feature set/focus then anything the incumbent can offer. And the incumbent, after ignoring, neglecting or simply being unable to compete in the new category all this time, is now generations behind in what today’s customers begin to consider to be the key features of the product. The new category explodes and becomes mainstream, displacing former incumbent product to an irrelevant niche. For the old incumbent, it’s game over. The new entrants become incumbents and start the new cycle of sustaining innovation and growth. Until the next disruption comes along.

And that’s exactly what happened in a smartphone industry over the last 4 years.

Nokia disruption starts

Before 2007, Nokia, Samsung, LG, Motorola, Sony Ericsson and even RIM were focused on perfecting mobile phone. The pace of innovation and growth in the mobile phone industry was already staggering. Mobile phones were rapidly consuming everything around that could fit into them – digital cameras and camcorders, stand alone navigation devices , PDA’s, etc;. Each added feature improved the attractiveness of the mobile phone itself. At the same time, Moore’s law allowed to keep the prices of the most feature rich devices steady, while pushing the simpler device prices down, making the phones accessible to virtually anyone.

During the last decade, a clear leader in mobile device technology emerged – Nokia. It was at the forefront of introduction and popularization of almost every new major feature mobile phone acquired since the nineties. Music player, ringtones, internet connectivity, camera, big storage, GPS, Wi-Fi – you name it, Nokia was either the first to launch a phone with that feature or was a very fast follower, quickly becoming #1 in unit volumes for a phone with that particular capability. And one of the ways to make the phone better, was to make it smarter. So Nokia created the smart phone category, where third party developers could write software applications to extend the capabilities of the phone. The problem is – all these innovations, however radical they have been, were sustaining innovations for a mobile phone. The pinnacle of this mobile mobile phone innovation was Nokia N95 – finally putting all the pieces that define today’s smart devices together.

Unfortunately, when viewed primarily as a phone, Nokia N95 was an overkill for average user. Yes, millions of them bought Nokia N95 and were extremely happy with it. Some of them liked the camera, some of them liked the music player, others enjoyed the cheap Wi-Fi connectivity to browse the net, some may have even installed few apps. Most of them also enjoyed it as a status/fashion statement – everywhere except U.S., Nokia N95 was THE coolest most advanced device you can get for most of 2007. Even if you only used it to call and text your friends – you still were a proud owner of the coolest gadget of the year. Very few were able to use N95 for what it  actually was – a small, always connected computer in your pocket. The phone centric design hid those potentially useful features from the average user very well.

Then, worried about the threat to it’s iPod media player empire, Apple took a hard look at the latest mobile phones. And, with their deep user centric PC industry roots, figured out what all the incumbents with their phone blinders were unable to see. The computing and communication hardware in those phones has advanced so far, as to make a general purpose true mobile computing device possible. And the key to competing in a computer world is a great and user friendly platform software, enabled by powerful computing hardware. So Apple went out and built an always-on computer for your pocket. Focusing on the things that matter for a computer: CPU, RAM, display and software.

The only specs where original iPhone beat Nokia N95 are telling – faster CPU (620 MHz vs 332 MHz), more RAM (128MB vs 60MB) and display. And, of course, software user friendliness/usability. Which was the only thing to give Nokia and other incumbents a pause. But it too was dismissed as a “gimmick”. With “we can easily do that better when we want to” cavalier attitude.

After seeing the iPhone, another outsider with mobile ambitions – Google – quickly pivoted their own mobile efforts and now started working on a real computer instead of a smart phone for your pocket. The disruptive innovation cycle has started.

Both companies started pushing for/adding the latest available mobile CPUs, GPUs, copious amounts of RAM, bigger/better displays, and were rapidly innovating on the software side. They were also enabling a vast ecosystem of 3d party developers with easy to learn development tools, while making mobile development economically attractive with streamlined app store distribution channels. Apple and Google (via their partners) were also improving/adding traditional smartphone features along the way, and achieved effective feature parity with Nokia devices by the summer of 2010.

Continue to part 2 of Nokia disruption story, to see how Nokia tried to fight back, lost and surrendered. And what the future may hold for the Finnish cellphone giant.


Author: Stasys Bielinis

While I like to play with the latest gadgets, I am even more interested in broad technology trends. With mobile now taking over the world - following the latest technology news, looking for insights, sharing and discussing them with passionate audience - it's hard to imagine a better place for me to be. You can find me on Twitter as @UVStaska'

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  • Anonymous

    Nokia totally missed the following disruptions:

     – UI/UX/UF/WoW that is is not tech-specs, but eye-candy and one-dimensional usability for the rest of us
     – retail chain power and marketing revolution (power from the telcos to the people). Users made iPhone a hit, not AT&T

     – Software, apps and ecosystem revolution. They were still selling pc installable .sis “applications” their smart phones. To them it was “smartphone is the next pc”, instead of “mobile phone phone is where everything is at and PC is left in the dust, both as a model and as a comparison.”

    Of course, it’s fair to say that hundreds if not thousands of people at Nokia saw these things.

    But they were not the people calling the shots or the people who actually executed the decisions.

    The rest is history.

    Good luck to Nokia. Hope you survive till the next disruption comes along (might take another 3-5 years minimum, if they are really  unlucky).

  • Marcus Christopher McFann

    Very elegant post. Hats off, bro. Look forward to part 2.