The ignominious end of Nokia's handset hegemony

On Tuesday morning (Finnish time), Nokia announced that it was selling its handset business to Microsoft for €5.44b. The payment includes €3.79b for the division and €1.65b for a 10-year (non-exclusive) license to the Nokia patents necessary to operate that business. The deal is funded by Microsoft’s offshore profits that (as with most US-based multinationals) it has been unable to repatriate due to the US tax law.

A PDF published by Microsoft summarizes the deal:

• Microsoft acquires Nokia’s phone business
• Microsoft acquires Nokia’s Qualcomm, other key IP licenses
• Microsoft licenses Nokia’s patents for use across all Microsoft products
• Microsoft licenses ability to use Nokia HERE broadly in its products
• Nokia retains NSN [Nokia Siemens Networks], HERE, its CTO Office, and its patent portfolio
• Nokia and Microsoft cement original partnership with this deal before 2014 recommitment date

As a Microsoft shareholder, this seems like a final failed effort by Steve Ballmer to make big strategic moves to distract from the failure of his efforts to execute on the core businesses he inherited when becoming CEO in 2000.

Want proof? In the same PDF, Microsoft projects in 2018 an “assumed market share” of 15% for the Nokia (or Windows Phone) business. Microsoft hasn’t had 15% share since 2005, and its most recently quarterly share (like Nokia’s) was under 4%. As with all of Microsoft’s mobile strategy since then, the deal is more about hope than feasible strategies.

About the only good news is that the troubled Microsoft is acquiring the even-more-troubled Nokia for a song. Three years ago, Nokia’s handset division was grossing more than €6 billion per quarter; two years ago, Microsoft paid 20% more to buy Skype, a company without a business model.

Meanwhile, what about Nokia? Basically, its current and previous CEO have panicked as they have driven the company into the ground. Since the 2007 introduction of the iPhone, bought full control of Symbian Ltd. (and then killed it), switched from the once-dominant Symbian to the also-ran Windows platform, and now is exiting the business. All this from the company that was the world’s largest handset maker from 1998 until 2012.

The urgency of the deal for Nokia is evidenced by the key financial terms. Microsoft is “immediately” advancing Nokia €1.5b so it can keep the doors open until the deal closes — and Microsoft presumably assumes the salaries of 32,000 Nokia employees in the money-losing division.

It’s hard to see how losers buying losers (cheap) creates a winner. Yes, the mobile market is growing as Microsoft’s core business is dying. Yes, having a captive† handset manufacturer will justify keeping open the Windows Mobile division. But how will having a distant third place product with single-digit market share solve Microsoft’s numerous growth and profitability problems?

† Microsoft claims other licensees will continue, despite decades of failed licensing efforts by vertically integrated platform owners. Licensing didn’t work for Nokia with Symbian, didn’t work for Palm with Palm OS, didn’t work for Apple with Mac OS 8, and didn’t work for IBM with OS/2.

Time for Nokia to replace Microsoft?

An article from the Oct 19 edition of Talouselämä, a leading Finnish news magazine:

Tutkijat: Android toiseksi kärjeksi Nokialle

Talouselämä

19.10.2012 09:22päivitetty 19.10.2012 09:26

Nokian olisi otettava Microsoftin rinnalle tai sen sijaan parempi kumppani, kirjoittavat tutkijat Timo Seppälä ja Martin Kenneyperjantaina 19. lokakuuta ilmestyneen Talouselämä-lehden Tebatti-palstalla.

The Google and Microsoft translations are a bit iffy, but here are some excerpts:

Nokia should take into Microsoft alongside, or instead of a better partner, write the researchers Timo Seppälä and Martin Kenney on Friday the 19th October edition of the magazine Talouselämä Tebatti column.

Timo Seppälä is a subsidiary of Etlatieto Ltd, a researcher at Etla, and Martin Kenney, Professor at the University of California (Davis).

The following post is part of a larger BRIE-ETLA research project.

Apple's iPhone revolutionized the mobile use of the Internet. In response, Google developed the Android operating system and offered it to phone manufacturers for free use.

