Out of Context

Nokia’s Maps Buy Made Sense at the Time

The future of Here is under question following the announcement that its visionary leader, Michael Halbherr, will be leaving soon.

In late 2007 Nokia’s overall handset market share was almost 40 percent, an enviable position for a company in any industry. But more notably, Nokia had an even stronger standing in the fast-growing smartphone market, selling two out of every three smartphones globally. Although total smartphone sales were only 125 million — about a tenth of what they are now — Nokia had every expectation that it would grow its share in-line with the market. Companies rarely plan on losing market share. If Nokia had maintained its smartphone share from 2007, the company would now be selling more than half a billion smartphones a year.

It’s easy to speak in theoretical terms now, but this does help frame the decision-making environment for Nokia executives at the time. The numbers were very different in those days. There were no Android phones, and the iPhone was only available in a few countries.

Nokia was in a dominant position that enabled it to support the development and maintenance of its own software assets such as a mobile operating system (Symbian with S60) and a wide set of Internet services (Ovi).

Marginal costs had come down to a point where every Nokia smartphone could be GPS-enabled and thus become a personal navigation device. By some metrics, Nokia was already the world’s largest camera brand and the world’s largest maker of MP3 devices. Thanks to convergence, Nokia had a chance to lead the market for personal navigation devices and the opportunities related to contextual usage. Location-based advertising, friend-finding services and user reviews could all be layered on top of maps. But the cost of leasing the maps for hundreds of millions of devices would add up. At the time, there was a duopoly for licensable digital map data: Navteq and Tele Atlas.

In October of 2007, Nokia agreed to pay $8.1 billion for Navteq, Nokia’s largest acquisition ever. It was a huge investment, but it was difficult to argue against the symbiosis of the two. Navteq would eventually be merged internally with other Nokia location-related units to form the division that would become Here.

Given the price tag for Navteq and the outlay on other geolocation businesses such as gate5 and Plazes, it’s easy to estimate of the sunk costs of Here. However, the real costs of Here and Navteq to Nokia are the opportunity costs. The fact that Nokia owned this huge location asset essentially precluded it from adopting Android, even as Symbian’s market share plummeted. Google already had its own map data and its own navigation and location-based services. The greatest value Nokia could have added on top of Android would have been its Navteq maps and points of interest, but they would have been redundant next to Google Maps for mobile, which was getting better by the day.

To Nokia executives, the company’s high-value location assets must have appeared to be a perfect strategic complement to Windows Phone, and thus guided Nokia away from Android and toward Microsoft. In fairness, it was sound thinking: Microsoft lacked maps; Nokia had maps.

Owning Navteq certainly influenced Nokia’s decision-making. With the benefit of hindsight and some conjecture, many believe Nokia would have been better off making Android-based devices. It could be argued that this might have prevented a market capitalisation loss of $10 billion or even more. While the final opportunity costs to Nokia of the Navteq acquisition will never be known, the success of Samsung’s Android-based smartphones and the consequential boost to the company’s value are stinging reminders to Nokia’s investors of what might have been. But that was the road not taken.

Revenue from Here has been essentially flat as Nokia’s share of the smartphone market fell faster than Here was able to build up its other areas of business. The market valuations of small location service start-ups like Airbnb, Lyft and Uber appears to leave the worth of Nokia’s mapping assets far behind. There is little remaining synergy between Here and the other two units of Nokia. Here’s current strategy doesn’t suggest that Nokia can build the unit’s value to multi-billion dollar levels over the next few years, meaning Here could miss out on the current market excitement for contextual services.

Nonetheless, Here still has a fantastic market position. It has about 80 percent of the in-car navigation market, and has several reliable customers such as Microsoft and Garmin. It has become the “anti-Google” maps service for Web players such as Amazon, Yandex and Yahoo. But the competitive environment is changing fast. There is a huge level of investment needed over many years to maintain its claimed superiority in mapping data, and realise its ambition for supporting driverless cars, for which much more-detailed mapping is required.

Nokia executives would be wise to recall the disruption of Android to Symbian when evaluating OpenStreetMap, the crowd-sourced map data project. If Nokia is unable or unwilling to commit to sustained high levels of investment, it should sell or spin off Here while it has market share, value and opportunity. Telematics and in-car devices are growth areas, but the rush is on. Perhaps some carmakers could pool their resources to snatch assets that might be lost to Google or Apple. Perhaps some Internet player needs the talent and data that Here has assembled around the globe. Here is still in a good position, but relative to other providers, it appears to be far from where it could be in attracting consumers’ and the market’s interest.