Why Did Nokia Fail?

Tl;dr, we know it was Apple and Google. But perhaps we can put it differently – did it have to be that way?

Let’s jump back to 2007, right before the iPhone came out. Nokia had 40% market share of all phones.

In comparison, right now Apple has 40% market share of US smartphones. Can you imagine them getting flattened just like Nokia? Can you imagine your iPhone considered as archaic as this Nokia 3310?

how did nokia fail?

Image: 12th most popular phone of all time – and the one all my friends at uni had

I’m here to explain why, despite what you read on the internet, it was not just software and poor management that did for Nokia.

It was Qualcomm and 3G.

It was industry structure. And this industry structure is why even Apple is vulnerable. Unless they can change the rules.

Back when Nokia was Russian

You may have heard the story about Nokia starting off life as a paper mill. This beginning goes so far back Finland was actually part of the Russian Empire at the time.

Just after World War I, Finland became independent and Nokia joined up with a cable company. Not cable like Comcast, cable like literally copper wires.

Wiring became electronic engineering, which became telecommunications. From there it was barely a hop and a skip into mobile handsets.

Hot tip: If you ever want to lose someone at the airport, head over to the Finnair desk. It’s literally the perfect place to disappear into thin air.

how does nokia make money

Image: clipperarc via flickr commons

GSM favors the IP

Twenty years ago more people in Europe had mobile phones than in the States. And the reason for that was governments in Europe stepped in and standardized second-generation (2G) digital cellular networks. They called this the Global System for Mobile Communications or GSM.

If you are of a particularly pro-market bent, feel free to call this state industrial policy. Because that’s exactly what it was.

The Tech sector is based on a many patentable discoveries. Telecoms particularly so. Every little piece of hardware, software and signal tweak typically gets patented by somebody.

GSM was all about IP and to be a player in GSM handsets you had to have lots of patents. It isn’t unfair to characterize this as two guys coming in with their pile of papers and then getting out a ruler to measure who’s got the bigger pile of emergency toilet paper.

And boy, if you didn’t have any patents, that would be a 15% royalty thank you very much.

This royalty wasn’t to one guy; it was to the whole industry. You had to pay a rent for everybody’s patents. But, if you had a nice pack of patents, you paid nothing, because you’d just agree to respect the other side’s pile of paper.

CDMA favours the Qualcomm

If you got a phone, you probably got a Qualcomm microchip in.

nokia basic phones

Image: mobilephonehistory

Qualcomm grew out of satellite tracking. They came up with a new cellular base station for AirTouch in the United States. It was based on CDMA – code division multiple access for geeks like me. Before that, the signal would be divided by time and be referred to as TDMA.

Qualcomm was a private business doing what the state had come together to organize in Europe. Qualcomm set the standard in the United States.

So what did they do with it?

They started making microchips. And they started licensing the technology.

How does Qualcomm make money?

  • Patent everything and its cat
  • Ensure that these patents become some kind of standard
  • Design microchips based on these standards
  • Make everyone sign a royalty agreement with them charging a cool 3-5% of revenues for using technology based on these standards
  • A term of the agreement is a cross licensing agreement of their intellectual property
  • Offer a discount on their microchips that other microchip providers cannot match
  • Sue the ass off of anyone who doesn’t toe the line

Intellectual property and industry structure in CDMA and GSM

That’s an ugly heading for a blog section. And even worse luck that’s exactly what the section is about.

So the States had CDMA and everyone paid a single royalty to Qualcomm. Most likely you thought your phone was by Sprint or Airtouch or Verizon. No, in fact somebody else made it, maybe Panasonic, maybe Motorola.

In this market phone makers could not hold market share. Motorola did blow up with their RAZR flip phones, but it didn’t last. That was a pure product driven cycle and once people got bored of the RAZR, Motorola’s market share dropped fairly quickly.

how does razr make money

Image: Roland Tanglao via flickr commons

This one payment to Qualcomm was the barrier to entry. Qualcomm would give you everything else you needed: the IP, the microchips, and even a few technicians to help you integrate it all.

Remember the cross license you gave to Qualcomm to get their IP? That means other Qualcomm customers were licensing your IP.

As I discussed, Europe had much bigger barriers. 3 to 5 times the size of royalties. But importantly handset makers could easily find ways to refuse you a license. They could slip in an onerous contract term, like a free license to any IP you invented in the future, and that was it, you would refuse and get your ass sued.

This was the market where Nokia got to 40% market share. They got there via great manufacturing, logistics and customer segmentation. But it was the standards and the IP that kept out new entrants.

New entrants like Huawei, OnePlus and Apple.

State industrial policy in the mobile industry

Back in 2000, state industrial policy looked like a massive winner. GSM had come to dominate everywhere except Japan and the United States. Because of these bigger volumes, manufacturers had more scale and the phones were cheaper. Cheaper rocks. Cheaper sells a lot.

how cheap phones make money

Image: wikipedia

The case for state industrial policy got weaker from there. Japan had gone with their own standards, called FOMA. This was supposed to hand the local market to Japanese handset firms, which it did. But it massively handicapped them overseas.

The Chinese learned from this and went for a mix of technology, forcing separate mobile providers on to separate standards. That’s a little bit of guaranteed local market share and a bit of training in making phones to export to other markets.

The end of GSM

Worse was to come for Europe’s centralized model. CDMA was better. It was moving forward technologically in a way GSM could not. Third generation (3G) mobile technology was going to standardize as WCDMA.

