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Technology | Strategy | Consulting

Connecting People … with Nokia

In the book of corporate history, the summer of 2010 will be remembered as a deadly summer for mobile phone CEOs. Just a few weeks apart three CEOs - LG, HP and Nokia - have been asked to leave by their respective board of directors. Of the three, perhaps Nokia's story is the most interesting.

Last Week’s Executive Musical Chair Game

After months of rumors, the Nokia Board of Directors on September 10, finally appointed Stephen Elop as the President and Chief Executive Officer of Nokia, to replace Olli-Pekka Kallasvuo. OPK, who took the job four years prior, will continue to be Chairman of the board for Nokia Siemens Networks (the joint venture between Nokia and Siemens AG).

As the first non-Finnish CEO in Nokia’s 139-year history, the Canadian Elop was previously the head of Microsoft's Business Division and had held several senior executive tenures in various US-based public companies, such as Juniper Networks, Adobe Systems Inc. and Macromedia Inc.

Three days later on September 13, Anssi Vanjoki, Nokia's EVP of the Mobile Solutions unit and long time considered as the next-in-line CEO, gave his six months’ notice. Not being selected for the top job the second time around was the main reason for his departure.

The next day on September 14, the Nokia Chairman and previous CEO, Jorma Ollila confirmed [WSJ] that he plans to step down in 2012. During his 14 years as CEO, Ollila transformed the Finnish engineering giant into the world's largest mobile phone manufacturer and one of the few non-US technology companies with a truly global footprint on handsets.

This recent executive management shuffle has not managed to curtail the fall in Nokia’s share price. Some US financial analysts have now downgraded Nokia stocks (NOK) from Hold to Sell, arguing that they are "concerned over near-term dynamics given the lack of compelling high-end solutions."

Though Nokia announced three new high-end smartphone models (C6, C7, E7) at the Nokia World 2010 conference in London, the press still focused more on the possible delay of Nokia’ iPhone competitor, the N8 (since then refuted by the Finish company). The new "Nokia is back" tagline has been lost in translation and the company has seen its share price slipping away from its best days pre-economic crisis.

Under the PR Hood, Nokia’s Reality

So if you read the press, Nokia with its entire senior management exodus, its lack of offering in the smartphone category, and its depleting single-digit market share in the US, is a company on the verge of implosion.

According to the same press coverage (US based majority), Nokia’s latest move to an external CEO is a lost attempt of a company that only sells cheap phones in the developing world, who wants to move up to the iPhone battle.

But the reality is very much different and should be placed in its proper context.

First Nokia Company's Logo

Nokia is the world leader in the mobile phone manufacturing industry with 34.2% market share [Gartner, Aug 12, 2010] selling 260,000 phones per day around the world, and manufactures close to 60 different types of phones, of which half are considered to be in the smartphone category.

Nokia employs 123,000 employees in 120 countries, and has €41 billion in sales across 150 countries and an operating profit of €1.2 billion in 2009. With €8.8 billion in cash and short-term investment and over €5 billion invested in R&D in 2010, Nokia has solid reign to be able to deliver its small incremental growth around the world. Separately, the Nokia brand itself, which is valued at $34.8 billion, is listed as the fifth most valuable global brand and first non-US company in the Interbrand/BusinessWeek Best Global Brands list of 2009.

The Finnish company is divided in three distinct business groups.
  • Mobile Solutions is in charge of smartphones, enterprise-class devices, internet and multimedia solutions.
  • Mobile Phones is responsible for Nokia's portfolio of affordable mobile phones.
  • Markets is in charge of sales and marketing of the company.
Nokia also has several subsidiaries, of which the three most important are the two recent acquisitions – network manufacturer from Siemens (now called Nokia Siemens Networks) and cart manufacturer Navteq – and the recently created Symbian Foundation which helps to distribute the Symbian platform royalty-free as open source.

Nokia plays a very large role in the economy of Finland and is by far the largest Finnish company, accounting for about one-third of the market capitalization of the Helsinki Stock Exchange, but the company has seen a drastic collapse of its share on the New York Stock Exchange -70% since 2007, and -40% in the last 52 weeks alone.

Nokia Share Price as OPK as a CEO (since 2006)
Source: www.bloomberg.com

Analysis of the annual income over the past eight years shows that revenues are increasing over time while profits are decreasing. Mobile phones have been commoditized.

