The creative destruction process

There are companies and companies. While most are mere business enterprises, a small number develop into symbols of nationhood and become sources of national pride. Nokia is an example of the latter and therefore it’s entirely natural that Microsoft’s $7.2-billion acquisition of its mobile phone business has triggered a wave of nationalist sentiment in Finland. The feeling is not entirely dissimilar to what transpired when Sony took over Columbia Pictures and CBS Records in the US or when Coca-Cola bought out Ramesh Chauhan’s home-grown Thums Up/Gold Spot soft drink brands. But the Microsoft-Nokia deal signals much more than the fact that dog-eat-dog capitalism doesn’t respect borders. It is emblematic of the fickleness of technology and the forces of ‘creative destruction’ — a term coined by the legendary economist Joseph Schumpeter in the early 1940s that is particularly apt when applied to developments in the mobile phone industry over the last decade.

Until 2008, Nokia had an almost 40 per cent share of the global mobile handset market (this was well above 50 per cent in India up to 2009). The change began happening in 2007 with the launch of Apple’s iPhone, which transformed the mobile phone into a pocket PC. Users could make and receive calls, browse the web, listen to music, watch movies and access a host of downloadable applications by just touching a screen. The first casualty was Motorola’s mobile division, which lost its No. 2 slot behind Nokia till 2006 and ended up being consumed by Google in early 2012. As for Nokia, its fall was speeded up with the growing popularity of Google’s Android operating system, which emerged as an open platform for a clutch of handset makers to manufacture smartphones. This wave saw Samsung overtaking both Nokia and Apple in the smart phone segment worldwide; in India, Nokia lost out to local players as well such as Micromax which, apart from producing cheap smartphones, also saw the potential of double-SIM models.

Nokia’s fall is a product of complacency and an inability to respond to a rapidly changing marketplace. Such failures are much more costly in the mobile computing business than in traditional sectors such as cement, steel or rice milling, where production technologies have either stabilised or are subject to incremental innovations. For consumers, ‘creative destruction’ is always welcome; without it, capitalism loses its inherent vitality and degenerates into monopoly exploitation. If Microsoft’s acquisition of Nokia — which is still No. 2 in overall handset sales — can give a leg-up to the former’s Windows Phone 8 operating system, the smartphone market will benefit. An effective third mobile operating system, in addition to the current duopoly of Android and Apple’s iOS, will hasten the transition to smartphones. These instruments account for just six per cent of handset sales in India. This is a figure that needs to rise in order to promote mass Internet access, something a phone is better placed to do than tablets and PCs.

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