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A fire broke out on an oil rig in the North Sea in 1988, forcing a worker to choose between certain death in the flames or a less certain death if he jumped into the freezing sea. He jumped and was saved in a story that’s now become a favourite for authors of books about change management. The metaphor of the “burning platform” was also used by Stephen Elop to describe a major change at Finnish mobile giant Nokia, where he’s been CEO for less than six months.
Elop headed Microsoft’s business division before being brought in to replace Olli-Pekka Kallasvuo, who had been with Nokia since 1980 and served as CEO since 2006. Nokia is the world’s biggest manufacturer of mobile handsets and has been for some time. However, over recent years the market has changed fundamentally and Nokia shareholders didn’t believe the company was keeping up with that shift.
Elop was brought in and within four months announced the company had partnered with Microsoft to develop its next generation of smartphones based on the Windows Phone operating system. Nokia’s platform was burning, he said in a note to employees, and Microsoft represented the icy ocean he’d decided to jump into. Surviving the cold will rely on regaining relevance in a lucrative market.
The emergence of the smartphone – spearheaded first by BlackBerry and then by Apple – created a US$100bn segment in the mobile phone market. Apple rules the roost in terms of revenue, having sold 16,2m iPhones over the last quarter of 2010 alone, in which it generated total revenue of $26,7bn. Analysts say the iPhone accounts for almost half of that.
Nokia has been falling behind in terms of smartphones. While Apple was breaking records up to year-end 2010, Nokia’s smartphone market share over that period dropped to 27% from 36,6% the year before. And it’s causing sleepless nights for both Apple and Nokia as Google saw the market share for its Android operating system grow to 23% last year, up from less than 4% the year before.
Nokia’s platform – Symbian – really is burning. So it’s no surprise investors have changed tack. Paul Theron, CEO of South African asset management firm Vestact, used to bullishly hold Nokia in his company’s portfolio. “We sold out of Nokia late last year, switched to Apple,” he says. “We got tired of waiting for their iPhone killer.” However, Theron says Nokia still has great scale and market share and could well return to glory if its Microsoft bet pays off.
This view is echoed by Goldman Sachs, which changed its outlook on Nokia recently, shifting its coverage view to neutral. A Goldman Sachs research paper reported: “We believe Nokia is now in a period of maximum uncertainty, creating a long-term opportunity for value investors. In our view the new CEO’s decision to take Nokia back to its hardware-orientated roots as the industry rapidly commoditises is appropriate and creates the potential for €1bn or more in cost reduction. Visibility is low on Nokia’s market share potential with Microsoft, but we estimate the stock is pricing in a near halving of handset value market share to 10% and only 3% long-term EBIT margins, which appears excessive. We think there’s a floor to Nokia’s share declines and expect high single-digit ‘recovery’ handset EBIT margins, creating a turnaround opportunity.”
At the core of Nokia’s current woes is the reality that it’s lost relevance, as has Microsoft. Windows on mobile phones occupies less than 5% of the market and Windows Phone 7 hasn’t enjoyed much uptake since finally launching late last year.
So Microsoft and Nokia are in similar boats. Both were market leaders before falling behind in new segments. Both need a way to take the fight to the new kids on the block. And they might have found the answer in each other.
But not everyone believes so. The day before the Nokia announcement, Google senior vice-president Vic Gundotra posted this on Twitter: “Two turkeys don’t make an eagle.”
Nokia had also spoken to Google but had sided with Microsoft.
Stephen Elop, @selop on Twitter, responded with: “Or this: ‘Two bicycle makers from Dayton, Ohio, one day decided to fly’.” In reference to the Wright brothers: Elop is a pilot.
I met the new Nokia CEO in Dubai in March to discuss his turnaround strategy. An eloquent and confident Elop explained the battle against mobile ecosystems that threaten Microsoft would take precedence over Nokia’s fight against rival handset manufacturers as such, over the short term anyway.
“First of all, the highest order point of differentiation we need to focus on is Windows Phone versus Android versus Apple,” he said. “So our number one competitor isn’t a Samsung or an HTC or whatever – it’s Android.”
