We’re familiar with the syndrome – one company doing badly while another, apparently in the same business, bombs. It’s usually simply a question of management talent.
Last year in the retail industry, for example, we had Marks & Spencer’s share price plummeting in the wake of slashed earnings and boardroom infighting and Storehouse on bid alert after two profit warnings and a halved share price. Meanwhile, Debenhams was watching its share price quadruple on handsome earnings growth (admittedly it has subsequently fallen back) and even Littlewoods was flourishing on the sale of stores to M&S.
A similar situation has emerged over the past couple of weeks in the telecoms industry. Last week, Nokia’s third-quarter results confounded those who a few months ago were droning that the telecoms boom was over. Operating profits in the period rose 39 per cent on increased sales of 50 per cent, while in the key mobile-phone division, where the Jeremiahs predicted imminent saturation, operating profits rose 42 per cent on a sales increase of 59 per cent.
Cool. Nokia’s shares in Helsinki duly rocketed 22 per cent. Then Swedish rival Ericsson reported the following day. It beat market expectations for nine-month profits, but warned that sales and margins for the year would turn out to be lower than expected, largely on the back of a loss from handsets that would be twice as bad as it had expected.
Apparently, here we have two telecoms manufacturers, in the same line of business – making the things that analysts predict 1 billion of us worldwide will be pressing to our ears within 18 months (and both operating within the Scandinavian micro-economy) – with entirely different experiences of the market.
It’s tempting to say that the reason for this is that Nokia is good at it and Ericsson isn’t. But even expressed less extremely, that is only partially true. Actually, Ericsson’s handsets really are pretty poor compared with Nokia’s. The result is that Ericsson loses as much on every handset it sells as Nokia makes in profit on every sale.
But that doesn’t make Ericsson a bad business – it makes it a different business. Ericsson builds telecoms networks and it does so very well. It built Vodafone, for goodness sake. There’s nothing wrong with that business – it’s on an upgrade cycle and it will win out in due course. But one bit of it, albeit an important bit, is very bad. And that is its performance in the handset market, which is where the sad comparison is going to be made with Nokia.
The bottom-line conclusion that we can make here is that Ericsson is run by engineers, not marketing people. Long term, that doesn’t necessarily matter. Look at PowerGen, the electricity generator. Run by engineers to a man when it was privatised, it is now a broad services provider with a finger in lots of retail pies.
So Ericsson suffers through comparison with Nokia – its shares fell 12 per cent in Stockholm on the lacklustre news – but that’s only part of the story. The trouble is that handsets are where the action is and that attracts all the attention at the moment.
This is not to say that Nokia hasn’t been piling the pressure on its competition, including the luckless Ericsson. To defend Ericsson’s position is to take nothing away from Nokia’s triumphs of late. It is almost relentless in its growth and if saturation in the handset market is in sight – penetration is approaching 70 per cent in the UK – then Nokia’s continued growth will be at the expense of its less competent competitors’ market shares.
The dozier quarters of the stock market were only too willing to assume that this growth was over back in July, when Nokia issued a profit warning. Nokia’s market valuation tumbled 25 per cent on that announcement, despite Nokia telling anyone who would listen that it would continue to take market share in the mobile-phone industry and that the tightening of margins foreseen in the summer was merely a gear change. And it was moving into a much, much higher gear.
That higher gear will, I’m confident, deliver some frightening performance – for the competition. The process that Nokia has been going through runs roughly as follows. It has been used to selling at high prices and enjoying high margins. There has been a relative components shortage, but once that supply comes through we’ll see unit prices tumble as Nokia goes all out to rip market share off competitors.
And that is what will keep the growth charts for this market on a straight line to the top right-hand corner. Add to the equation replacement technology in the shape of Internet access for mobiles and the growth line only steepens. Sure, WAP is crap as things stand – but we’ve been through the intermediate-technology cycle in the computer industry and its growth hasn’t noticeably suffered.
I recall that the original Apple Mac was rubbish, but that didn’t stop Apple making a great deal of money in computers. Dell and Compaq went through similar development phases without any long-term harm. We’ve just witnessed a similar phase in telecoms. Those who called the end of the telecoms boom spoke too soon.
George Pitcher is a partner of issue management consultancy Luther Pendragon