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The (Tech) King is dead… long live the King

Back when I bought my first mobile phone, Nokia (NYSE: NOK) was the must-have brand. The industry was young, the mobile internet hadn’t yet awoken, something like three out of four phones sold were Nokia, and the company had a lock on the market.

But Nokia has since been outshone by Apple (Nasdaq: AAPL) and its ultra-desirable iPhones and iPads, and this week has been forced to release a profit warning. The erstwhile king of the castle is now expecting to make a loss for the first two quarters of the year, where previously it had been forecasting break-even.

During the first quarter, Nokia sold two million of its new Lumia phones, but increasing competition has led it to forecast a “negative 3%” operating margin for the period, with the second-quarter margin expected to be worse than that.

The shares plunged on the news, falling 15%, and are now down nearly 90% over the past four years.

What went wrong?

Some would point to the costs of developing the next generation of phones, of competition in the market and all sorts of short-term things. But I think the true answer goes much deeper than that.

Consider that other troubled competitor, Research In Motion (Nasdaq: RIMM). RIM is the maker of those once-wanted BlackBerry devices, which caught on strongly in the corporate market. But with their focus on email and instant messaging, they’ve been upstaged by modern devices like tablets that can do that just as well, while being able to surf in ‘proper computer’ style, take photos and synchronise everything via the ‘cloud’, too.

In too early

These two companies did something in common. They both entered the fray when the technology was woefully inadequate, and they succeeded by making the most of a bad job.

I remember an old Nokia phone I had. It was one of the early WAP phones (Wireless Application Protocol — remember that, you antiques experts out there?). It cost hundreds of dollars, and by hooking up with a WAP provider, I could get some sort of rudimentary web-type data services. But with bandwidth so poor, a dearth of WAP services and the inadequacies of those tiny little displays, it was, frankly, useless.

And that’s not hindsight. It was clear at the time that we were looking at the mobile phone equivalent of wax cylinder recordings, and we knew that the eventual technological winner would be very different.

RIM was similar. What RIM did was take the existing inadequate technology, and focus on making it work for one specific type of service, text-based communication. The BlackBerry devices did that very well, but it was only a matter of time before mobile technology caught up with the whole range of services demanded of it, and occupying a niche in mobile email just wouldn’t cut it any more.

Just like aviation

I’m minded of Warren Buffett talking some years ago about the early aviation pioneers. Their technology was very impressive for its day, but was woefully inadequate for the kind of commercial services that would be needed to make it a success. None of the early enterprises lasted long, and the business was eventually dominated by latecomers who didn’t join in until the technology was sufficiently advanced.

Now compare Nokia and RIM with Apple. I remember many years ago being disappointed when Apple dropped its Newton line, one of the world’s first forays into mobile computing, with handwriting recognition and all that. But it was a sound commercial decision, because even though we had a few years of rudimentary PDAs after that, what mobile computing needed was connectivity.

And when the technology was up to it and Apple rejoined the fray, it was able to blow the competition away. Mobile technology had progressed far enough for iPhones, and later iPads, to work as genuine everyday devices that provided integrated services right from the start, and not cute gadgets that kind of worked, most of the time, if you held the stylus just right and squinted. Apple didn’t have to reinvent its mobile offerings by moving on from older obsolete technologies.

The lessons for investors

So what’s the thing to learn from all this? I think it’s quite simple — be very afraid of new technology.

For while technology will continue to revolutionise the way we conduct our lives, and will make billions for future entrepreneurs, it is very rarely the early pioneers or the niche producers who go on to corner the market.

Wilbur and Orville were commercial failures, J Lyons & Co did not become a leading computer maker and Nokia is not going to get back to leading the world in mobile computing. Finding the next Apple, that’s the hard question. But whoever it is, it will be someone who knows when the technology is ripe.

The second lesson? Innovators will invent or reinvent whole industries, often in the blink of an eye. Whether its retailing, computers or yes, mobile phones, truly sustainable competitive advantages are much rarer than you think. You only have to recall the mid-late nineties and the then-unassailable lead Nokia had in mobiles. Who will be the next giant to fall?

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A version of this article was originally published on fool.co.uk

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