In the past five years has led to a situation where Apple, as well as Samsung and other Android phone manufacturers utilize dominate the smartphone market. Nokia's "burning platform" has shrunk Symbian to insignificance and Microsoft Windows is still the underdog role.
…
Early last year, however, Nokia chose Microsoft's Windows [as its] only smartphone [platform]. In poker terms Nokia played all in, when the hand was a pair of jacks. Microsoft has no immediate risk at all.

The translation (from Finnish from the original English) is a bit hard to follow, but basically tells Nokia (in its home town) that it would have been better either with Meego or Android, and encourages Nokia to drop Windows (or at least choose a second parallel platform) rather than stick it out "until death do us part."

Nokia: bad news without end

Like other CEOs of struggling companies, Stephen Elop has an unenviable job. He took over Nokia in 2010 when his predecessor had been unable to arrest the company’s decline.

Still, let’s not put too fine a point on it: Elop’s gamble to bet the company’s future on switching to the Windows Phone platform has been an absolute disaster.

In quarterly earnings announced Friday, the company lost €4 billion for the first 9 months of 2012 — nearly a billion of that in the 3rd quarter — versus €0.4 billion lost in the same period of 2011. This is not a one-time blip: here months ago, Nokia also lost money and announced massive layoffs.

Smartphone sales have been falling since 2010, but the major collapse came this year as the company phased out its Symbian handsets. AllAboutWindowsPhone.com (née AllAboutSymbian.com) published the damning chart:

Nokia has been more successful at killing Symbian — by starving new releases — than getting people to buy Windows Phones. In fact, as late as Q2, Nokia was still selling more Symbian than Windows phones.

The only uptick in smartphone sales in Q3 came because during Q3, the company has rebranded its S40 (now “Asha Touch”) as a “smartphone” platform. Whether or not the new classification is accurate, it doesn’t reduce in increased sales and highlights how far the company has fallen since its 2010 peak.

It seems like the assumptions behind the Windows bet were flawed. Nokia (or at least Elop) hoped that being the big fish in the Windows pond would be better than slugging it out in the Android market.

Yes, Nokia (at least for now) has the majority of WP sales, but that's not much. The assumption was that Windows Phone would be competitive with Android and iOS, but so far it isn’t. Q3 numbers won’t be out until next month, but in Q2 WP was #5 at 3.5%, after Android, iOS, BlackBerrry and Symbian. Meanwhile, the transition has been managed in such a way to kill its Symbian cash cow before the customers embraced its new products.

For years, Nokia was the world leader in both smartphones and handsets. Now Samsung is selling almost 3x as many Android smartphones as Nokia is selling for WP, Symbian and S40. If Nokia isn’t ready to compete with Samsung, maybe it should just close the handset business and focus on infrastructure.

More realistic is the advice from former Apple Europe president Jean-Louse Gasée: fire Elop and switch to Android. If Nokia’s board believed in accountability, they’d lower the axe after the end of the Christmas quarter, but more likely they’re going to limp along until they can no longer deny the reality of Elop’s failed platform strategy.

The importance of unlearning

Among academic research on knowledge, creativity and innovation in the 1980s and 1990s was a smaller body of research on forgetting (or unlearning). The importance of unlearning was one of those insights that seemed counter-intuitive at first, but over time the argument grew on me until I realized it captured an essential truth of organizational change.

Perhaps the most-cited article here is the 1986 article by CK Prahalad and Rich Bettis on the “dominant logic” — the idea that managers filter their environment (particularly opportunities) through a cognitive framework rooted in past results. A simpler way to put it is the old saying “When the only tool you have is a hammer, everything looks like a nail” (attributed to Maslow).

Two things happened Monday to link this idea to Microsoft, Windows Mobile and the company’s future role (if any) in the smartphone space. (Time spent in a steel tube prevented me from posting this earlier).

