Nokia’s death spiral accelerates with Microsoft’s deal

Feb 13

When I read Stephen Elop’s “Burning platform memo” to Nokia’s employees, I was impressed.

We too, are standing on a "burning platform," and we must decide how we are going to change our behavior.
Over the past few months, I’ve shared with you what I’ve heard from our shareholders, operators, developers, suppliers and from you. Today, I’m going to share what I’ve learned and what I have come to believe.
I have learned that we are standing on a burning platform.
And, we have more than one explosion – we have multiple points of scorching heat that are fuelling a blazing fire around us.

The memo is worth a read. Rarely has a CEO come across with so much honesty and courage to face the truth. Naturally I expected a very bold and imaginative strategy and I am disappointed.

Though there are multiple points of scorching, Nokia decided to focus on the operating system for the smartphone. Essentially it had 3 options after it decided to abandon Symbian phones; none of which were easy: Go with Android, pursue with its development of MeeGo or go with Microsoft Phone 7. It wasn’t an easy choice.

But the Microsoft deal and more specifically the terms of the deal seems to be a bigger disaster in the making.

The financial markets were quick to see this. Nokia’s shares tumbled 14% on Friday after the announcement as investors came to the conclusion that Nokia will be able to fight Apple or Google in the mobile marketplace.

Let me analyze the strategic arrangement:

Microsoft’s gain:

  1. Microsoft which just had 4% market share could see the Windows Phone 7 become a mass market.
  2. Microsoft will be able to put Bing – Microsoft’s search engine on Nokia’s phones giving its advertising business a potential boost.
  3. Microsoft will also be able to get royalty revenues for Windows phone which could be anything between $15-$20 per device.
  4. This being a non-exclusive arrangement, Microsoft will continue it’s existing relationship with other smartphone manufacturers like Samsung, Dell, HTC and so on.

Nokia’s loss:

  1. Rather than getting locked in with Windows Phone 7 (which hasn’t made any significant headway with the developer community), it could have made a safer bet with Android which could have given them interesting possibilities. The Windows Phone 7 will remain a closed system. With such a miniscule number of apps (less than 8000, compared to iPhone’s 350,000 apps or even Android’s 100,000 apps), there is no advantage for Nokia.
  2. A fair case can be made that Nokia could risk commoditization with Android, but that would inevitably be the case as a number of manufacturers both in India and China are building devices to compete with Nokia.
  3. Getting the Microsoft – Nokia partnership to work together will take time. There’s a huge coordination effort, learning curve costs and sorting out all kinds of conflicts and disagreements.  No wonder, Stephen announced that 2011 and 2012 will be transition years; which means no new products from Nokia. The earliest the Windows 7 devices would ship is mid 2012 by which time Nokia would trail far behind Apple and Google. This is no way to respond to a platform which is burning.

HTC, Samsung abandoning the Windows 7 platform is not totally inconceivable; more so if the partnership gets some initial traction. That could make it more difficult for Nokia.

in my view, this is going to be accelerating the death spiral for Nokia The least that Nokia could have done was to maintain multiple platforms – Android, Windows and even continue with MeeGo. Now, it is going to be a slave to Microsoft.

In my view, this will accelerate the death spiral which I pointed out as early as Sept 2009.

I can’t help but ask the question: Whether Stephen Elop maybe having a bigger strategic agenda. He may have brought in not to sell Nokia’s phones, but to sell Nokia or engineer a merger.

I would be curious and watching the space.

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4 comments

  1. debdeep /

    Considering the position Nokia is in now, it would have been difficult for them to maintain too many platforms. They followed what Motorola di about an year back. Motorola, which was in dire straits, decided to let go of most of the platforms it was working on and concentrate on Android. We all know how it helped them to turn around.

    Android would definitely have been a safer bet for Nokia. But looking at the large number of Android phones coming up, it would be difficult to differentiate a new entrant. Windows Phone 7 is technologically pretty sound and is virtually untouched. Nokia might be able to leverage this.
    Regarding the number of available applications, it will take some time for Windows Phone 7 to match up to Android. But a successful model could see application developers flocking to it as demand rises. Also, Nokia has a number of applications in its Ovi Store, primarily for Symbian, and I expect them to port the applications in Windows Phone. That will boost the number of applications considerably.
    Its a high risk game for Nokia, going for Android may have been safer for them but they might have been reduced to “just another device maker”. With windows phone they might have a chance to open up a new niche, a new paradigm.

  2. The competencies needed for success shifted over the years. In the early years of the mobile phone right till perhaps 4-5 years ago, software, platforms, ecosystems weren’t that important … it was more about RF engineering, hardware …. And by the way, back then, Nokia wasn’t even an early mover or innovator… on the battery front, it was a follower from NiCad, NiMH, to Lithium Ion. Camera pixels,.. the Japanese were ahead as well. Color screens … when the Japanese had 256k color, Nokia had 64k colors…

    Now software rose in prominence a few years back,.. not Nokia’s core competence! But it is Apple’s!

    Nokia failed to adjust to fundamental structural shifts in the industry!

  3. Harry /

    Nokia could have launched Windows phones without killing its other options like HTC, and Samsung. They are taking a serious risk by killing all their options by using only Windoes mobile os. Windows was never the loved mobile OS and it will never will be.

  4. siddharth /

    I remember reading your post in 2010, can better relatd to it now. Well written

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