Elop is focusing Nokia’s resources on strengthening Windows Phone, which includes contributing services such as Nokia’s Ovi Maps and content store to the Microsoft platform in a move that will also bolster the operating system for other manufacturers. “We have to take steps to ensure the Windows Phone ecosystem is very strong and very powerful. So we’ll take steps to make sure that whether it’s us or even our competitors within Windows Phone, all should have access to some of the best technologies.
“That being said, we have a number of different areas – be it in services, in hardware and in software – that we can and will contribute to our efforts to ensure we can differentiate. So while mapping and navigation and location-based services are things crucial in the ecosystem, we’ll also make sure we do unique and differentiated things on our devices within that ecosystem so that we work to stand apart from everybody else,” Elop said. “But again I emphasise: our principle competition is Android.”
The Microsoft partnership also opens up new revenue streams for Nokia. A new advertising platform is being assembled for various Microsoft services, including its Bing Maps and Xbox Live stables. All that advertising content will be served in conjunction with Nokia and create a new revenue stream for the company that Elop believes will bolster it considerably.
But without coaxing mobile application developers to its platform, Microsoft and Nokia will fail over the long term. And that’s where Apple and Google have made inroads. Smartphones are only as good as the application stack they offer users. Nokia’s Ovi Store has come a long way and Microsoft benefits from being able to offer familiar development tools to programmers who have worked with Windows. However, Apple still preoccupies most mobile developers and those who aren’t developing for iOS are developing for Android.
Developers are also dropping Nokia’s other operating systems – its traditional Symbian, which remains the predominant mobile phone platform, and MeeGo, that it’s been developing with Intel. Despite assurances those platforms aren’t dead, developers I’ve spoken to find it hard to believe Symbian and MeeGo will be worth supporting over the medium to long term.
Of course, Elop is aware of the importance of developers and believes Nokia still has a lot to offer them with its other platforms. “I think the best message for a developer to embrace, if you like, is to look closely at the strength Nokia has and what we bring to the market as it relates to Symbian today and in the months and years ahead, because Symbian still has a large role to play even as we transition and focus on other things in the future.
“There’s a wide range of markets where Nokia the brand and Symbian the platform are remarkably strong. And as we’ve described, we expect tens of millions of [Symbian] devices still to ship in the months and years ahead. There’s a tremendous opportunity there for developers, because when you look at the absolute scale of the operation you say ‘wow, there’s something really there’. And so we’re definitely encouraging developers to continue with that, while also recognising we hope to create a new opportunity around Windows Phone in the future.” Keeping developers interested in Symbian is only one piece of the puzzle, of course. Nokia and Microsoft need developers to be moving to Windows Phone. That’s where Nokia brings Microsoft what it needed: a manufacturer committed to pushing millions of devices into the market and bringing scale to the platform.
“When you look at it from a developer perspective, there’s actually a range of things you consider: does it have breadth, are there lots of people using Windows Phone devices? Well, not today. But clearly with the relationship between Nokia and Microsoft we believe there will be quickly tens of millions of people who are using these devices.”
Nokia also brings some solutions that will allow Windows Phone to differentiate. For example, it’s worked hard on operator billing that allows users to bill applications bought to their mobile phone account.
“There needs to be great monetisation for the developers,” said Elop. “Nokia brings operator billing with more operators in more countries and regions around the world than anyone else by far and that we’ll bring to the ecosystem for general use. Developers need great tools. They need a solid development platform. Clearly, that’s part of it already in terms of what Microsoft brings to the table. And then of course developers need the support from vendors, such as Nokia. For example, here in Dubai today we’re talking about what we can do with developers to help them build local applications and local capability.”
The local approach is something Nokia preaches and Microsoft could use more of. The one flaw in Apple and Google’s strategies is that it’s very United States-centric. Microsoft has had the same problem. Meanwhile, Nokia has been working hard to stimulate the creation of localised content and applications. “Local content, local applications, local services – those are hugely important to our efforts to differentiate. And indeed the strength of the Nokia brand in emerging markets and Africa and other places is largely because we’ve delivered more than anyone else on the promise of a great experience that makes sense within your local environment.
“And while other ecosystems and players churn out devices at a furious rate we’re far more focused on making sure you have a great experience that connects you. You know our overall statement about the company – ‘connecting people’ – [that means] connecting people with their community, with the environment in which they operate, with opportunity. That’s what Nokia is focused on.”
