The mobile phone business is a giant free business-school education for everyone else. It is only 19 years old but it has managed to combine staggering success and remarkable disasters.
Two developments in the past week underline the ability of the industry to amplify traditional business errors and to discover new ones of its own.
The first of these is the Ericsson rights issue, announced yesterday. Ericsson has done a lot right in the past year. It has cut costs and - at last - started to produce attractive handsets. But its revenues have been falling faster than its costs.
That is a traditional problem in a weak market but at Ericsson it has happened on a heroic scale. Operating margin in the business has gone from a positive 4 per cent in the first quarter of 2001 to minus 9 per cent in the first quarter of this year.
Ericsson’s solution is to keep cutting costs and to raise SKr30bn (£2bn) through a rights issue. Here is the sales pitch it is offering investors to stump up the cash: “With the proposed rights offering, we will have the financial strength fully to leverage our strong competitive advantage. At the same time, we will also have a robust financial position with increased security if poor market conditions continue or deteriorate further.”
Roughly translated, the second sentence means: “Things are tough. If they get worse, at least we shall be able to pay our salaries out of the money we want you to give us.”
MBA students could pick up a few tips on bare-faced cheek from this. But the real chutzpah is in the fine print of the statement. This tells us the new rights issue will consist entirely of Ericsson’s B shares, which have only a thousandth of the voting power of the A shares.
For reasons rooted deep in Sweden’s industrial history, the main A-share owners are Investor, the holding company of the Wallenberg family, and Industrivarden, a holding company linked to Svenska Handelsbanken. Between them, they hold 7 per cent of the group’s capital but 67 per cent of the voting rights.
Control of a company through privileged shareholding confers a corresponding responsibility to get strategy right. If things go wrong and more money is needed,it is surely appropriate to couple this request with a surrender of those misused privileges - in this case, through full enfranchisement of the B-shareholders.
The second mobile phone development was buried in Nokia’s much more cheerful results last week. It is still making handsome profits and still gaining market share. But it has lost its tone of optimism about volume growth in mobile phones, at least in the short run. The market is now increasingly a replacement one. Last year was the first year since the introduction of the mobile phone when unit sales fell.
Against that background, take a look at how many mobile phone shops there are on your local high street. Then ask yourself whether the probable sales of handheld phones justify the infrastructure now available to sell and support them.
In the early years of the mobile phone boom, users needed lots of help to cope with their complicated new devices. More important, the networks were seeking to build market share as quickly as possible, so they were willing to pay a lot for distribution, blanketing the country with their own stores and subsidising the price users paid and the margins third-party retailers received. Inexperienced users, a need for a high degree of service and sales push, a hefty subsidy, a rapidly growing market: this recipe created millionaires from entrepreneurial retailers such as the Carphone Warehouse.
Now, given flat sales and a market increasingly dominated by replacements, the need for a cluster of mobile phone shops on every high street is unclear. As has happened in every other retail business when the product has become a commodity, such an expensive distribution system cannot be supported. In time, there will be drastic concentration, the emergence of “category-killer” dominant chains and the growing influence of a host of cheaper distribution channels, including direct sales by phone, mail order and the internet.
This is the inevitable fate of distribution systems that have outlived their initial economic rationale. But history shows that this process takes a long time. Although door-to-door daily milk distribution passed the economic point of no return several decades ago, it still survives in the UK and has only just disappeared in Canada. It took 60 years from the commercialisation of radio - and 80 years from the mass-marketing of the gramophone - for consumer electronics to migrate from high street specialists to edge-of-town electronics superstores.
The dynamic pattern of development in an industry is important in determining its future. Economists and investors alike tend to think of the world as one of unbounded choices, in which bygones are bygones and portfolios can be painlessly reshuffled at a moment’s notice. Investment bankers have developed the techniques to allow impatient chief executives to put this theoretical vision into practice.
But operating managers, workers, customers, competitors, suppliers - in short, the whole of the rest of the industry - do not react like that. Where we shall be tomorrow is usually much more powerfully influenced by where we were yesterday than we should like to admit.
So the ultimate lesson from the mobile phone business is that even in such a recent industry, traditional patterns become set surprisingly rigidly, surprisingly early. Successful business lies in recognising those inherited patterns and knowing when it is time to change them. Are Ericsson’s controlling shareholders listening?
