In a recent interview with CNBC, Finnish Prime Minister Alexander Stubb blamed Apple for the demise of the Finnish economy’s two most prominent industries, which in turn led to an economic downturn and a ratings downgrade for the country: "A little bit paradoxically I guess one could say that the iPhone killed Nokia and the iPad killed the Finnish paper industry.” While the Finnish forest industry is likely to rebound – as Stubb quickly noted – Nokia seems to have lost not only its mobile device unit, which was sold to Microsoft in April 2014 for $7.5 billion, but also its mobile Nokia brand. Microsoft has officially announced its decision to discontinue the Nokia branding on smartphones, replacing it with the name Microsoft Lumia. Although the Nokia name will no longer be used for smartphones, low-end devices will still be sold under the Nokia brand, which maintains some cachet in Europe and developing markets.
A closer look at the Nokia brand in light of Microsoft’s decision reveals a fast devaluation, the likes of which have rarely been seen in the consumer space. After being ranked fifth on the 2007 World’s Most Valuable Brands list, compiled by brand consulting firm InterBrand, with an estimated $33.7 billion brand valuation, Nokia dropped to 98th in 2014, with a brand value of slightly over $4 billion – a staggering 90% decline in value in just seven years. A review of the InterBrand list reveals that of the 2007 top 10 brands, most have stayed fairly consistently in the top 10, while others have stayed close to the top 10. Regardless of their placement on the list, all of the 2007 top 10 increased in value between 2007 and 2014, with the exception of Nokia – as shown in the table below.
The world's most valuable brands: 2007 versus 2014
David Aaker of the Haas School of Business at University of California Berkeley, who is considered to be the father of modern branding strategy, has defined 'brands' as a “vital form of corporate equity, a measurable asset whose value is as important to a business as its capital infrastructure and staff”. While a brand name is not the only attribute guiding product choices, it is certainly considered central enough that Microsoft went through the trouble of rebranding the Nokia smartphones. What lessons can we learn from Nokia regarding the factors that affect brand valuation in the marketplace? Below are several observations related to brand values that could shed some light on Microsoft’s decision.
Brands drive their value from underlying products
Brands drive sales of products, while product sales – in return – strengthen the value of the brand. That said, products can still sell without strong brands, but no strong brands exist without products. Nokia’s brand value is tightly correlated to its decline in market share: its mobile phone business has been through a steep decline since the introduction of the iPhone in 2007. A once formidable player which had more than 40% of the world’s mobile phone market at its peak in 2007, Nokia saw its market share erode quickly to less than 5% by 2014, losing ground first to Apple and later on to Samsung and other Android handset makers.
Global smartphone market share 2008-2013
Interestingly enough, both Apple and Samsung have entered the InterBrand top 10 list since 2007, with Apple placing first with a brand value of $119 billion and Samsung placing seventh with $46 billion in 2014. The Microsoft brand itself is currently valued at more than $60 billion, so it is reasonable to assume that it could carry much higher smartphone sales than the Nokia brand currently would.
Brands need constant nurturing to maintain and grow their value
While Nokia invested heavily in R&D over the years and is credited with building the first mobile phone in the mid-1990s, creating a valuable patent portfolio along the way, it has reportedly lacked on the marketing side. A 2013 New Yorker article, recounting the Nokia sale to Microsoft, stated: “Nokia overestimated the strength of its brand, and believed that even if it was late to the smartphone game it would be able to catch up quickly.” The article went on to explain: “Nokia also failed to recognize that brands today aren’t as resilient as they once were. The high-tech era has taught people to expect constant innovation; when companies fall behind, consumers are quick to punish them.“
That is an interesting observation, given the brands in the InterBrand top 10 which survived until 2014. Spread across several industries such as automotive (Toyota, Mercedes-Benz), food and beverage (Coca-Cola, McDonald’s) and entertainment (Disney), all of these companies have one thing in common: they all invest significant amounts of money annually in marketing, maintaining and constantly evolving their brand identity, sometimes across multiple products. Most of the companies ranked as top 10 brands for 2014 were also listed in the Advertising Age top 25 list of advertisers for 2013, including:
- McDonald’s at $957 million (ninth on the brand list);
- Toyota at $879 million (eighth on the brand list); and
- Samsung for $597 million (seventh on the brand list).
About 40% of brands get discontinued in post-M&A integration
A 2006 Massachusetts Institute of Technology-Sloan study on post-merger branding strategy, which covered more than 200 acquisitions larger than $250 million carried out from 1995 to 2005, revealed that 40% of the companies followed a strategy called 'backing the stronger horse'. This strategy is based on the combined entity adopting the name and symbol of the lead company (the buyer). Notable examples of that strategy include DHL’s acquisition of Airborne Express and Verizon’s acquisition of MCI. The advantage of this approach lies in its simplicity: the merger is positioned as an upgrade for the employees and customers of the less prestigious brand.
'Backing the stronger horse' is the most common approach among several possible post-merger branding options, which include adopting the target’s brand, creating some combination of the two or creating an entirely new brand. It highlights the benefits of scale from adopting one unified and well-known identity for the merged entity. In the case of Microsoft, the choice was obvious since it was the stronger of the two brands. However, the decision to drop the target’s brand does not always go smoothly, as can be concluded from the board dispute at HP related to the post-acquisition discontinuation of the Compaq brand, then estimated at $25 billion. It was eventually decided to continue using the brand for limited retail purposes.
The Microsoft branding decision follows in the footsteps of 40% of M&A deals in choosing the stronger brand of the buyer, with the hope of driving higher smartphone sales. The Nokia brand suffered from declining product sales and did not compete well against the Samsung and Apple brands, both with a higher InterBrand value score and significant marketing spending to sustain their brands. Microsoft selected the stronger brand to try to reverse that trend. It remains to be seen how well the Microsoft Lumia phones sell in the marketplace and whether Microsoft has backed the right horse.
For further information please contact:
Foresight Valuation Group LLC
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This is a co-published article whose content has not been commissioned or written by the IAM editorial team, but which has been proofed and edited to run in accordance with the IAM style guide.