Elop said there’s also opportunity for Nokia to grow and diversify what it offers. We’ve seen it experiment with products such as the Booklet 3G laptop in the past, and speculation is Nokia will eventually have to join the tablet computing market. Elop isn’t in complete agreement and doesn’t want Nokia to be just another tablet vendor. “We’re building and contributing to this ecosystem in the belief the opportunity is much larger than that…
“There’s a much larger opportunity. The challenge I have for our team is to make sure that, as we enter adjacent markets, we have a unique and differentiated position. Today you can go and buy one of 150 or 180 – I’ve lost count – different tablets out there that, frankly, you can’t tell apart. And most of them aren’t particularly useful for much. But Nokia has to look at itself, its market opportunity, the strength of its ecosystem, the geographies where it has strength, and say: What can we do that sets us apart and goes after a unique opportunity? We have some specific ideas but we’re not announcing anything yet.
“It’s not just about tablets: there are other devices, platforms, things that can be done, that take advantage of the ecosystem and contribute to the ecosystem. And those are places where you may see us play in the future.”
Investors now like Elop’s talk, after having taken rash action when the Microsoft news originally broke. Sources inside Nokia say the initial hit on the stock went beyond even their worst expectations. Having now articulated the finer details of the agreement with Microsoft, things are improving.
However, not everyone is convinced. Noted telecommunications analyst John Strand, of Strand Consulting, says Nokia should have stuck it out with Symbian. “Their main problem was communication. Nokia had no self-confidence,” Strand says. “The company sold more smartphones last year than Apple and Android combined. But they behave like a loser.”
Strand says the decision to move away from Symbian was premature. “Symbian is probably the best smartphone operating system in the market today. Interface aside, it really is very good. I’m not saying Nokia didn’t have problems – it was a sick patient – but there were things that could have been done to save it without a move like this.”
The crux of the matter for Strand is Nokia’s ability to deliver. He says previously its Achilles heel was that it was too slow to adapt to the market and deliver the devices to keep it in the game. “Now they have Windows Phone – but the same people will be delivering the devices. So why should it be any different?”
By this time next year we should know the answer to that question. Elop said that Nokia will have its first Windows Phone device in the market before year-end 2011. He also sees new revenue entering the company from other channels, thanks to its relationship with Microsoft.
The mistake is to consider that all in terms of just hardware. It should be clear as day there’s far more to the equation than that.
Elop headed Microsoft’s business division before being brought in to replace Olli-Pekka Kallasvuo, who had been with Nokia since 1980 and served as CEO since 2006. Nokia is the world’s biggest manufacturer of mobile handsets and has been for some time. However, over recent years the market has changed fundamentally and Nokia shareholders didn’t believe the company was keeping up with that shift.
Elop was brought in and within four months announced the company had partnered with Microsoft to develop its next generation of smartphones based on the Windows Phone operating system. Nokia’s platform was burning, he said in a note to employees, and Microsoft represented the icy ocean he’d decided to jump into. Surviving the cold will rely on regaining relevance in a lucrative market.
The emergence of the smartphone – spearheaded first by BlackBerry and then by Apple – created a US$100bn segment in the mobile phone market. Apple rules the roost in terms of revenue, having sold 16,2m iPhones over the last quarter of 2010 alone, in which it generated total revenue of $26,7bn. Analysts say the iPhone accounts for almost half of that.
Nokia has been falling behind in terms of smartphones. While Apple was breaking records up to year-end 2010, Nokia’s smartphone market share over that period dropped to 27% from 36,6% the year before. And it’s causing sleepless nights for both Apple and Nokia as Google saw the market share for its Android operating system grow to 23% last year, up from less than 4% the year before.
Nokia’s platform – Symbian – really is burning. So it’s no surprise investors have changed tack. Paul Theron, CEO of South African asset management firm Vestact, used to bullishly hold Nokia in his company’s portfolio. “We sold out of Nokia late last year, switched to Apple,” he says. “We got tired of waiting for their iPhone killer.” However, Theron says Nokia still has great scale and market share and could well return to glory if its Microsoft bet pays off.
