Earlier this morning, Nokia announced its quarterly earnings, and the analysts celebrated the fact that the Finnish giant sold 91.1 million phones, putting some serious distance between itself and the beleaguered Motorola. That’s a gain of 21 percent when compared with the first quarter of 2006. And yet, the profits declined by 6.6%, as the new phone sales came from emerging markets where people prefer budget phones, and not the multimedia computers.
Similarly, Seagate, the Scotts Valley, Calif.-based disk drive maker saw its revenues grow, but profits tanked. “Seagate just delivered the industry’s first $3 billion quarter, and 30% growth over our year-ago quarter,” said Bill Watkins, Seagate’s chief executive officer. And yet the profits declined 22 percent.
Do you think that this peculiar problem of plenty – where the market share growth isn’t translating into profits – is peculiar to Nokia and Seagate or do you think this is a more widespread malaise?
a) The product is becoming a commodity and either they are unable to add enough perceived value to raise prices and make a bigger profit
b) Enough competition to keep the prices down coupled w/(a)
c) The customers just don’t want more features. Not everyone wants music, video, pda or other features. Some just want a portable phone. Or in the case of a HD…oops, my coffee high just ran out, maybe somebody else can answer that.
This is merely a sign of a maturing industry. Look at autos: It’s not like Ford and GM didn’t sell millions of vehicles last year, but they sold too many of them at a loss. TVs were in the same state until bailed out by the twin forces of HD and thin-panel. The problem for Nokia and friends is that they need the carriers to introduce more functional data networks / better pricing before they can really move into the smartphone business where there is still some profit. Meanwhile, many hard drive makers have seen the writing on the wall and are shifting to NAND and similar solid state technologies (akin to going from CRT to LCD). At least the destiny of Seagate and the like are in their own hands. Nokia and Moto, good luck!
I don’t see this as a problem:
Suppose nokia sold (In quarter #1 ) 71 million phones @ profit margin of x% roughly translated to net profit = EUR 950 million
Now (in quarter #2) nokia sells 91.1 million phones @ profit margin of (x-6.6%) but net profit is greater than (EUR 950 million)
As long as the net profit is climbing higher they should be happy.(Evident from nokia’s stock price ~ currently around their 52 week high)
Well the industry can only hope that the rise of the middle class in China, India and other developing countires will move onto more featured gadgets (phones, iPods, PDAs etc) with time.
For now, beginning to sell basic gadget to a lot of first times should be a satisfactory first step and introducing the brand to a first timer is surely an achievement.
I’d like to say that the market is going to workout this way. Until 2005, the people who bought mobiles were lower middle class, middle class and above in India. They could and did afford 100 $ mobiles. Which meant that nokia did well. Then the ownership pangs spread to all class rungs. First time mobile buyers can afford mobiles 50 $<
The market will mature in 3-4 years as people increase their incomes and graduate to costlier mobiles with more features. It is crucial to build your brand now and not balk at the lower revenues.
Nokia is investing too much in attempting to be Microsoft when they’re already committed to be Dell.