Nokia N81: Ominous lesson to iPhone from carriers

In comments on “iPod touch nay-sayers: shackled by ‘gadget thinking’” one of my observant readers says:

What about iChat? “We can’t have iChat because AT&T would get upset because people wouldn’t be paying money to send SMS messages.” Customers want to make ringtones out of music that they already own. “Well, we can’t let you do that because it might offend the music industry.”

In other words, screw what the customer wants.

Peter, I feel your pain. Now let’s also look at what kind of pain Apple is facing by way of one of its key competitors, Nokia. About a month ago, Nokia announced (PDF) its new portal service called Ovi:

Ovi – one key opens every door.

Ovi (http://www.ovi.com) is the gateway to Nokia’s Internet services, including the Nokia Music Store, Nokia Maps, and N-Gage games. It will also be an open door to web communities, enabling people to access their content, communities and contacts from a single place, either directly from a compatible Nokia device or from a PC. The first version of Ovi.com is scheduled to go live in English during the fourth quarter of 2007 and additional features and languages expected to go live during the first half of 2008.

nokia-ovi.jpg

Further, CEO Olli-Pekka Kallasvuo underlined Nokia’s ambition:

Nokia is the number one mobile device company in the world. Looking into the future, we will deliver great devices, combined with compelling experiences and services, to make it easy for people to unlock the potential of the Internet.

So that’s Ovi, “the one key that opens every door.” Who exactly would want to bury that key in the deepest cave in the Pacific ocean? None other than Nokia’s actual customers, the phone operators.

Nokia N81

In the UK, for example, T-Mobile, 3 UK, Orange and Vodafone won’t be promoting Nokia’s top music phone N81 for this Christmas shopping season. Without operator subsidies and promotion, N81 will have a very difficult time getting any traction in the crowded market.

At the launch of Ovi, Orange leaked a memo to The Independent announcing that it won’t offer the N81 to its 16 million customers in the UK. Surprised? Orange has its own music service.

This isn’t the first time a Nokia portal has been suffocated by operators. In 1998, Nokia launched Club Nokia to leverage music, wallpaper, ringtone and games services to prime its media-savvy handsets. Operators didn’t embrace the notion of their dominance being threatened then, they won’t like it now either. That’s the phone biz. Mind you, Nokia’s haul of over $50 billion makes it the largest handset manufacturer in the world; we’re not talking about an upstart here.

An upstart like Apple. The company that’s now essentially being boycotted by the biggest music label Universal and television/video network NBC Universal.

This is a long way of saying that the threat to Apple’s ability to establish progressive online and phone services is very much real. Taking a cavalier attitude or a boneheaded step could be catastrophic for Apple, its shareholders and its loyal customer base alike.

Before people declare Apple to be the new evil, I wish they’d think further about just what it must have taken to realign well established models in the phone business by getting the largest carrier in the U.S. to agree to a revenue-sharing arrangement. That is the foundation of shifting leverage from carriers to handset manufacturers, hopefully reducing the former eventually to bit-pipe operators. Unless a company has the financial underpinnings of breathing space to innovate and customer-driven demand, nothing much will change in this business, as the Nokia examples above indicate. Remember the N81!

With the iPhone, Apple has taken a giant step in the right direction. Apple’s building leverage. Can we have some patience?

22 thoughts on “Nokia N81: Ominous lesson to iPhone from carriers

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  2. For the guy or girl who said that Apple is offering much of the same I say you don’t know what your talking about. First of all, the iPhone is usings At and t’s edge network, which is too slow to buy music over it the air. Apple was able to get the carriers to approve of it putting wifi in the product which allows customers to buy songs wirelessly using the iPhone. It doesn’t have the At andt branding or malware. Are you kidding me? That’s progress!!

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  4. Good post but its old news and there have happen lot of news in UK for example. Vodaphone ,02 , Carphone Warehouse ,Phones4U , Telefonica have make deals to OVI and
    it be bigger evry day round the world.

  5. “I guess that’s why it’s so much fun just observing the Cupertino team.” It’s not only fun, but a very stimulating intellectual exercise in business strategy and execution. Of course, the very fact that Jobs and Co. are so “secretive”, makes every word they utter (about direction) carry so much weight. Observing, analyzing, and “guessing”, then seeing what actually transpires has taught me so much about consumers, products, strategy, marketing, and retail. (And the other part of the fun is seeing how badly most financial analysts, industry analysts, journalists, CEOs, and other pundits really are when it comes to Apple gazing.)

    Thanks again for your post.

  6. Thanks, fog city dave. As you say, this is the difference between manufacturing a gadget vs. engaging in strategic design horizontally and vertically that not only moves your product but manages to change an industry in the process as well. What seems like incomplete moves by Apple at the time they make them turn out to be integrated maneuvers in retrospect. I guess that’s why it’s so much fun just observing the Cupertino team.

  7. By the way, Kontra… nice article. You’ve brought reason to the flood of “Apple is pissing on us” nonsense. One thing that I’ve come to realize over the last ten years is that Apple has a road map, and they are making moves now that will only become clear to those outside One Infinite Loop in the following months or years. Purposefully antagonizing consumers is probably not part of their plan, I would imagine, though many seem to believe that.