This view is echoed by Goldman Sachs, which changed its outlook on Nokia recently, shifting its coverage view to neutral. A Goldman Sachs research paper reported: “We believe Nokia is now in a period of maximum uncertainty, creating a long-term opportunity for value investors. In our view the new CEO’s decision to take Nokia back to its hardware-orientated roots as the industry rapidly commoditises is appropriate and creates the potential for €1bn or more in cost reduction. Visibility is low on Nokia’s market share potential with Microsoft, but we estimate the stock is pricing in a near halving of handset value market share to 10% and only 3% long-term EBIT margins, which appears excessive. We think there’s a floor to Nokia’s share declines and expect high single-digit ‘recovery’ handset EBIT margins, creating a turnaround opportunity.”
At the core of Nokia’s current woes is the reality that it’s lost relevance, as has Microsoft. Windows on mobile phones occupies less than 5% of the market and Windows Phone 7 hasn’t enjoyed much uptake since finally launching late last year.
So Microsoft and Nokia are in similar boats. Both were market leaders before falling behind in new segments. Both need a way to take the fight to the new kids on the block. And they might have found the answer in each other.
But not everyone believes so. The day before the Nokia announcement, Google senior vice-president Vic Gundotra posted this on Twitter: “Two turkeys don’t make an eagle.”
Nokia had also spoken to Google but had sided with Microsoft.
Stephen Elop, @selop on Twitter, responded with: “Or this: ‘Two bicycle makers from Dayton, Ohio, one day decided to fly’.” In reference to the Wright brothers: Elop is a pilot.
I met the new Nokia CEO in Dubai in March to discuss his turnaround strategy. An eloquent and confident Elop explained the battle against mobile ecosystems that threaten Microsoft would take precedence over Nokia’s fight against rival handset manufacturers as such, over the short term anyway.
“First of all, the highest order point of differentiation we need to focus on is Windows Phone versus Android versus Apple,” he said. “So our number one competitor isn’t a Samsung or an HTC or whatever – it’s Android.”
Elop is focusing Nokia’s resources on strengthening Windows Phone, which includes contributing services such as Nokia’s Ovi Maps and content store to the Microsoft platform in a move that will also bolster the operating system for other manufacturers. “We have to take steps to ensure the Windows Phone ecosystem is very strong and very powerful. So we’ll take steps to make sure that whether it’s us or even our competitors within Windows Phone, all should have access to some of the best technologies.
“That being said, we have a number of different areas – be it in services, in hardware and in software – that we can and will contribute to our efforts to ensure we can differentiate. So while mapping and navigation and location-based services are things crucial in the ecosystem, we’ll also make sure we do unique and differentiated things on our devices within that ecosystem so that we work to stand apart from everybody else,” Elop said. “But again I emphasise: our principle competition is Android.”
The Microsoft partnership also opens up new revenue streams for Nokia. A new advertising platform is being assembled for various Microsoft services, including its Bing Maps and Xbox Live stables. All that advertising content will be served in conjunction with Nokia and create a new revenue stream for the company that Elop believes will bolster it considerably.
But without coaxing mobile application developers to its platform, Microsoft and Nokia will fail over the long term. And that’s where Apple and Google have made inroads. Smartphones are only as good as the application stack they offer users. Nokia’s Ovi Store has come a long way and Microsoft benefits from being able to offer familiar development tools to programmers who have worked with Windows. However, Apple still preoccupies most mobile developers and those who aren’t developing for iOS are developing for Android.
Developers are also dropping Nokia’s other operating systems – its traditional Symbian, which remains the predominant mobile phone platform, and MeeGo, that it’s been developing with Intel. Despite assurances those platforms aren’t dead, developers I’ve spoken to find it hard to believe Symbian and MeeGo will be worth supporting over the medium to long term.
Of course, Elop is aware of the importance of developers and believes Nokia still has a lot to offer them with its other platforms. “I think the best message for a developer to embrace, if you like, is to look closely at the strength Nokia has and what we bring to the market as it relates to Symbian today and in the months and years ahead, because Symbian still has a large role to play even as we transition and focus on other things in the future.
“There’s a wide range of markets where Nokia the brand and Symbian the platform are remarkably strong. And as we’ve described, we expect tens of millions of [Symbian] devices still to ship in the months and years ahead. There’s a tremendous opportunity there for developers, because when you look at the absolute scale of the operation you say ‘wow, there’s something really there’. And so we’re definitely encouraging developers to continue with that, while also recognising we hope to create a new opportunity around Windows Phone in the future.” Keeping developers interested in Symbian is only one piece of the puzzle, of course. Nokia and Microsoft need developers to be moving to Windows Phone. That’s where Nokia brings Microsoft what it needed: a manufacturer committed to pushing millions of devices into the market and bringing scale to the platform.
