NQ Logic

Technology | Strategy | Consulting

Nokia-Microsoft Partnership

NQ Logic had previously discussed the nomination of Stephan Elop as CEO of Nokia, but had not anticipated the new strategy that Nokia recently presented, a strategy that will forever change the mobile industry and most certainly the Finnish company.

When Two Giants Collide

Following Nokia CEO Stephen Elop’s "Burning Platform" memo on Feb 09, Nokia and Microsoft announced a new global strategic partnership two days later. Under the proposed deal, Nokia would adopt Windows Phone as its principal smartphone OS, gradually phase out Symbian and abandon MeeGo before its launch. The undeployed MeeGo, created last year from the merger of Nokia and Intel's Linux-based platforms Maemo and Moblin, was seen, until now, as a key initiative in Nokia's battle against Apple iPhone and Google Android in the high-end smartphone and tablet PC markets. Intel, who was kept in the dark until the announcement, has decided since then to look for new partners.

Mobile Devices Net Sales Mix
presented by Nokia CEO Stephen Elop and CFO Timo Ihamuotila,
at Nokia's Capital Markets Day [Feb 11, 2011]

Stephen Elop, an ex-Microsoft executive, considered for a moment Google’s Android OS, but he quickly turned to Windows instead stating that Nokia was seeking “sustainable differentiation” with some financial compensation for the transition.

Two turkeys do not make an Eagle” Google SVP of Social, Vic Gundotra [Feb 09, 2011]

For some years now Nokia and Microsoft have been allies in the mobile arena, so this choice of a partner should not be seen as a surprise (though entirely moving to a partner's OS is). Nokia has had a license from Microsoft to connect its smartphones to Exchange e-mail servers since 2010, a modified version of Microsoft Office since 2009, and a preloaded Windows Live services on its phones since 2007. It seems almost normal that Microsoft, after developing and integrating applications on Nokia phones for so long, move down to the OS level and partner to plug the recent Windows Mobile 7 on Nokia’s hardware.

The Mobile Market Today

As previously explained, the mobile industry has a clear and unhealthy bias towards the US and its financial market. Though the US represents just 8% of the global mobile phone market in terms of revenue and 6% in terms of users, it has become the market maker for the rest of the world.

US Smartphone Market
by Nielsen & Engadget [Mar 03, 2011]

65.8 million people in the US owned a smartphone out of the 234 million Americans who used mobile devices (28%) according to comScore. The latest Nielsen research shows that Google's Android, Apple's iPhone and RIM's Blackberry are evenly sharing the US market with 30% each, leaving just 10% to their distant competitors (HP’s webOS, Microsoft's systems, Nokia’s Symbian, etc.). In the last quarter of 2010, Google finally managed to surpass Nokia's Symbian as the most popular smartphone platform since the smartphone industry took off a decade ago.

Most recently this week, after officially signing the partnership deal with Microsoft, Nokia decided to reduce its workforce by 4,000 people and transfer another 3,000 employees to Accenture (12% of its phone unit workforce). At the same time, Nokia has to change its Symbian source code to a non-open license, and begin to restrict its deployment around the world.

Quarterly Releases

In its latest Q1 2011 release, Nokia confirmed that its worldwide market share fell below 30% for the first time in over a decade, with declining smartphone sales, average sale prices, revenue, and profit. And all this while the overall mobile industry grew by 32% in 2010, according to Gartner.

Whereas Apple is doubling (+113%) its worldwide iPhone sales from last year and rumors have surfaced about an iPhone nano that could sweep the market once more, Nokia has just managed to expand its phone sales by a mere increase of 5% globally. Today, with just 4% of the global mobile phone market, Apple's iPhone accounts for over 50% of the total profit of the mobile industry (a U$600 iPhone costs U$187 in parts), where Nokia is below 10% in total profit.

Nokia Shares on NYSE
[Google Finance Feb 09 - Apr 25]

Nokia’s 23% drop in share price since the company announced its partnership with Microsoft speaks volumes about consumer and investor confidence regarding the new strategy and execution outcome.

Worldwide mobile OS shipments
by AllAboutMeeGo [Apr 21, 2011]

A new market trend is quite obvious in mobile. Apple, and more importantly Google [Nielsen] are on the rise, while Nokia is in decline not only in the US but also in the world.