Nokia Revenue & Profit Margin since 2002
Source: www.nokia.com

Wall Street has been sending a strong message to Nokia Board of Directors the last two years. If Nokia wants to be traded in the US, Nokia has to be visible and play a leading role in the smartphone business in the US. The mere 3.9% market share in the smartphone category compared to 51% for Research in Motion and 29.5% for Apple in North America is not acceptable [Gartner, Dec 2009].

Forecast of Mobile OS (Millions Units)

Stuck between Motorola’s precedent of a mobile company that can rise and fall in a short time frame, and Apple iPhone hype, Nokia has been hammered by US investors to the point that the board was forced to change the management team to avoid a hostile take-over. Although the hefty price tag (over $U35 billion), and a strong involvement from the Finnish government will probably discourage the most perseverant acquisitors of the market (Cisco, HP, Apple, Google, Oracle, Microsoft…), speculations are still abound on Wall Street of snapping the market leader of the next device revolution for a cheap price. Nokia with its worldwide brand, strong R&D, solid distribution network around the world is the best bargain on the market today.

The Real Problems

In order to position itself as a clear winner of the trillion dollar mobile industry and establish itself as a sustainable market leader, mobile handset manufacturers have to play with a mix of new and old rules.

Telecommunications companies are still the ones who own the relationship with end users. Users are downloading and using more and more applications on their more and more intelligent phones. The OS of the future will be open source based on Linux, pushing closed systems to one end of the market (corporate and high-end segment).

The first challenge Nokia faces in the US is a Distribution Channel challenge. It is true around the world but more so in the US, where the smartphone market can be divided in three categories with each a distinct, and at times, competitive distribution channel:
  1. The first is the corporate category (30%). Large corporations buy large amount of smartphones with predefined settings, standardized OS and configuration. The key factor in the purchase decision is the IT maintenance cost. Due to history and business relationships cultivated by account managers, only two companies are sharing the pie: RIM and Microsoft. Nokia currently does not have an appealing solution on this market segment in US.

  2. The second category is in the subsidized phones (60%). The big four US carriers decide what phone should be on their networks and subsidize a portion of the phone in return for a two-year contract. In the late 90’s Nokia rightly decided to pursue the GSM standard (80% world and AT&T and T-Mobile USA in the US) rather than the CDMA standard (Asia, and Sprint and Verizon Wireless). Unfortunately with AT&T’s exclusive deal with Apple, Nokia is left with only T-Mobile USA, the fourth telecommunications carrier and its 34 million US customers, representing a mere 12% [comScore Mar 2010] of the total addressable market. Nokia is not visible for this market segment in US.

  3. The third category is for the non-subsidized phone (10%). Customers walk into retail stores and buy a phone to use with pre- or post-paid contract. Usually a customer pays the actual price of the phone and the latest smartphones could easily be in the range of over U$600. This is the most competitive market to be in. With hundreds of devices from large manufacturers including Acer, Dell, HTC, Motorola, Samsung, Sony Ericsson, LG and many others, Nokia is fighting a tremendous marketing war. Even Nexus One had failed and Google had to stop selling it online just after six month in business even though it was considered as the best smartphone on the marketplace. Nokia is one brand among others in the US for this segment.

The second challenge Nokia is facing is its protracted OS Redesign, and the recent competitive innovations that set new standards and expectations in US.

In 2007 Apple introduced the iPhone and changed the mobile industry not only in terms of functionality but also in term of interface. The new multi-touch screen interface based on a more intuitive graphical design became the de facto standard for smartphones in the US. This new user interface consumed more battery power and needs more CPU horsepower than the regular smartphones out on the market. But Moore’s law helped over time to overcome these technological challenges. The iOS (iPhone OS), derived from Mac OS X, is a Unix-like operating system by nature, but is still a closed system and is kept confidential by Apple.

Also, in early 2009 and after four years of incubation, Google finally managed to release a new generation of mobile operating system based on a modified version of the Linux kernel called Android. All versions are licensed through the Open Handset Alliance, a consortium of 78 hardware, software and Telecom companies devoted to advancing open standards for mobile devices. Google released most of the Android code under the Apache License, a free software and open source license. This OS is also based on latest graphical interface and can support touch screen capability.

During that time, Nokia was transforming its proprietary Symbian OS from a fragmented, closed standard to a single, open standard version. This was a tremendous undertaking as mobile manufacturers were licensing Symbian from around the world from Nokia (Fujitsu, Mitsubishi, Sony Ericsson, Sharp etc.) and with each new mobile model, there were often upgrades to the OS. The Symbian OS, a descendant of Psion's EPOC, runs exclusively on ARM processors but is based on a microkernel and has unique constraints that limit the graphical interface capabilities altogether.

