Reuters - Putting customers to work, Nokia takes on the Web

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Putting customers to work, Nokia takes on the Web

Tuesday, Mar 18, 2008 1:43AM UTC

By Tarmo Virki

HELSINKI (Reuters) - A popular video on Youtube shows a 'concept phone' that could -- literally -- bend to fit your wrist. Called Nokia Morph, it's also an image of how the world's largest mobile phone maker wants to change.

As the Internet goes mobile and companies like Apple and Google find cool ways to embrace the trend, the mobile market leader is rewriting its product development rulebook. Instead of working in secrecy and isolation, it wants to start sharing.

"For Nokia this is probably the biggest throw of the dice since they entered the cellphone business," said Ben Wood, research director at CCS Insight, who has followed the Finnish firm since 1994.

Besides putting up futuristic ideas on video-sharing sites -- like the Morph concept, which imagines a stretchable, flexible, solar-powered, self-cleaning device which also has a sense of smell -- Nokia has invited bloggers and tech-savvy media specialists to brainstorm on future mobile products.

"We realized in early 2005 that if we only focused on innovation from within, we were limiting our scope for real breakthroughs," Chief Technology Officer Bob Iannucci told Reuters in an interview. "We want more wild ideas."

At stake is a share of the next phase of Internet growth, to offset the commoditization of Nokia's signature product. Forrester Research expects the number of mobile Internet users to triple over next five years to 125 million in Western Europe alone, while Nokia knows its double-digit margins on handsets will shrink.

To make its move in Internet services, Nokia plans to use its base of one billion customers -- one-sixth of humanity -- to consult on what works, what wows, and what doesn't. Compared with Apple's much-hyped iPhone, which has sales of just 5 million so far, its customers put Nokia in a strong position.

The market for Internet services is approaching 100 billion euros, and Nokia is the first big cellphone manufacturer to embrace the Internet media business. Close rivals Samsung and Sony Ericsson could follow, but are a couple of years behind.

Already the world's largest non-U.S. technology firm by market capitalization, controlling 40 percent of the world market for mobile devices, Nokia is still chasing growth.

Technology shares are valued on sales growth expectations and Nokia trades at around 1.4 times 2008 sales, a deep discount to Google's 6.1 times and Apple's 4.4 times, Reuters Estimates data show. Shares in Research in Motion, which makes the Blackberry that rules the mobile email niche, trade at 10 times 2008 revenues.

CHANGE AGAIN

Change may be in Nokia's genes. Founded in 1865 as a timber company, its brand -- now ranked fifth globally by Interbrand and valued at $33.7 billion -- was stamped on paper goods, wellington boots and television sets before the company focused on the mobile market 16 years ago.

But the process of developing and testing new phone models was once like a state secret, and the results haphazard.

Wood of CCS Insight said that in the past Nokia would develop products "behind closed doors in a room with no windows. With some products I asked them: had they shown them to anyone?"

In 2003 reviewers and customers laughed at Nokia's gaming phone, which had to be held awkwardly, sideways, to make calls. The same year Nokia introduced its first media phone, the bulky 7700, but withdrew production plans after heavy criticism.

Although its conservative designs had mass appeal, Nokia has also missed many big design trends in recent years -- clamshells, thin phones, touch screens, for instance.

The Morph concept, which Nokia is exploring with researchers in nanoscience at Cambridge University, is one example of a more consultative approach: combining know-how about tiny particles and electronics to see, for example, if a stretchy circuit could be made. Another was the way Nokia in February floated the notion of a phone made almost entirely from recycled materials.

"The ability to include large numbers of users into the development cycle means you can have a much more collaborative approach to development and you can try ideas out, refine them and move forward -- or fail fast and get out," said Nokia's Iannucci.

Blogger Oliver Thylmann (http://blog.thylmann.net/), who took part in a Nokia product development workshop this month, believes many European companies are set to follow the more open model, leveraging customer input to grow.

"Working with your customer is something where the world is going to," said Thylmann, who has been writing about technology since 2001.

"As a company you cannot close yourself off from the world anymore. If you're locked in your ivory tower and there is discussion about you going on, it makes sense to get out there and take part in that conversation."

FAIL FAST

In its bid to direct users to its Internet services instead of Google's, or to its music stores instead of Apple's iTunes, Nokia is not the first tech firm to turn from hardware to software and services. As the personal computer has been commoditized, IBM and HP have similarly sought new business.

But while Nokia experiments, its profit margin on phones, which rose to 23.6 percent in the quarter to December, is a cushion. Margins at Nokia's best-performing rivals -- Samsung and Sony Ericsson -- are at half that level.

The shift to services means Nokia must get nimble.

"In services it is hugely important to be on the market as early as possible," said Niklas Savander, head of Nokia's Internet services unit. "You will see a lot of beta launches, or limited-function launches, or limited-geography launches from us." Betas are public product tests.

The company is looking to copy Google's approach to new business: try as many as you can, quickly.

Its Beta Labs Web site www.nokia.com/betalabs, where it puts up software for testing to public, has more than a million visitors a month. The internal mantra is "Fail fast, learn fast, scale fast."

The company's online music stores are in test mode and it is about to launch a global gaming service. Millions of people have downloaded programs or media from Nokia's new mobile activities site Mosh, also still in beta.

However, there are limits to all this openness. Writing before he attended the Nokia development workshop, Thylman said: "Sadly I will not be able to blog about the contents."

(For a video report on Nokia Morph, go to:

http://www.reuters.com/news/video?videoId=77681)

(Reporting by Tarmo Virki; editing by Sara Ledwith)