8 May, 2015
There's Plenty of Room at the Bottom
In early February, 2011, Stephen Elop delivered the infamous 'Burning Platform' speech, likening Nokia to a man on a burning oil platform and urging that it was time to jump. The sea into which Nokia was urged to jump was, of course, Windows Phone. Symbian, MeeGo, Series 40 and, as we learned later, Android were the burning platforms (pun intended) that showed no promise and Windows Phone was the salvation of the company. Some would agree that, in light of rapid ascension of iOS and Android based smartphones, and Nokia's lack of success in that arena, that a relatively novel approach was warranted. Others might suggest that in that moment, Microsoft stole the soul of Nokia.
However, four years later, it certainly looks like a good deal more of Nokia's sensibilities have survived in Microsoft than anyone could have imagined. And what Microsoft has learned is that, with all due respect to Richard Feynman, there's plenty of room at the bottom.
Nokia had a long history in mobile communications from analog equipment through the development of the Global System for Mobile Communications (GSM). Where they were particularly strong, excepting of course the strong followings in Europe radiating away from Finland, was in the design and manufacturing of inexpensive handsets that were relatively impervious to harsh conditions (water, sand and dirt) as well as to a lack of electricity (many classic Nokia models boast standby times measured in weeks). If you need a reference, think Nokia 1100. And where this style of phone is most useful is in the developing world, where it may be a long way to an outlet, a community may only have electrical power occasionally or where the phone is used in the fields.
Now the Nokia 1100 brings only voice and SMS services, and while there have been a wide variety of services built on SMS as the data transport, there is certainly a market inefficiency here for data services. In this time frame, Nokia was targeting the Next Billion with a variety of, mostly 2G, Series 40 devices with both type and touch interfaces. Clearly Nokia recognized that there would be demand for more advanced handsets, that internet use would advance and that there were few products targeting these new 'smartphone' customers.
Apple certainly wasn't, and isn't, targeting anyone but the most high end customer. Their basic strategy is to develop an aspirational brand, make those smaller numbers of sales (think globally here) at relatively large mark-ups and, with aggressive cost-control structures, make an insanely great profit.
Much of the early Android rush was directed to match the features of the Apple product both in software and hardware. This has led to the rapid release cycle of Android flagship phones. Certainly there was some deployment of Android, with zero dollar cost licensing fees, on more affordable handsets, but those devices were typically not so impressive, or even functional. Now, as Google has been recently moving away from the free-for-all model toward a more controlling hand in the Android arena (taking the Apple approach—Google, don't be evil), Google has been much more conscious of performance on less expensive hardware in recent releases. In addition, the Android One initiative is designed to target the emerging smartphone market outside the first world. You probably haven't heard much about Android One as the target regions are India through Southeast Asia. There is one Android One qualifying handset available in the United States—the Moto E from Motorola.
But I digress, this is really about Microsoft.
And, very simply, it looks as if they have remembered their history lessons. Prior to the release of the IBM PC in 1981, there was a tremendously diverse ecosystem of different computer operating systems, and the Apple ][ was on top of the heap. But very quickly the consumer computer industry (it took a bit longer for the university and industry markets to collapse to one dominant system, but that's another story originating in Finland) coalesced to one dominating operating system. Clearly Microsoft understands that having two major players in the smart phone market is extraordinary—there isn't much room for a third player on top.
But there is plenty of room at the bottom. Where there isn't yet a dominant smart phone player because, well, smart phone penetration is low, and there is great room for growth. And with growth comes profit. Not profit from the sale of hardware—no iPhone sized margins here, but profit from the advertising that comes with the use of services—search, email, cloud storage, navigation, in-app advertising. Both Google and Microsoft are well equipped to make money on the advertising model in these regions, and you can be sure that Microsoft isn't going to (again) miss the opportunity to be a major player in these markets (Apple will gladly pass on this high volume/low margin hardware game and contentedly be the aspirational brand, waiting until new customers can afford their products). But how do we know Microsoft is working to make inroads in these markets? Let's compare which Lumia phone models have been released under the Nokia and Microsoft brands. Below is a plot of Lumia model numbers (the higher the Lumia number, the more advanced the handset hardware) versus release date for both Nokia (blue) and Microsoft (orange) phones.
The solid line represents the average Lumia phone released from both companies. Nokia was considerably more aggressive in attempting to target the high end (on average 253 Lumia Model Numbers higher). The Lumia phones released under the Microsoft brand have plunged to new low territories (giving hardware specifications for the Lumia 430/5 models, very similar to the last of the S40/Asha phone models), and, on average, have been much more hardware and price conscious phones. Phones designed to succeed globally, not domestically.
Now, if you're interested enough in Windows Phone to have read this far, fear not. Microsoft will release a flagship Lumia in 2015. That release will correspond to the release of Windows 10, no update requires, it will be Windows 10 native out of the box. While that date isn't advertised, it will be this year, and they will likely target all major carriers. Will it be the Microsoft Lumia 1030 with a 40+ megapixel PureView camera? Probably not that large a camera sensor in order to cater to the thin-is-in phone design aesthetic, but an impressive camera none-the-less.
But also expect more Microsoft Lumias in the 400 and 500 range (could we even see the release of a Lumia 300 with a 3.5" display? A more weather proof design? The layered polycarbonate design language of the Nokia Asha 501/502/503 or the Nokia X2, the Android one, not the S40 one, for a more rugged appeal?) targeted at the 900/1800/2100 Mhz frequencies and sold only in the nascent smart phone markets?
Remember, there's plenty of room at the bottom.