First, serial entrepreneur (and loyal blog reader) Doug Klein got an op-ed published in Forbes.com in which he comments on Microsoft’s trouble thus far transferring its desktop Windows quasi-monopoly to the handset. His first paragraph is punchy and to the point:

As a start-up focused on delivering services to the next generation mobile Internet devices, we are constantly amazed at the failure of Microsoft to repeat its Windows and Office success in the mobile world. And the problem is just that: Microsoft has a history of seeing all opportunities within the narrow definition of its existing world and past wins. Repeatedly they have seen new devices, for example, as simply "little PCs." This has led to a long litany of disappointments in handhelds that will repeat unless a new approach is realized. [emphasis mine]

Second, I spend all day Monday at a conference on platform strategies hosted by Annabelle Gawer of Imperial College in London (more on the conference later). The closing event was a panel discussion with four industry and six academic representatives (including yours truly).

After Annabelle asked the industry panelists how their platform strategies have changed, I jumped in with a question to the Intel and Microsoft representatives. I didn't have my laptop on the panel (and couldn’t have typed while saying the question), but roughly what I asked was “You have a dominant position in the desktop platform, but it hasn’t worked that way in the mobile space. What’s different?”

The Intel rep, Alberto Spinelli, said that the mobile ecosystem is more complex, in that Intel has to try to influence government bodies and standards committees. Also, the industry is facing a convergence of PC and communications — not just in technology but in business and industrial dynamics. (Later on, he also emphasized the technical aspects of success, such as their Atom microprocessor being introduced this week in Shanghai.)

The Microsoft rep was Simon Brown. These are my written notes of his answer:

“Rule #1, there’s no single playbook or rulebook. … It’s pretty clear there will never be another business like the Windows business.” He then added that the second best business is the Office business, so there won’t be anything close to these two.

Microsoft has been working for years on Windows Mobile, and it has been a highly iterative process. “You have to be prepared to unlearn a lot of things.” For example, Microsoft has to do things for handset makers it never did before [for PC makers] and thus has to learn to “rewrite our own rules”.

In the program, Simon was listed as “Vice President, Field Evangelism, Developer and Platform Group”. He took on these responsibilities for EMEA in 2003 and worldwide in 2007, so obviously he’s spent a lot of time thinking about ecosystem management. I thought he was one of the most insightful and articulate speakers on the panel, and the fellow academics that I talked to afterwards seemed to agree.

Ironically, a year ago I blogged on mobile phone platform fragmentation after a visit to Annabelle at Imperial. For “platform” I meant mobile phone operating systems such as Microsoft’s; on the hardware side, ARM-licensed processors have a near monopoly, a monopoly that Intel hopes will someday be its own.

If Microsoft hopes to consolidate the world around Windows Mobile, it has its work cut out for it. I don’t see anyone displacing Symbian in the global market, while in North America both the iPhone and Blackberry will continue to grow more quickly than Windows Mobile. Still, Simon’s answer suggested Microsoft has figured out that “same old, same old” won’t work.

This remind me of something Apple friend used to say. The challenge of competing with Microsoft was not their 1.0, which was almost always terrible — but if it was an important market, they had enough money and determination to keep iterating and making it better, until they eventually had a winning product. (Sorta like the Terminator, except that you get at least one chance to live.)

Sony Ericsson toys with the dark side

In conjunction with 3GSM (aka GSM World Congress aka Mobile World Congress), Microsoft announced Sunday that it has finally won Sony Ericsson over to its camp. Of course, Sony Ericsson still retains a significant financial stake in Symbian OS as the owner of UIQ Technology.

This got me to wondering about all the side bets being made by the major cell phone vendors. Below are the platform choices by the top 2007 mobile phone vendors; X is a major bet and † is something that (for now) looks like a side or limited bet.

