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Nokia is the largest vendor of telephone handsets in the world, with 40% of the global market and EUR 13.5 billion in operating revenue in 2007. Nokia both designs and produces mobile phones and built the world’s first handheld mobile phone in 1987. Since then, the company has pioneered much of the technology used in handsets throughout the world, especially the Global System for Mobile Communications. Nokia's scale advantage manifests itself in low-cost, high-margin handsets. In fact, it has the highest profit margin in the industry, at nearly 15.9% per handset; Samsung Group, which sells phones 50% more expensive, realizes a profit margin of 14% in comparison. The net effect of Nokia's market command led to a disproportionate share of the industry's operating profits: 48% in 2006 compared to 36% revenue share. Nokia leverages its leading position through a dual strategy of expanding in low-cost emerging markets as well as offering higher-end mobile phones in established markets. The company aims to take advantage of its scale by expanding into emerging markets in China, India, Latin America, Africa and the Middle East, which collectively constitute 40% of the global handset market and are growing. Its 2006 joint venture with Siemens AG (SI) allows for immediate growth in its already substantial mobile phone capacity, but it also means taking on business in an area where Nokia has little expertise (i.e., land lines) per terms outlined in the deal. Nokia hopes to maintain customers in the developed markets of Europe, North America, and Asia, which account for the remaining 60% of the market. The demand in these markets is for replacement phones, and Nokia intends to sell advanced third generation (3G) phones and business phones that compete with the popular Blackberry and Motorola's Q. Nokia commands about 50% of the world's smartphone market and produces 13 of the top 20 selling smartphones.[1]
[edit] Company OverviewNokia began life in 1865 as a pulp mill in Finland and has since undergone numerous transformations, becoming Finland's largest company and the largest producer of mobile phones in the world. In the 1970s Nokia began producing telecommunications equipment and in the 1980s it began work on mobile phones, which form the core of its business today. Nokia has three other business segments: 1) enterprise solutions; 2) multimedia; and 3) networks. Enterprise solutions and networks focus on providing communication tools to businesses. Networks also helps integrate Nokia's phones with global communication and broadband networks. This is the domain of multimedia, which provides internet, mail, and music service to phones. Nokia sells its phones to service providers, who often resell them at a discount. Nokia reports sales and profits for each division of the company, and mobile phones are clearly the dominant aspect. In FY 2007, Nokia's total net sales were €51.0 billion, with €7.9 billion in operating profit. The following table shows the breakdown of this income as compared with the same previous year's metrics from the previous year.
Source: Company reports. The percentages refer to the proportion of total sales or operating profits. Mobile phones are responsible for the majority of Nokia's total sales and operating profits, but these categories are mutually reinforcing. The enterprise division allows Nokia to sell more advanced, expensive mobile phones to business customers, and the multimedia and networks divisions are essential to the development of the latest generation of phones with broadband technology. Although Nokia distinguishes among its divisions, it makes sense to treat Nokia as a single entity, as there are strong synergies among the four divisions. [edit] Trends and Forces[edit] Nokia Aquires NavTeqNavteq, one of the two primary global electronic mapping companies, was acquired by Nokia for $8.1 billion. Navtech generates income for operations through issuing licenses for the use of its databases to GPS in-car navigation system companies and other technology companies such as Google, Microsoft, and Yahoo. Navteq’s only main competitor, Tele Atlas, was set to acquired by Amsterdam based GPS-navigation device maker Tom Tom NV in July of 2007 for $2.8 billion. However, a bidding war has erupted, instigated by Garmin, the Cayman Islands based in-car navagation system company. Garmin executives plan to place a $3.0 billion bid for Tele Atlas. The direct implication of this acquisition for Nokia is the possibility for standard setting integration of location based programs and products into their mobile technology. By introducing GPS information through primary service rather than through third party companies, Nokia can effectively lower the costs of providing GPS navigational equipment to the end-user, establishing itself as leader in the market. For this reason, litigation pertaining to anti-trust laws could come into view for Nokia if their price setting for products using Navteq’s global electronic mapping systems significantly inhibits the entry of competitors in the mobile telecommunications industry. [edit] Emerging and Developed MarketsWhile Nokia's overall sales are split evenly between the emerging and