Hardware, and beyond : Nokia and Samsung race to provide Internet services

BARCELONA, Spain – Samsung Electronics Co. Ltd. announced plans at the Mobile World Congress trade show to launch an Internet-services strategy for its handsets, a move that could put the Korean vendor into direct competition with Nokia Corp.’s overarching Ovi content play.
And though Samsung’s offering initially appears to be a mere tracing of the broad strokes Nokia has used to paint Ovi and its future, it nonetheless indicates Samsung’s intentions to tie services to the sale of its cellphone hardware. And, presumably, the goal of Samsung’s nascent services strategy is the same as Nokia’s Ovi effort: captivate users, please carriers and, ultimately, ensure that customers keep coming back for more.
“Ovi should be the dashboard (for users’ lives),” said Ilkka Raiskinen, head of Nokia’s software and services business. “Ovi is one way to make Nokia an Internet company.”
Samsung’s new services strategy, as well as Nokia’s Ovi play, has roots in the tried-and-true models from successful service providers including Apple Inc. and Research In Motion Ltd. Although both RIM and Apple are primarily known for their gadgets – the BlackBerry and iPod, respectively – a large part of their success is due to the services that go along with their hardware; Apple’s iPod music player works exclusively through its iTunes music service, and RIM’s BlackBerry delivers corporate e-mail through the company’s BlackBerry servers.
Though it is the hardware that generates the buzz (and a majority of profits), it’s the services that help set Apple and RIM apart from the competition and keeps customers coming back for more.
“It is essential to offer sticky services which will keep customers on the same hardware platform,” wrote UBS analyst Maynard Um in a January research note on Nokia. “We do not expect the multi-platform Ovi to add significantly to Nokia’s financial performance in the short term. . However, if Nokia is able to sign 100 million of its 830 million installed device customer base to a subscription model, we believe that the increased value in ‘stickiness’ could represent as much as $8 per share.”
UBS makes a market in Nokia securities.
Interestingly, Internet services stand as major new business model for a worldwide handset industry that has so far concerned itself almost exclusively with chipsets, plastic molding, antennas, processing power, distribution, marketing and the myriad other logistical elements in the consumer electronics market. But, to be fair, a focus on cellphone services was unnecessary until just a few years ago, when phones evolved from mere voice-calling implements into “multimedia computers,” a term Nokia executives insist on using for the company’s lineup of N-Series phones.
As the world’s No. 1 and No. 2 cellphone players work to break into the services business, they’re likely to run up against those companies that already have placed expensive bets on such offerings. Wireless carriers across the world have been keen to keep their brand in front of mobile users, whether they are placing a call or searching for their location via GPS. Thus, cellphone makers could put themselves in a bit of a quandary in their attempts to bolster hardware with their own, branded services.
“Carriers have mixed feelings on handset-branded services,” said Avi Greengart, research director of mobile devices for research and consulting firm Current Analysis. “Smaller ones may actually prefer them if there’s a revenue-share component, while larger, branded carriers often feel that they compete with their own efforts. Still, if the services are compelling and drive revenues – directly or as a function of subscriber growth – many carriers will gladly capitulate.”
Some handset makers appear content to let the carriers do their thing.
“Our strategy is to partner closely with carrier partners,” explained Don McLellan, senior VP of mergers and acquisitions strategy for Motorola Inc. “It’s our belief that we can go carrier by carrier.”
Others seem to be straddling the fence; Sony Ericsson Mobile Communications, for example, offers music downloads in select countries through its own PlayNow service. But the company relies on carriers and third parties for other types of services.
It’s unclear how the connected-services market will eventually play out. Indeed, it’s very early days: Nokia only recently brought its first Ovi-branded service to market, having announced the effort last year, and projects that it could take a year or longer to combine its various services under the Ovi umbrella.
Samsung too is just in the beginning stages. For example, the company currently outsources its blogging client to ShoZu and its navigation service to Navigon, but plans to bring those services and others in-house to offer a unified Internet-services strategy.
Further, evaluating the success of an Internet-services play could be difficult. Nokia’s Raiskinen said the company has one single profit-and-loss calculation, which relieves individual businesses from independently proving worth. Thus, Ovi itself doesn’t need to be profitable to be considered a success. Raiskinen said “more sophisticated” metrics need to be applied to Ovi, such as customer retention and usage patterns.
But Ovi and connected services from other handset makers may well have significant revenue components. Aside from charging end users for the services (none has discussed doing so), players could make money through advertising or revenue-sharing contracts with carriers. Raiskinen said Nokia would “share value” with its Ovi carrier partners, but declined to elaborate.
Nonetheless, industry observers will be keen to watch Ovi and other Internet services roll though the market. Whether such efforts will be as successful as iTunes, BlackBerry and others remains to be seen.