Dec 05 2007

Is Nokia in denial?

Nokia Won’t Play iPhone’s Tune

As we know, oligopolistic markets are characterized by a few large firms which act interdependently based on the actions of one another. Examples of such interdependence may include pricing and output behavior, advertising behavior, sales and promotions, non-price competition, services offered to consumers, and so on. The “game” of oligopoly is played with one very important goal in mind: maintaining market share in the face of competition from rivals.

In a previous post I discussed some of the strategies Apple has used to break into the oligopolistic market for cellular phones, which it recently did by introducing the thus far wildly successful iPhone. A chart in that post showed that as of earlier this year, the dominant firm in the mobile phone market was Nokia, with a market share of 35.1%. Apple was not even a competitor in this market until July of this year, which saw the successful launch of the iPhone, causing some of the incumbent mobile phone makers to pay close attention to the newcomer’s behavior.

Nokia executives, however, appear to be in denial of the potential threat posed by the iPhone to its dominance in the cell phone industry:

Nokia managers would never admit to being influenced by the Apple iPhone, which mobile phone industry insiders regard as clever but technologically unimpressive. “We don’t determine strategy based on the competition,” insists Anssi Vanjoki, Nokia executive vice-president and general manager for multimedia. “The consumer is our compass.”

The message seems clear enough: “No one influences our firm’s behavior except the consumer”. If this were true, it would seem that our basic assumption that oligopolistic firms act interdependently based on the actions of the firms with which they compete may be incorrect. But wait a minute, is Mr. Vanjoki being truthful here? Has Nokia really simply ignored the impact that Apple’s launch is having on the mobile market? Let’s look more closely:

Nokia announced a new initiative Dec. 4 that seems aimed squarely at Apple. Beginning next year, higher-end Nokia phones will come with a built-in music service offering unlimited downloads of songs for a year. Nokia has signed up Universal Music to provide its catalog, including top contemporary musicians such as Amy Winehouse and Kanye West. And the handset giant is already negotiating with other major music companies, Vanjoki says.

Hmm… a Nokia cell phone with music playing and downloading capabilities. Surely Apple’s iPhone had NOTHING to do with this new product, right? The presence of Apple on the mobile market has clearly influenced the incumbent firms, even the unflappable Nokia, whose claims of acting only at the behest of consumers seems to ignore the reality of the matter: consumers demand phones that play music because Apple makes a phone that plays music. Is it really a coincidence that Nokia launches their first music playing phone only months after the launch of the iPhone?

In AP Microeconomics we study oligopolistic market structures under the assumption that firms in such markets act interdependently of one another. If a firm like Wal-mart slashes its prices for, say, board games, then Target and K-mart are likely to respond by announcing price cuts on board games or other such products themselves. They don’t behave this way because they want to sell their products at a lower price, they do so because if they don’t, then Wal-mart threatens to increase its market share at the expense of Target and K-mart.

In the mobile phone market, firms respond not only to the behavior of consumers but to the actions of other firms as well. In this case, Nokia knows that the arrival of Apple and the iPhone has changed the name of the game for mobile makers. The iPhone’s technology may be “unimpressive” to Nokia, but who could help but be impressed by Apple’s clever decision to make a user-friendly all-in-one Mp3, video, web-browsing cell phone? Clearly, Nokia is broadening its product selection and features to include such “Applesque” features to try and maintain that 35% market share in the face of Apple’s newfound success in the mobile market.

Powered by ScribeFire.

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

7 responses so far

7 Responses to “Is Nokia in denial?”

  1. Michael Dailyon 13 Dec 2007 at 12:48 pm

    I find the concept of interdependence between firms in an oligopoly pretty funny. Especially in this situation since the executive vice-president of Nokia is denying actions influenced by Apple. Nokia's actions make sense, but it is pretty funny that they would deny something so obvious. It is even more funny that they call Apple's product "technilogically unimpressive," since they are the ones copying its design.

  2. yunqimokon 15 Dec 2007 at 1:01 pm

    Michael sentiments exactly. Oligopolies are willing to sabotage everything in order to gain market power, as they know that in the long run, gaining market power will lead to profits. Nokia, one of the world's leading cellphone makers, feels threatened by Apple's new iPhone, and thus creates a substitute for it. In a way, the fight between oligopolies is even better for consumers, as new and improved products are constantly being created, and the prices are also constantly being pushed down as firms race to create something absolutely un-imitable.

  3. Teemar Ratanasirigulon 06 Jan 2008 at 3:45 pm

    What exactly is being sabotaged? The interdependence between the companies benefits the consumers with lower prices and innovative products, however, the products may just be cheaper copies of each other after a while. It is a competition for market share, and if a company can benefit from introducing a new product into the market, then it probably should (disregarding ethics, providing that some products are unethical).

    The claim that Nokia is driven by the consumers has some truth to it, however, the consumers are also influenced by Apple. With the iPhone, the consumers tend to lean towards the “revolutionary features.” Because consumers demand these new features, such as downloading and playing music, Nokia is providing them. Nokia is truthful that the consumers are driving them to create their new phones; however, they ignore the catalyst for the demand for music playing/downloading cell phones. Thus, Nokia is being influenced by Apple. They, however, probably consider it, at most, as an indirect influence.

    I recall that music playing cell phones have been out for at least 2 years now… so is it really the music playing that people want? Or is it the downloading? Possibly the all in one – downloading, music, touch screen, internet combo? It's all about the innovation.

  4. Dana Yeonon 09 Jan 2008 at 1:58 am

    Apple has been famous for its innovation for a long time now. Even the 1984 commercial of Apple's new personal computer is stunning. Drawing inspiration from George Orwell's novel, 1984, Apple manages in successfully portraying a 1984 without an infringement in personal freedom, which is exactly what is portrayed in the book. Getting back to the point, Apple has revolutionized not only the computer industry it failed to penetrate the first time round, it has become one of the most "hippest" gadgets to carry around nowadays, whether they be iPods or iPhones. Naturally, Nokia is clearly sensing the threat posed by the burgeoning phone sector of Apple. Otherwise, Nokia wouldn't be befuddled to the extent they are to make contradictory comments, and neither would they go out of their way to deny the fact that they are indeed imitating iPhones. This is not new: Microsoft copied iPods, and now it's Nokia. At the end of the day, economic principles are true: interdependence is the key in oligopolies.

  5. Jenson 22 Jan 2008 at 5:18 pm

    Is Nokia in Denial?

    No, they're not. They understand pretty well the impact of the iPhone on the mobile telephony market. And I am sure they certainly think about bringing out phones with a similar feature set and will try to copy some of the smart pricing approach that Steve J. has negotiated with operators.

    But it does not surprise me at all that they are not proclaiming that as their strategy. Why should they? It wouldn't be a smart move to name a competitors product as benchmark. It is much wiser to point out the technical unimpressiveness (by pointing to a lack of certain features). Additionally they are not putting themselves in a me-too-position by copying a competitors product but rather put the customer in focus. That's what customers want to hear, anyway. And if customers demand music phones (which Nokia btw has since ages) then so be it. And Nokia can still claim that it is "just coincidence" that an iPhone like music capable phone is launched briefly after the launch of the iPhone. Customers demanded it.

  6. My bad experience with Nokia – ramineon 18 Dec 2010 at 5:13 am

    […] belittled the achievements of Apple’s first phone. It’s almost as if the company was disconnected from reality. Now the N900 is launched. Its app offering is still extremely poor. I was genuienly interested by […]

  7. golden rama touron 01 Aug 2015 at 2:22 pm

    golden rama tour

    Is Nokia in denial? | Economics in Plain English