Smartphones & Schumpeter

by on April 12, 2012 · 0 comments

Two weeks ago, I penned a column for Forbes about the astonishing rise and fall of BlackBerry (“Bye Bye BlackBerry. How Long Will Apple Last?”), which somehow became the most widely-read and retweeted thing I’ve ever written in my life. I argued that BlackBerry’s story — indeed, the story of the entire U.S. smartphone sector — is the living embodiment of Schumpeterian creative destruction. Joseph Schumpeter’s “perennial gales of creative destruction” are blowing harder than ever in today’s tech economy and laying waste to those who don’t innovate fast enough, I argued, and nowhere is that more true than in the smartphone sector. I noted how, just five years ago, “BlackBerry” was virtually synonymous with “smartphones” and was considered one of the tech titans that seemed destined to dominate for many years to come. But now the BlackBerry’s days appear numbered and its parent company Research In Motion Ltd. is struggling for its very survival.

But there’s another company that I ignored in that essay that was also perched atop the mobile handset hill for a long time: Nokia. Here’s the horrifying opening lines from a Wall Street Journal story today about the company (“Nokia Crisis Deepens, Shares Plunge“):

Nokia Corp., long the biggest name in the cellphone business, is scrambling to stay relevant in the smartphone age. On Wednesday the company warned things will get worse before they get better, saying that competitors are rapidly eating into its sales in emerging markets such as China and India. Nokia also said its newest phone in the U.S. had a software glitch that is preventing some users from connecting to the Internet, marring its attempt to fight into the world’s most important smartphone market. The company’s American depositary shares slid 16% to a 15-year low of $4.24 in New York. Its market capitalization now stands at $16 billion, down from $90 billion five years ago.

It gets worse from there. The article continues on to document Nokia’s gradual slide and notes that, “like BlackBerry maker Research In Motion Ltd., Nokia is trying to re-establish its relevance in a market dominated by Apple Inc.’s iPhone and Google-powered devices. Both Nokia and RIM are working on new devices they hope will make a splash, even as Apple and Android work on improvements of their own.”

To put into context how remarkable this rapid reversal of fortunes is, you need to try remember what life was like just five years ago:

  • The iPhone and Android had not yet landed.
  • Most of the best-selling phones of 2007 were made by Nokia and Motorola.
  • Feature phones still dominated the market; smartphones were still a luxury (and a clunky luxury at that).
  • There were no app stores and what “apps” did exist were mostly proprietary and device or carrier-specific.
  • There was no 4G service.
  • And regulatory advocates like Tim Wu and the New America Foundation were running around saying that the FCC needed to pursue massive regulation of the cellular industry for a variety of silly reasons.

In those now-seemingly Mobile Dark Ages, those competing for power included Nokia, Motorola, LG, Sony, BlackBerry, Palm, and Microsoft, among others. Some pundits thought the idea of entry by anyone else — especially Apple and Google — was simply silly. Here are some of the more entertaining predictions I unearthed when researching my Forbes piece two weeks ago:

  • In December 2006, Palm CEO Ed Colligan summarily dismissed the idea that a traditional personal computing company could compete in the smartphone business. “We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”
  • In January 2007, Microsoft CEO Steve Ballmer laughed off the prospect of an expensive smartphone without a keyboard having a chance in the marketplace as follows: “Five hundred dollars? Fully subsidized? With a plan? I said that’s the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good e-mail machine.”
  • In March 2007, computing industry pundit John C. Dvorak argued that “Apple should pull the plug on the iPhone” since “There is no likelihood that Apple can be successful in a business this competitive.” Dvorak believed the mobile handset business was already locked up by the era’s major players. “This is not an emerging business. In fact it’s gone so far that it’s in the process of consolidation with probably two players dominating everything, Nokia Corp. and Motorola Inc.”

Of course, we now know how this story turned out. Today, less than five years after these predictions were made, Nokia’s profits and market share have plummeted and a struggling Motorola was purchased by Google last summer. Meanwhile, Palm appears dead and Microsoft is struggling to win back all the market share it has lost to Apple and Google in this arena. Of course, Microsoft has partnered with Nokia to try to make a go of it together. Five years ago, the Antitrust Gods would have likely thrown down the hammer and stopped such a deal. Today, many analysts wonder if MS has made yet another strategic blunder by partnering with Nokia. Their new Lumia 900 is a very impressive device, but it’s already been plagued by design flaws. Moreover, as today’s Journal article notes, “It’s still far from clear whether Nokia’s effort will be enough to convince many customers that its smartphones are a good alternative to the iPhone and Android devices. Part of the reason: iPhone and Android offer a much greater array of ‘apps’ built by third-party developers.”

Meanwhile, wireless carriers (Sprint, T-Mobile, Verizon, AT&T, etc.) are suffering from whiplash as they wonder how Apple and Google flew right by them to become the focus of all the headlines and the darlings of Wall Street analysts. This is all part of the ongoing “Gravitational Shift” we are witnessing in the mobile ecosystem, as economist Tom Hazlett argues in a Barron’s oped this week. “The telecommunications industry’s center of gravity has shifted,” Hazlett noted. “The edge is squeezing the core.” Hazlett continues on:

Competition among the physical networks spins profits out to the virtual networks. Apple’s value (from iPhones and iPads) to the wireless industry was estimated in early February at $248 billion—about 92% of the enterprise value of the entire U.S. mobile-network sector. Apple owns not a single base station or wireless license; it builds no networks. And yet it has emerged, in four short years, as “dominant in the mobile market”—an unqualified assessment offered by Walter Isaacson in his superb Steve Jobs biography.

I cannot find a more dynamic, Schumpeterian market on Planet Earth than today’s mobile marketplace. Everything and everyone has been upended in just 5 years. Not even Schumpeter could have imagined creative destruction on this scale.

Nokia after the iPhone

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