Nokia's N8: Dawn of the "Swiss Army Knife" Cellphone Handset

The mobile market has looked to Apple (AAPL), Google (GOOG), RIM (RIMM), and Microsoft (MSFT) as trendsetters in what smartphones can do. With all that attention, it's easy to forget that Nokia (NOK) has been the world leading seller of smartphones. No longer. The newly announced Nokia N8 handset, with planned availability this summer, is a powerful combination of hardware and features that should leave the other companies nervous.

The N8 specs are striking in how much Nokia packed into a case that is shorter, thinner, and flatter than an iPhone:

• claimed maximum 7 hours of talk time or 390 hours of standby on quad-band GSM
• 12 megapixel camera sensor using Zeiss optics (a big deal if you know cameras) with xenon flash and a facing secondary VGA-resolution camera for video calls
• HDMI, Bluetooth, and USB 2.0 connectors
• Wi-Fi support for 802.11 b, g, and n (the latter being the fastest version and unusual in cell phones)
• HTML 4.1 browser with Flash Lite 4.0 to play most Flash 10.1 content
• ability to play H.264 720p HD video at 30 frames per second and record at 25 fps in either H.264 or MPEG-4
• on-demand web-based TV with such channels as CNN and National Geographic
• first phone to use the Symbian^3 OS touch interface
• GPS with free navigation for driving or walking
• compass, accelerometer, and proximity sensor
• 16GB internal memory with up to 32GB expansion via microSD card
• music playback and FM radio and transmitter, to send music to a radio in a car without Bluetooth support
• integrated Twitter and Facebook support, with automated photo and video sharing
• dedicated graphics processor with OpenGL 2.0 support for 3D gaming

In many areas, Nokia is catching up with other vendors. But when you look at the extras -- high capacity image sensor, faster Wi-Fi, FM transmitter -- the N8 goes beyond what competitors offer and, in doing so, breaks a fundamental barrier.

The consumer electronics industry has faced an old technology dichotomy. In IT circles, it's called best of breed versus integrated systems. Consumers, like companies, have long had to choose either really good category-specific products -- higher end still and video cameras, GPS systems, music players, and phones -- or combination devices with convenience but lesser features.

Nokia pushes the cellphone to a true convergence device. Most consumers could buy one and very possibly not want for anything else. For example, I was recently headed on a trip and had accidentally destroyed my old phone. (Oh, for a true wash-and-wear model.) I picked up an older unlocked Motorola with a 5 megapixel camera to carry just one piece of equipment in my pocket. With an N8, I could probably drop the GPS as well. Download apps and who knows what else goes out the window?

Ah, but the business implications are significant. There is a limit on what consumers will spend for a single electronics device. Various companies have shown that although some people will pay $500 or more for a phone, most prefer subsidized prices of less than half that amount. The more they fork over for the handset, and the richer the handset features, the less most consumers will spend on other devices that they perceive as no longer necessary. It's a question of perception. At what point do people see so little difference between best of breed and integrated offerings that they go with the latter? I think we're about there.

That creates pressure on the individual device manufacturers. (Check this post about some problems of GPS manufacturers by my colleague Damon Brown.) However, convergence also creates problems for the handset vendors. Competition has turned the smartphone into the electronic über Swiss Army knife. All the hardware and software is expensive for an industry where companies control product costs to fractions of a penny. Vendors must keep adding to the phone package, and yet there is a practical ceiling for what they can charge. Maybe that's one reason Apple just acquired another chip design company. The more you can fit on the silicon, the more you can control costs. Direct the chip design and you ensure that you have what you need.