  8. Peter, it is overly simplistic to suggest that all Apple got out of its exclusivity with AT&T is Visual Voicemail. It is even more simplistic to assume that Apple could have made GSM and CDMA versions of the iPhone and you would have been able to walk up to any carrier and say “I’d like service please.” Do you think Verizon Wireless is really going to let you use a phone on their network with YouTube, Google Maps, and the ability to side-load music and videos from iTunes to it? Are you insane? Verizon is all about making you pay for those things through V Cast. That is their raison d’etre, my man. What AT&T gave up to Apple was so much more than Visual Voicemail and revenue sharing. It was complete non-interference in the design. Yes, an AT&T iPhone currently lacks iChat and VoIP (we’ll see what happens post-SDK), but I venture that a Verizon iPhone would have lacked maps, weather, stocks, YouTube and the integration with iTunes for music, videos and podcasts. Some iPhone that would have been…

  9. Peter,

    You are overlooking a simple, powerful fact. The iPhone will be Apple’s 2nd dominant product (iPod being the 1st). Apple has to focus on satisfying the SILENT masses (90% satisfaction); it can’t sacrifice its coming dominance by bowing to the pressure of it’s most loyal whiners.

    Winning the whiners’ approval would get Apple some points.

    But optimizing the products’ mass user experience for elegance, usability, reliability, security, and ongoing innovation will win the GAME.

    So, which do you choose? Home run or the series?

  10. “Apple basically delivered a crippled iPhone in order to make AT&T happy.”

    ATT is the biggest GSM carrier in the US. They just bought 12 MHz of the magic 700 MHz band. This is gonna get interesting.

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  13. “Was it possible to introduce the iPhone without a major carrier contract and also meet Wall Street expectations for AAPL?”

    And, as I’ve said, remember when Apple was about pleasing customers rather than Wall Street?

    Call me naive, but I believe Apple’s success over the last few years comes from building products that please customers and marketing them very well.

    Suppose Apple had built the iPhone so that it could be used with any GSM carrier worldwide–just plug in a SIM card. You could buy an iPhone from Apple and take it to any GSM network provider. So here in the US, you’d have AT&T, T-Mobile, Alltel, and other regional companies competing for iPhone customers with data plans.

    Furthermore, Apple wouldn’t have to cripple their phones, so they could make a phone that would really please customers. And I trust Apple could successfully market a standalone phone (heck, they do it now!)

    There are those two elements where Apple has been successful.

    Now, I don’t expect that Wall Street would have taken kindly to Apple doing that. You’re 100% correct. But would the iPhone be as successful as it is if it didn’t have AT&T backing it? If customers got to choose which GSM-based provider to go with? If Apple could include even more things that people want without having to worry themselves about offending AT&T?

    Again, call me naive, but I say, “Heck, yeah!” Those people weren’t camping out in front of Apple stores so they could switch to AT&T. They wanted an iPhone. I don’t think they’d’ve had any problem finding a provider. Heck, a smart provider would have been walking up and down the line with business cards saying, “Bring your iPhone to T-Mobile and get our awesome voice/data plan.” Imagine that 2 or 3 hundred people are standing in line to buy a phone that will work on your network? You’d be an idiot to not have a rep there! There would have been fighting on the sidewalk!

    And once the money started rolling in? I think Wall Street would have changed their tune pretty darn fast.

    Yes, you’re right. The safe move was to sign with a major carrier, which is what Apple did. Apple was happy. AT&T was happy. Wall Street was happy.

    And the customers? Well, here’s the trick. See, Apple prices it kind-of high. So the people who buy it will have a strong case of cognitive dissonance. “There’s no way I paid $600 for a crippled phone,” they’ll say. “The iPhone is the best thing since sliced bread! I wouldn’t have spent all that money otherwise!” So they’ll be happy.

    And no one will ask what could have been…

  14. Peter, I did pr/marketing for Sony during the intro of Walkman in the U.S. And later saw the results of complacency and, as you rightly point out, ‘synergy’. Not much to argue there.

    But, notice I haven’t argued that iPhone is not ‘crippled’. I recognize Apple held back a lot of functionality that’s trivial to add to the iPhone. The technology or the design is not the problem here, it’s the packaging.

    Was it possible to introduce the iPhone without a major carrier contract and also meet Wall Street expectations for AAPL? I argue that it was not. The iPhone could not have been introduced as iPod touch. It would have been suicidal.

    If Nokia N81 is wildly more successful than the iPhone, then I guess I’ll have to eat my words. ;-)

  15. Wow! I’m famous… :^)

    You bring up Nokia, which I’ll get to in a minute. But first, since you’re bringing up companies, I’ll bring up one: Sony.

    Sony, as we all know, owned the market for portable music players–their “Walkman” brand was almost the generic term for a portable music player. When portable digital music players came around, Sony stopped thinking about what the customer wanted and started thinking about it’s corporate needs, synergies, etc.