Faced with unprecedented comparison and competition from Apple’s slick iOS and Google’s free Android, Nokia decided in early 2010 to join forces and co-develop with Intel, MeeGo, an also Linux-based open source mobile OS aimed to run with both ARM and Intel x86 processors. The MeeGo architecture will allow developers to produce applications compatible across multiple platforms beyond the mobile (such as tablets, car, TV, etc…) and with graphical interface. But contrary to what Microsoft did when moving away from Windows Mobile 6.3 to Windows Mobile 7, Nokia decided that all development tools for Symbian will be harmonized with MeeGo to allow smooth migration from the Symbian OS to the MeeGo OS.

By doing so, Nokia is rightly planning to keep its Symbian partners and developers community it has built over years. Unfortunately Nokia started three years too late and should have embraced the Linux Base kernel sooner than 2010. It is now on the long road to catch-up.

The third and last challenge Nokia is facing in the US is the Software Ecosystem.

According to a recent study [Pew Internet study with Nielsen, Sep 2010] 29% of US mobile phone owners have downloaded apps to their phone and 13% have even paid to download apps. The fast adoption curve of the "apps phenomenon" in US is fascinating for a market which is just two years mature. Although mobile apps are not the main selling point for a phone purchase decision, it seems that once used, customers start addictively using apps to the point of reaching mobile data traffic saturation in certain US cities.

Following the trend of internet and software companies, mobile hardware companies have outsourced app development to third parties in return for a share of the profit (30% in the case of Apple, Nokia and Android, but 20% for RIM). Online stores and sometimes telecommunications billing and provisioning capabilities provide an ecosystem where startups can build and sell applications or games that can reach millions of customers. Costly in-house development and large acquisitions (such as Nokia’s U$8.1 billion purchase of Navtec in 2007) are passé. Having a vast ecosystem of apps and developers around the OS is not the surefire the road to success, but not having one is certainly a detriment in the smartphone battle (see Palm or Windows).

"Developers, developers, developers" [Stephen Elop, CEO of Nokia, Sep 15, 2010]

To counterattack Apple’s App Store launch in 2007, Nokia announced the creation of the Ovi ("door" in Finnish) Store. After a languished beginning, the Ovi platform that offers 13,000 apps is reaching 2 million downloads a day, onto over 120 different mobile phones in over 190 countries and in 30 different languages. According to Evans Data, Ovi Store has already overtaken Apple in high growth markets in Asia Pacific and Latin America, but is still far away from the Apple App Store’s cumulative 6.5 billion downloads and its 250,000 apps catalogue. The mobile game has changed from "hardware" to "hardware plus software", and Nokia still has a long way to attract a strong and financially viable developer community around its Ovi Store if it wants to compete in the same category as Apple and Android.

What’s Next

The promising idea that users will upgrade their mobile phone from standard to smartphone within the same brand has long faded away. Telecommunications companies’ exclusive partnerships with certain manufacturers, and certainly the introduction of the iPhone by Apple changed the game for mobile phones.

Nokia has the global breadth, but Apple and Android have the depth especially in US and that is the one market that can shift the tide of the financial markets.

Nokia’s new CEO Elop has the key priority to fix the share price. Nokia has to be back on track financially and address US investor doubts. This will be done only if Elop manages to introduce custom-made smartphones in the US market, expedite the MeeGo OS migration, and create a strong and vocal developer community. The "2010 Calling All Developers: North America" competition announced jointly by AT&T and Nokia is a first step in the right direction to make the N8 finally visible on the US market.

This will not be sufficient enough to make investors happy. Elop will certainly have more challenges ahead, such as leading a bureaucratic company with over 120,000 employees globally, defending its market share in the developing world against the cheap Asian mobile brands, and making Nokia savvier in the PR media game in the US.

Nobody internal seems more appropriate than Elop, a seasoned executive of established US tech companies, with a strong background in both networks and software, deep experience in building alliances with large corporations (such as Intel), all while nurturing a vast business partner network (such as Microsoft’s).

In the coming months, be prepared for some budget cuts, realignment in the workforce, a buy back program, spin off of non-strategic and deficient subsidiaries (i.e., Nokia Siemens Networks), and aggressive media coverage. Shareholders will love it, the employees and the Finnish government less so. But this is the price to pay if Nokia still wants to be a global, independent technology company.

Even though the US represents just 8% of the global mobile phone market in terms of revenue and 6% in term of users, it is still the market maker when it comes to financial market. If Wall Street sneezes, the world catches a cold. OPK was fired to have forgotten it.

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