developed markets, the global market for cell phones is not homogeneous. It is useful to divide the global market for mobile phones tends into emerging and developed areas. Emerging markets are characterized by a large volume of customers purchasing their first handset, while repurchases and upgrades are common in the developed market. Although much of the world's population lies in China, India, and Africa, the majority of cell phones are owned by the people of Europe and North America. Nonetheless, emerging markets represent an important source of current revenue and future growth for the handset industry. Mobile phone adoption rates in China, India and part of Africa have been in the mid to high double digits in recent years, and are expected to remain robust in the near future. Nokia has demonstrated that it can earn high profits on cheaper phones. This combination makes Nokia suited to dominate the emerging markets, where the demand for cell phones is high but wealth is limited. Nokia has very strong market share in Central/Eastern Europe, the Middle East, and Africa, where it controls over half of the market. In China, India, and the emerging Asian markets, Nokia has a leading 43% share. Some of Nokia's largest sales areas are in emerging markets--in 2006, China alone accounted for 20% of Nokia's total sales, and India claimed another 10%. Nokia controls only 22% of the developed market for handsets. The market for handsets in the developed countries is mainly a replacement market, meaning sales consist of replacing existing cell phones rather than selling handsets to new customers. In these markets Nokia focuses on providing new features and services rather than price discrimination.
Source: Nokia's 20-F FY2007 report [edit] Siemens JVIn 2006, Nokia and Siemens AG (SI) announced a joint venture whereby the two would merge business operations in mobile communications and telecommunications. The JV should generate about €15.8 billion in revenue per year. The joint venture should considerably enlarge Nokia's operations, especially in cell phones, and lead to further economies of scale. However, it requires Nokia to take on Siemens' business in telecommunications, an area in which Nokia has had little experience or business.
[edit] 3G Phones and Qualcomm3G refers to the third generation of mobile phones, which come with broadband capacity and have download speeds comparable to a personal computer. The phones integrate internet, music, messaging, and traditional communication into a single package. The phones are technologically complex, and to produce them Nokia has used technology owned by Qualcomm, which had a patent-sharing arrangement with Nokia that expired in April, 2007. A new 15 year agreement was reached in July 2008 which provides an overall rate structure for licensing and royalties between the two companies.[2] Nokia and Qualcomm were in a legal dispute because Nokia thought the royalty rates it was paying were too high, but the legal battle has ended with this new agreement. Nokia said it has paid Qualcomm over $1B in royalty payments since the early 1990’s and expected to pay Qualcomm nearly $600M in royalty rates in 2008 under the previous terms. [3] Nokia will still be paying in the hundreds of millions as an initial payment to Qualcomm, but the long term agreement promises to ease tension between the companies and help facilitate innovation going forward. [edit] Legal IssuesNokia's dispute with Qualcomm highlights the growing legal complexities in the industry, which fall into two categories:
[edit] CompetitionNokia occupies a dominant position in the global handset market, contributing almost 40% of the global market's wireless headsets. In 2007, Nokia sold 437 million or 38.4% of all of the 1,138 million mobile device sold globally. Not to mention, Nokia's Series 40 mobile phone platform accounts for over 30% of all phone shipments. [4] Nokia's size means it can exploit economies of scale; that is, average production costs fall as output increases. The following table suggests this advantage:
Note: data includes only mobile handset Nokia leads not only in terms of sheer volume of units sold but accrues the highest profit margin at nearly 16% per unit. The company outpaces even Samsung Group from a margin rate perspective; Samsung sells higher-end phones and charges over 50% more per unit but realizes only 14% margin. However, in a survey of 24 stores nation wide by Tickermine Researchers, the Nokia 5310 was ranked last in overall phone sales as only 2 of the 24 stores identified the Nokia 5310 as its top selling phone. This survey does not measure actual volume, but rather whether or not the phone was the top sold at the store. The BlackBerry was was the best being identified as the top selling phone in 7 of the 24 stores. However, the Nokia 5310 was identified as the best phone for music by 8 of the 24 stores, that was the highest in the survey.[5] Nokia captured at least 45% of the operating profits in the industry in each of the last four years, despite never having more than 36% of total sales; not only is Nokia's gross profit highest among its competitors, its operating margins are also disproportionately high.
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