If you’re wondering, the W was just wide, as in wide band.

3G when it was launched was mostly a dud. The phones were big, reception was patchy and you wouldn’t tolerate those data download speeds today.

But the industry had changed. The barriers to entry went from GSM style super high to CDMA style pretty damn low.

Apple goes Boom

Yep and then the iPhone came along.

how iphone won

Image: Alan Levine via flickr commons

Yeah they changed the game. They did a beautiful phone with intuitive user interface and easy to write apps.

The world before Apple had even seen mobile providers demanding many phones not having WiFi. I mean seriously, no WiFi?

But think about it. In a GSM world, Apple might have got a license from Ericsson, who are Swedish and super nice guys, but would they have got one from Nokia? Would they have got one from Alcatel?

The bits of the story you know

From there Nokia were playing catch up. Google came in with Android and in many ways lowered barriers to entry even more. Free software! Or free as long as you let Google put in their search bar…

Android solved the software problem for all the other players. These firms could source chipsets from Qualcomm, software from Android, flash memory from Samsung and batteries from LG.

But what about Nokia?

e71 nokia failed blackberry

Image: the only Nokia I ever owned was a blackberry rip off

They were too proud to give up the golden goose to Google. Because that’s exactly what search had become.

Nokia had Symbian, which had grown out from the old Psion business. Unfortunately, this legacy, a largely Java based operating system, based on dated mobile phone code, with four different user interfaces (UIs), was holding them back.

The existence of Symbian puts a decent sized nail in the idea that Nokia’s problem was they couldn’t do software or that it was some problem with Finnish innovation systems. Nokia had already outsourced the software coding and they had outsourced it to a firm based out of London, UK.

One thing that I find crazy is that Nokia were spending 10% of revenue on research and development. Patent filings had jumped from 300 a year to 6,000 a year.

Billions were getting spent and yet they didn’t put together anything as good as iOS or Android. Effectively this is billions being used to make an inferior product component that they could buy from third parties e.g. Android. It is the in source outsource conundrum that companies everywhere struggle with.


It was around now that people got obsessed with ecosystems. iPhone – Safari – Apps. Android – Google – Apps.

This is logical. Ecosystems were the new barrier to entry on the software side. The more Apps you had, the more everyone else had to do to catch up.

how does an ecosystem make money

Image: Doug Belshaw via flickr commons

Symbian / Nokia were three years behind (Google bought Android Inc in 2005). What to do?

They took the lowest risk options one by one. Nokia bought out their partners in Symbian and open sourced the code. They started investing in Maemo / Meego, which was based on Linux.

It is actually understandable why they didn’t switch to Android at this time. Switching to Android was like getting $400 dollars of a pot of $1k and saying sure, I’ll settle for $100 next year. They gambled on any hand of cards they could to keep the $400.

One way to explain this is with a special type of auction. A Dutch auction is where the auctioneer says out a slowly declining price and the first bidder to step in gets the lot. Nokia did a Dutch auction of its options, going for each as it became their maximum possible payoff.

Making a success of Symbian was a $400 gamble. Launching a new operating system Maemo was a chance at $300. Windows software $200. Sale to Microsoft $150. Adopting Android $100.

Even worse, this was as the effective market size was going from $1k to $1.5k to $2k. Apple had raised not only the bar, but the price people where willing to pay for the phone in their pocket.

This is what happens when you focus on the payoff, and not the probabilities.

Imagine the guy who dumps his wife at forty. He’s thinking he’s going to go out there and hook up with Taylor Swift.

Taylor Swift ignores his tweets. Then he tries all the girls on the Big Bang Theory. In sequence from hot blonde to geeky with glasses.

how nokia is like big bang theory

Image: Hollywood Branded via flickr commons

The end is tragic: on the kerb and on his own.

Stephen Elop

Nokia hired a guy who was a contender for the top job at Microsoft. He is famous for writing the burning platform memo.

“There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform’s edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters.

As the fire approached him, the man had mere seconds to react. He could stand on the platform, and inevitably be consumed by the burning flames. Or, he could plunge 30 meters in to the freezing waters. The man was standing upon a “burning platform,” and he needed to make a choice.

He decided to jump.”

Click here to check out BlinkistThis vivid story was Elop’s way of switching to Microsoft’s phone software. I’m not one to criticize Elop, all of Nokia’s options were unattractive. However, reading the whole story from beginning to end, he could have been a Microsoft plant.

Nokia the telecom company is still a big player in the equipment space.

But Nokia the handset company sold out fully to Microsoft in 2013. It is mostly just a sub brand for bigger companies now.

Apple is as clever as you think they are

In October Apple sued Qualcomm for a billion dollars.

This may be about money. But an incidental benefit of ending the royalty agreement with Qualcomm would be that Apple would no longer be within’s Qualcomm’s IP umbrella.

It raises the possibility that Apple could sue companies under Qualcomm’s IP umbrella. It raises the possibility that Apple could raise old IP barriers against new competitors.

Crazy huh.

Yuen Lo


  1. Hey, somehow I missed this blog post. Another cautionary tale. Some similarities to Blackberry. What is sad is that Nokia ended up ruining their brand, which is hard to put a price on. Instead of the “Burning Platform” how about the “If you can’t beat them, join them” idea. They could have saved their Nokia brand and joined in with Android and continued to make billions. Adaptation is life!

  2. Exactly! That’s a great way to put it and shows the power of the words we choose!

    Happy Christmas! Hope all is good and Santa is generous 🙂

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