So What’s Next

[1] Nokia’s Shareholder Concerns Addressed Temporarily
Stephen Elop was named Nokia CEO last year to primarily address shareholders' concerns about their valuation in the US. Squeezed between an aggressive iPhone revolution on one hand and an exponential Android OS adoption in the other, Nokia had no choice but to differentiate itself between these two value propositions and create a third ecosystem, to appeal to telcos.

Despite market leadership position everywhere in the world except the US, and across all mobile phone market segments, Nokia decided to get out of the software business once and for all and to concentrate on the hardware mobile business industry instead. The decision became to simply choose a partner. Microsoft with its know-how in the PC software industry, historical business relationship with Nokia, low penetration in the mobile arena, investment in the mobile industry, and its billion dollars in cash, Nokia choose the only plausible choice for itself. Nokia with an aggressive PR campaign has provided a clear yet dangerous strategy to its investors, outsourcing not only its financial future, but also its potential lucrative customer relationships to Microsoft.

[2] Microsoft Re-Enters The Smartphone Market
By partnering with its long time Finnish collaborator, Microsoft managed to maneuver itself in the top category of the mobile phone industry again. It secured a deal with a current market leader, and if successfully executed, Microsoft could end up being in its usual comfort zone: licensing software around the world across different devices.

Previous phone forays at Microsoft (Kin or Windows Mobile) proved that selling mobile is very different business from selling PCs or servers. Typically with mobile, telcos, not hardware manufacturers, decide what to offer to their end customers. In this partnership, Microsoft essentially outsourced the consuming and difficult relationship management with telcos to Nokia and will concentrate on its strength of software development. Nokia, which already manufactures and distributes over 400 million phones a year, will continue to focus on hardware, something Microsoft never mastered with Kin.

Microsoft is probably the real beneficiary of the partnership, not only on the short run but also in the long run if the deal happens to work out well.

[3] History Will Repeat Itself
In 1994, the dominant global provider of mobile phones was Motorola with 45% of worldwide market share. Six years later, Motorola's market share collapsed to 15%, while Nokia's had grown to a new leading position with 31% market share.

In 2004, Windows Mobile accounted for 23% of smartphone sales in the world and it was optimistically projected to overtake Nokia's Symbian to become the leading mobile OS. But in 2007, Nokia's dominant share of the global mobile phone market was close to almost 40%.

Today, Apple owns over 50% of the total profit of the worldwide mobile phone industry, and Android is scheduled to have over 50% of the US smartphone OS some time soon. History can also repeat itself with the rise and fall of these two Californian companies.

[4] The Market Will Stay Fragmented
Symbian and MeeGo are dead, and so are true open mobile ecosystems. The mobile world is becoming quite binary with on one hand a copy-left OS called Android that dresses all low-cost mobile hardware manufacturers; and on the other hand, many closed ecosystems addressing different market segments.

With its free licensing, Google’s Android OS will have a significant market share in a not so distant future (over 45% of the smartphone market in 2015, according Gartner and IDC) but will have a very difficult time monetizing its impressive penetration. With more proliferation comes the difficulty of maintaining different code versions across different platforms and Android development will start slowing down, lagging against its closed system competitors, becoming a victim of its own success.

The other closed systems will cash out and will position themselves toward a dedicated niche in the market place (iOS and Windows Mobile in the consumer segment and RIM in the business, while WebOS will need to create its own space). This segmentation will benefit all telcos (less traction) and will impact not only end users but also the developer communities slowing down innovation cycles. The supplier surplus created by the mobile revolution is in reality being captured by telcos (mobile data consumption) and the handset manufacturers (device + ecosystem).

[5] Nokia For Sale?
In outsourcing the software component of its mobile strategy, Nokia has officially ended its market leader position and therefore its ability to influence the mobile industry altogether. Despite its extraordinary financial results, Apple will not become the next dominant mobile player, because the company has always positioned itself at the top end of the price spectrum, refusing to go mass market. Ironically, Google’s Android seems to be positioned to be the next potential market mover and become the equivalent of what Microsoft is today in the PC industry.

Nokia and Microsoft will lose some precious months trying to integrate their respective functional entities and create a working relationship while merging two different company cultures. Markets might not be patient enough to wait for the miracle to happen, and it may not be long to have the "FOR SALE" sign appearing on the front porch of Nokia.

And what if the real long-term strategy of Microsoft was in reality to buy an undervalued Nokia?

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