Vendor	Share	Symbian	Windows	Linux
Nokia	38%	X		†
Samsung	14%	X		†
Motorola	14%	†	†	X
Sony Ericsson	9%	X	†
LG	7%	†		†

The 110 current Symbian cellphones far exceeds that of the 39 Windows Mobile phones. Linux can be used for smartphones and feature phones, but at least among smartphones the market share is (roughly)

• 62% Symbian S60 (inferring from Nokia smartphone sales)
• 15% Symbian UIQ and MOAP
• 13% Windows
• 11% RIM
• 4% Linux (estimated from 2006, 2007 Canalys data)
• 3% iPhone
• 2% other including Palm, proprietary OS

In contrasting the willingness of European vendors to partner with the Evil Empire, it would seem that Sony Ericsson wants to sell smartphones in North America and Nokia doesn’t.

Of the side bets, rumors have it that Motorola will make more Symbian UIQ phones using its acquisition of Sendo. And of course all the efforts to use Linux as a mobile phone platform are still early, and all of the vendors could have major Linux commitments if the OVA or LiMo catches on.

HP wants to make smartphones, too

Lost in all the noise of Apple’s intro, HPQ unveiled a passle of iPAQ PDAs on Wednesday. All run some derivative of Windows CE and have WiFi, but I think the segmentation is a little more clever than that. At the high end of the product line are two smartphones:

• the iPAQ 910 or 914 (910 is US): a GSM Windows Mobile 6 smartphone with a Blackberry-style keyboard.
• the iPAQ 610 or 614: ($600) a GSM Windows Mobile 6 smartphone with a 10-key pad.

They also have the iPAQ 310/314 ($450) which is like a portable GPS (with a 800x480 touch screen) running Windows CE 5.0. All three replace earlier models in these segments. Overall HP is targeting RIM and its Blackberry product line. However, HP badly trails both RIM and even struggling Palm in global PDA sales.

Microsoft has always wanted more impact on the US smartphone market, but it seems that their Windows Mobile sales leaned towards the carrier-branded (ODM-made) phones like the HTC 8525 even though Cingular also carries HP, Palm and Samsung WM phones. HP née Compaq is Microsoft’s best known licensee, so these new iPAQs have the potential to put portable Windows Media players into more hands than ever before. (Particularly if HP could someday leverage its PC distribution in Office Depot and Best Buy to sell smartphones).

Also on Wednesday, Microsoft quietly announced a price cut of its 30gb Zune MP3 player from $249 to $199. As Bloomberg reports:

Microsoft has sold more than a million Zunes since the player went on the market last November, less than 3 percent of Apple's iPod sales over the same period.

“If they're going to grow the Zune, they're going to have to offer a viable alternative to what Apple is offering,” said Michael Gartenberg, an analyst at JupiterResearch.

Microsoft, based in Redmond, Wash., held 3 percent of the portable digital player market in the six months ended in June, compared with Apple's 71 percent, according NPD Group Inc.

Clearly Microsoft’s greatest handheld success has been with business users, not consumers. Since HP was selling about 1.5 million iPAQs a year with its obsolete product line, its new family could easily outsell the Zune.

Technorati Tags: HP, mobile phones, smartphones, Windows

HP’s Cell Phone Entry: Déjà Vu All Over Again

At the 3GSM World Congress, HP has introduced the iPaq 500, a GSM/Edge smart phone using Windows Mobile 6. The Washington Post headlined this “HP Enters the Cell Phone Fray,” but I was sure I'd heard this song before. And I had — in 2004.

Why does HP keep entering the mobile phone market, a brutal commodity business that’s in the midst of a shakeout? Who do they think they are, Apple?

Not surprisingly, HP’s entire mobile phone strategy is drafting on Microsoft — because the iPaq division is one of the few parts that HP kept from Compaq, a slavish Microsoft loyalist. So while HP (California) is a big Linux fan — and might be tempted to dive into the more difficult task of making a Linux mobile phone — it makes a lot of sense for HP (Houston) to use an open innovation strategy until they figure out whether they stand a chance in this market.

Windows Mobile is part of Microsoft’s long-standing Windows Everywhere campaign that mainly appeals to large corporate IT managers, so it’s plausible for its major systems partners to support the full range of products. But then IBM was running a money-losing PC division under the same theory until they decided synergy was too expensive and outsourced the losses.

Technorati Tags: HP, mobile phones, open innovation, Windows Mobile