The Problem With Nokia

I was only half right. In a March 2009 article, I warned that Nokia Corp. (NYSE: NOK) was "vulnerable to a maturing mobile market" and that "rapid technological change is increasing the sophistication of consumers worldwide," meaning Nokia needed to respond quickly to competition from high-end smartphone makers and low-end suppliers in China.

As it turned out, Nokia is indeed extremely vulnerable, but not because the mobile phone market is maturing (that's where I was wrong) but essentially because the company had failed to respond quickly to a rapidly changing landscape. I got that one right. Nokia needed to transform quickly to become a "total connectivity solutions provider," I wrote.

In other words, like Apple Inc. (Nasdaq: AAPL), it must develop a vibrant ecosystem that can help it become a stronger player in its market. Nokia failed to do that and now faces an uncertain future, according to CEO Stephen Elop in an internal memo that was leaked to the press.

It bears repeating. The mobile handset market is far from maturing. In fact, it has gained a new lease on life courtesy of Apple, which has surged from zero market share to now rank as the No. 3 vendor of mobile phones and the fastest-growing player in that high-end market. In 2010, mobile handset shipment for the first time eclipsed PC sales, according to IDC . Nokia, meanwhile, is losing ground to new and old players at all levels of the market. It has a leading but fast-eroding market share; offers no truly compelling product worthy of drooling over; and still churns out clunky devices encased in an operating system worthy of the Stone Age.

If you think I am being harsh on Nokia, then you haven't read what Elop had to say about the company. Before we dive into that, though, consider what the equity market -- the arbiter on competitiveness and profitability -- has to say about the company. Today, Nokia's market value of $41.4 billion is a fraction of Apple's $331 billion. The two companies' sales are also heading in different directions. In fiscal 2007, Apple's revenues of $24.6 billion were less than half of Nokia's $69 billion (current exchange rate).

As of the end of their last fiscal years, Apple had surpassed Nokia in sales. The Cupertino, Calif., company recorded sales of $65.2 billion for the fiscal year ended September 25, 2010, compared with Nokia's $57.8 billion for the calendar year. Granted, these are not directly comparable periods, but the trend is obvious: One company is moving on up while the other is foundering, trying to reclaim old glory.

CEO Elop in his memo to Nokia's employees starkly detailed the challenges facing the company, what he believes it had done wrong, and the way forward. That memo will go down in high-tech history as the "burning platform" missive. Elop said the company had been on a burning oil platform rig and must jump into the frigid water below. That analogy is painful, but it reflects the unfortunate reality facing Nokia. Will it survive the plunge?

Elop will on Friday, February 11, lay out his plans for rescuing Nokia. We will dissect his vision here. In the meantime, here are excerpts from his memo.

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. For example, there is intense heat coming from our competitors, more rapidly than we ever expected. Apple disrupted the market by redefining the smartphone and attracting developers to a closed, but very powerful ecosystem.

While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. At that time, we thought we were making the right decisions; but, with the benefit of hindsight, we now find ourselves years behind. The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience. Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes. Unbelievable.

We have some brilliant sources of innovation inside Nokia, but we are not bringing it to market fast enough. We thought MeeGo would be a platform for winning high-end smartphones. However, at this rate, by the end of 2011, we might have only one MeeGo product in the market. At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America. Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.

At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us. And the truly perplexing aspect is that we’re not even fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis.

The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyse or join an ecosystem.

This is one of the decisions we need to make. In the meantime, we’ve lost market share, we’ve lost mind share and we’ve lost time. Consumer preference for Nokia declined worldwide. How did we get to this point? Why did we fall behind when the world around us evolved?

I believe at least some of it has been due to our attitude inside Nokia. We poured gasoline on our own burning platform. I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven’t been delivering innovation fast enough. We’re not collaborating internally.

We are working on a path forward – a path to rebuild our market leadership. When we share the new strategy on February 11, it will be a huge effort to transform our company. But I believe that together, we can face the challenges ahead of us.

To read the full transcript on the Financial Times Website, you may click here (registration required).