The most common comment I hear in my blog starts to be “But market share decline is not a problem, company can be profitable and increase sales while losing market share.
Totally agree. I know a company named Nokia that did it at end of 2010. I’m now going to go through the ugly figures from the history. No speculations here. Let’s see if I can make my point finally.

UNIT SALES

Nokia amount of smartphones sold (from Nokia quarterly reports):

Q2 2010 | 24.0 M
Q3 2010 | 26.5 M | +10%
Q4 2010 | 28.3 M | +7%
Q1 2011 | 24.2 M | -14%

(Q1 2011 drop due to Elop Effect, according to Tomi Ahonen)

So here we have “unit sales Nokia”. Increasing unit sales in Q3 and Q4, drop of 14% in unit sales in Q1. This is the one Tomi Ahonen speaks of when he explains us the “Elop Effect”. We have clearly increasing sales and profitable company until Q1 2011 and Elop Effect.

MARKET SHARE

Nokia smartphone market shares (as reported by Tomi Ahonen)

Q2 2010 | 39%
Q3 2010 | 33% | -15%
Q4 2010 | 28% | -15%
Q1 2011 | 24% | -16% (Elop Effect)

This is now what Tomi Ahonen alerted in January 2011. I have added actual result of Q1 2011 that was not existing then, but otherwise it’s the same. We see decline of market share and it continues in a linear manner (as percentage of remaining market share lost) from Q3 2011 to Q1 2011. In this presentation we practically cannot detect Elop Effect.
This is the view I have been using. This is what I now try to make more clear.

SO WHICH ONE MATTERS?

As said, people keep telling me that company can increase sales and remain profitable while losing market share if the overall industry grows. So how much did the industry grow?

Overall industry sold smartphones (by calculating from previous two):

Q2 2010 |  61.5 M
Q3 2010 |  80.3 M | +31%
Q4 2010 | 101.1 M | +26%
Q1 2011 | 100.8 M | -0%

I don’t have exact decimals in place, so this may be off by one or two million. Still – did anyone notice? Measuring by unit sales industry grew over 25% per quarter. In fact, smart phone market grew byalmost as many sold units as Nokia sold alone. (While Nokia was being larger than its two closest rivals combined). That is not a healthy sign. Not for a market leader. (I’ll explain later why)

How about Q1 2011?
Flat zero.
Smartphone sales did not increase at all on that quarter.

Now Nokia was not able to keep up with growing industry. It might seem sound they could keep their market share when growth stops, right? In that sense Nokia should have sold same amount as in previous quarter.
I understand, it is natural to assume it works that way. But unfortunately, it doesn’t.

TRIP TO THE FAIRY LAND

Those who look Nokia’s fall just from unit sales are unfortunately living in a fairy land where 28 million Nokia fairies come every quarter to buy a Nokia smartphone. These loyal Nokia users are immune to anything affecting the industry, they will always buy a new Nokia after 3 months. In this fairy land Nokia can produce same amount of smartphones every quarter and sell them, even though growing industry has stopped growing.

BACK TO REALITY

Why did I call it fairy land? I do admit there was – and is – a market segment of loyal Nokia owners that will buy another Nokia, unless you really piss them off. However, those stopped being a majority of Nokia customers long time ago. The growth of market and replacement cycle of smartphones take care of that.  It’s a fairy land because a fact is (and we cannot deny it) that during Q2 2010, if 100 people had stepped into a store and bought a smartphone, 39 of them bought Nokia.
Without any Elop effect, only 33 out of 100 people coming to store bought Nokia in Q3. That’s 15% less than in Q2.
By end of 2010 (Q4) Nokia was facing a horrible situation: if 100 people walked into a store to buy a smart phone, only 28 left the store with a Nokia device. Once again, 15% less than in previous quarter. Once again, without Elop Effect.

Within half a year Nokia devices lost 25% of their desirability.

THIS is my point. THIS is why I called it a fairy land. Units produced are not units sold. I can assure you that no company – not Nokia, not Apple, not Samsung – can keep producing smartphones they can’t sell. And no matter how well you market your product, you can only sell as many devices as there are customers buying them.

First there are consumers buying smart phones.
The ratio of ones choosing your product is your market share.
Multiply by amount of people buying smart phones and you get your amount of units sold.
It’s really that simple. I know Tomi tries to generate the figures in opposite order.