    Sony’s first crop of digital music players didn’t play MP3 music. Instead they played Sony’s ATRAC format. ATRAC has appropriate encryption and copy protection so that customers couldn’t copy music. Of course, the only place to get ATRAC-formatted music was to buy it again from Sony’s Connect store (which, surprise surprise, offered Sony’s catalog but little else). Customers stayed away in droves. Sony tried various permutations and combinations (converting users MP3 files to ATRAC, etc) but never managed to give customers what they wanted.

    Sony was so concerned about not offending their partners in the music-side of the house that they lost the market to Apple and their iPod. Today, iPod is the generic term for portable music player.

    There’s a lesson to be learned here.

    But let’s take a look at what Nokia is doing. You’re right–Nokia is trying to sidestep the phone companies and offer compelling services directly to the person who buys their phone. Ideally, what Nokia wants is for people to buy their (arguably) cool phone and then take it to the phone company of their choice and say, “Sign me up!” Nokia will control the customer experience and the phone company will just offer the connection back to Nokia.

    Will this be successful? Will Nokia’s N81 become the next big thing?

    Probably not.

    But we all have to admit that we like the business plan. This is the way it should work. We go buy our favorite phone with the capabilities we need and then we go find a service provider who’ll provide us the connectivity at the price we want to pay. But–Woe is we–this cannot happen. We’re trapped by the evil phone companies and nobody will save us!

    But wait! Off in the east, riding in from the rising sun on a white horse! It’s Steve Jobs and Apple! Hooray! We’re saved!

    Or are we?

    Apple paired itself with AT&T. From this, we got an advanced voice-mail system called “Visual Voicemail.” This is great. I can check my messages without having to waste time going through each one. AT&T also offered iPhone users an inexpensive data plan.

    And–speculation begins–AT&T now has control over the iPhone.

    Consider this: Why can’t I download music from iTunes Store over my AT&T connection? Why can’t I stream music? Why can’t I use my iPhone as a bluetooth modem to connect my laptop to the Internet?

    Because AT&T is offering a flat-rate “all-you-can-eat” data plan. Needless to say, the less you download, the better off AT&T is. So AT&T wants to limit what you can do over their network.

    So, nope–we don’t want you downloading 256Kbps AAC files. We don’t want you streaming music. We don’t want you using Skype on your laptop or anything like that.

    Furthermore, there’ll be no iChat to compete with SMS. And don’t even think of any kind of VOIP.

    You can surf the web and read your e-mail. That’s it.

    Apple basically delivered a crippled iPhone in order to make AT&T happy. And you’re telling me that this is progress? That Apple is right to deliver crippled products and that Nokia is wrong to attempt to sidestep what Steve Jobs called the “orifices” that are the phone companies and work directly with the people who buy their products?

    How much of that Kool-Aid have you been drinking?

    Personally, after reading your story, I’m interested in the N81. Nokia is trying to do the right thing for people who use their products and taking a risk in doing so, granted. Apple, on the other hand, is the one playing it safe and giving us more of the same.

  16. Tom B, Good point. Nokia has used the words “computer company” but they really want to be like Apple, selling consumer electronics devices (with computers inside them) and services. Besides Navteq, Ovi is a service.

  17. Very Nice. Just two little points.

    First, it is the Constitutional Responsibility of every American to whine about getting what we want, NOW! and paying nothing. Patience? Hell, no! I think it’s great to keep holding Apple’s feet to the fire for letting short-term profits get in the way of a bigger market. For example, some part of the revenue-sharing could’ve paid for a first-class IM/SMS/Push-eMail deal with AT&T.

    Second, to Tom B: we consumers will do just fine from Nokia buying Navteq because it will signal to other nav capabilities that there’s money to be made (and a safety net, if a dotPhone bust happens) from clever integration between location and phone users. You DON’T want clever ideas to go down in flames for lack of a sales strategy. It’s not as if it’s a nuclear weapon, or Finland is committed to taking us over.

    Finally, I couldn’t agree more about turning the phone co’s into bit pipe providers. Let’s make sure our CongressCritters hear that auctioning off public spectrum to oligopolies who impose anti-free-speech restrictions is tantamoung to selling our birthright. Google’s proposal for spectrum auctions need reinforcement if we’re going to turn around the notion that consumers exist for corporations’ benefits.

  18. “And Nokia has also recognized this need to change the structure, thus, they’re trying to become a computer company”

    In part. In part, they want to be services. They just bought Navteq, which means selling subscriptions to NavTeq’s database. BTW: if I were the FTC, I’d disallow that deal– selling a US company to Finnland? No thank you; not unless the US consumer gets something out of it.

  19. Good analysis. Many things fail because the incentives aren’t right, or don’t go to the right party, or the Old Guard has too much control.

  20. Thanks for putting these thoughts in a blog.

    The hackers are so short-sighted, unable to recognize these huge structural changes that Apple is trying to effect. Their impatience is really just a form of selfishness.

    And Nokia has also recognized this need to change the structure, thus, they’re trying to become a computer company. But they’re going to have a hard time transitioning; culture change is hard.

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