“When you look at it from a developer perspective, there’s actually a range of things you consider: does it have breadth, are there lots of people using Windows Phone devices? Well, not today. But clearly with the relationship between Nokia and Microsoft we believe there will be quickly tens of millions of people who are using these devices.”
Nokia also brings some solutions that will allow Windows Phone to differentiate. For example, it’s worked hard on operator billing that allows users to bill applications bought to their mobile phone account.
“There needs to be great monetisation for the developers,” said Elop. “Nokia brings operator billing with more operators in more countries and regions around the world than anyone else by far and that we’ll bring to the ecosystem for general use. Developers need great tools. They need a solid development platform. Clearly, that’s part of it already in terms of what Microsoft brings to the table. And then of course developers need the support from vendors, such as Nokia. For example, here in Dubai today we’re talking about what we can do with developers to help them build local applications and local capability.”
The local approach is something Nokia preaches and Microsoft could use more of. The one flaw in Apple and Google’s strategies is that it’s very United States-centric. Microsoft has had the same problem. Meanwhile, Nokia has been working hard to stimulate the creation of localised content and applications. “Local content, local applications, local services – those are hugely important to our efforts to differentiate. And indeed the strength of the Nokia brand in emerging markets and Africa and other places is largely because we’ve delivered more than anyone else on the promise of a great experience that makes sense within your local environment.
“And while other ecosystems and players churn out devices at a furious rate we’re far more focused on making sure you have a great experience that connects you. You know our overall statement about the company – ‘connecting people’ – [that means] connecting people with their community, with the environment in which they operate, with opportunity. That’s what Nokia is focused on.”
Elop said there’s also opportunity for Nokia to grow and diversify what it offers. We’ve seen it experiment with products such as the Booklet 3G laptop in the past, and speculation is Nokia will eventually have to join the tablet computing market. Elop isn’t in complete agreement and doesn’t want Nokia to be just another tablet vendor. “We’re building and contributing to this ecosystem in the belief the opportunity is much larger than that…
“There’s a much larger opportunity. The challenge I have for our team is to make sure that, as we enter adjacent markets, we have a unique and differentiated position. Today you can go and buy one of 150 or 180 – I’ve lost count – different tablets out there that, frankly, you can’t tell apart. And most of them aren’t particularly useful for much. But Nokia has to look at itself, its market opportunity, the strength of its ecosystem, the geographies where it has strength, and say: What can we do that sets us apart and goes after a unique opportunity? We have some specific ideas but we’re not announcing anything yet.
“It’s not just about tablets: there are other devices, platforms, things that can be done, that take advantage of the ecosystem and contribute to the ecosystem. And those are places where you may see us play in the future.”
Investors now like Elop’s talk, after having taken rash action when the Microsoft news originally broke. Sources inside Nokia say the initial hit on the stock went beyond even their worst expectations. Having now articulated the finer details of the agreement with Microsoft, things are improving.
However, not everyone is convinced. Noted telecommunications analyst John Strand, of Strand Consulting, says Nokia should have stuck it out with Symbian. “Their main problem was communication. Nokia had no self-confidence,” Strand says. “The company sold more smartphones last year than Apple and Android combined. But they behave like a loser.”
Strand says the decision to move away from Symbian was premature. “Symbian is probably the best smartphone operating system in the market today. Interface aside, it really is very good. I’m not saying Nokia didn’t have problems – it was a sick patient – but there were things that could have been done to save it without a move like this.”
The crux of the matter for Strand is Nokia’s ability to deliver. He says previously its Achilles heel was that it was too slow to adapt to the market and deliver the devices to keep it in the game. “Now they have Windows Phone – but the same people will be delivering the devices. So why should it be any different?”
By this time next year we should know the answer to that question. Elop said that Nokia will have its first Windows Phone device in the market before year-end 2011. He also sees new revenue entering the company from other channels, thanks to its relationship with Microsoft.
The mistake is to consider that all in terms of just hardware. It should be clear as day there’s far more to the equation than that.