So in half a year, Nokia became 25% less wanted by consumers – or less sold by retail. Smart phone industry is growing so fast that it hides anomalies like this. I can’t think another multi-billion dollar industry which grows unit sales 31% in a quarter. I don’t think there is any other industry where one could lose 25% – one quarter – of market share in 6 months and increase sales.
One quarter of market share.
In six months.
While increasing sales.

And really, Tomi Ahonen had a suitable comparison for it. He puts Toyota (largest car manufacturer) to lose quarter of its market share:
If Toyota lost one quarter of its market, and instead of selling 8.4 million cars, they would only sell 6.3 million cars.
Toyota would fall behind General Motors, AND Renault-Nissan AND even behind Volkswagen Group, landing in 4th place, just ahead of Ford Motor Company.” [1]

Now car industry does not grow 31% in a quarter. That’s why he can just adjust unit sales and get reasonably close figure. Imagine if 15% less of the customers entering a store would drive out with a Toyota for two adjacent quarters? Toyota would lose sales catastrophically. Probably the said 15% per quarter. They would be looking for a reason frantically. And I mean strategy changes, marketing campaigns, anything! “Why did car buyers abandon Toyota?” Would be in the headlines.

Nokia ended up to same situation and everybody blames strategy change that was done when problem had been continuous for two-and-a-half quarters!?!
Give me a break.

WHAT CAUSED THIS?

Now why less and less of the people going to the store were walking out with a Nokia? Tomi Ahonen made a good analysis on it. [1] He ended up noticing that average sales prices were going up in Q4, suggesting discounts from previous quarters being removed. Otherwise good, but actually that does not explain the start of the crash from Q3. I would assume low-end Nokia smartphones were simply outperformed by rivals. In such a situation Nokia both lost market share and increased average sales price. We do not know exact reason, but in the end it was resales issue.

Not from Elop Effect this time, but perhaps due to some other issue, like return rates.

Tomi Ahonen blames Lumia to have high return rates but cannot provide evidence to support it. I think that buyers of Nokia N97 most likely did NOT buy another Nokia after it. Same for…
…heck, same for about the whole Nokia line of smartphones offered 18 months (smart phone replacement cycle at that time) before market share crash. Tomi Ahonen put it well in January 2011:

Take the N8. It would have been a hot phone in early Q2, before the iPhone 4, if facing off against the iPhone 3GS and very early Android devices. But it got onto store shelves for Q4, by that time there was the ‘Retina Display’ iPhone 4, and the magnificent Galaxy 2 series of Samsung phones, and vastly upgraded Blackberries and HTCs and Motorolas etc.” [2]

Nokia was not delivering proper devices in time. The industry is just too fast to allow such mistakes. So Nokia fell off the cliff. So did RIM. Read Cliff Theory from Tomi Ahonen for more. [3]

As said already we do not know for sure what caused it, but we do know that for every 100 customers going to buy a smartphone, 15% less came out from the store with Nokia phone in Q3 2010. Another 15% less in Q4. And in Q1 2011… 16% less.
Take the amount of people who bought smartphones that quarter, multiply by a number that is 16% less than previous quarter multiplier and BAM – you know amount of devices Nokia could sell no matter how many they produced. The growth of industry hides it well for Q3 and Q4 2010 but growth stopped on Q1 2011, revealing the horrible truth.

Sorry folks, but no Elop Effect needed for that.

…And this is why I focus on market share instead of unit sales when looking where downfall of Nokia started. Hopefully you understand better now.

REFERENCES:

[1] http://communities-dominate.blogs.com/brands/2011/01/sherlock-holmes-hounds-of-the-nokiaville-why-did-nokia-market-share-crash-dive-i-may-have-an-answer.html

[2] http://communities-dominate.blogs.com/brands/2011/01/undesirable-at-any-price-what-happened-to-nokia-who-invented-the-smartphone.html

[3] http://communities-dominate.blogs.com/brands/2012/03/the-cliff-theory-of-handset-collapse-why-in-mobile-phones-do-companies-die-so-fast-siemens-motorola-.html

Guideline for commenting:  I hate the way Tomi Ahonen deletes criticizing comments from his blog. However, I plan to follow three of his principles: I’ll delete comments that are

  1. Personal insults to someone
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In addition, if you wish to challenge my previous posts, please comment to those.

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