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Nok-Win a No-Win Combination

Perhaps {complink 3847|Nokia Corp.} should not have hired a former {complink 3426|Microsoft Corp.} executive as its new CEO. Four months after joining the troubled but still world's biggest vendor of wireless handsets, Stephen Elop has pulled the company into a tighter embrace with his former employer, setting Nokia on a highly risky and uncertain path, with no guarantee of success.

By Elop's own admission, Nokia is entering a two-year period of uncertain growth characterized by management and operational reorganization, an intensely competitive and fast-changing market, and growing unease within the electronics market that the company is on a slippery slope and may not be able to regain a strong footing.

The announcement today that Nokia struck an agreement to adopt Microsoft's Windows operating system as the centerpiece of its smartphone products reeked of desperation, but also demonstrated the company's determination to confront a looming crisis. In sidelining Symbian, the operating system it had pushed for years and which was fast losing grounds to Google's Android and Apple's iOS, Nokia finally admitted it doesn't need to forge ahead on its own in a world where partnerships can be leveraged into market leadership.

But Microsoft? That's really leaping from a burning platform into the icy cold water — the analogy Elop used in an internal memo to employees. (See: The Problem With Nokia.) Microsoft's share of the smartphone OS market had been falling and was at 3.1 percent in the fourth quarter of 2010, sliding from 7.2 percent in the comparable 2009 quarter. Meanwhile, Google's Android, which debuted only two years ago, leads with almost 33 percent market share.

By hitching itself to Microsoft's fading Windows OS star, Nokia is certain to be forced to spend more money on research and development for the operating system (admittedly, in conjunction with Microsoft), marketing, and other sales promotion activities. Also, it would, much as it did with Symbian, have to spend time and resources courting application developers, many of whom have gravitated towards Android and Apple iOS.

There are other reasons why a Nokia-Microsoft tie-up in the smartphone OS sector is not in either company's best interests. Several press reports indicate that some industry analysts view this as favoring Microsoft, to the disadvantage of Nokia. I disagree. Certainly, it will initially boost Microsoft's market share by immediately porting over millions of Nokia phones to the Nokia-Windows system, but even this poses some danger to Microsoft. Other companies that currently use the Microsoft OS and that are in direct competition with Nokia will most likely begin a strategic pullback and further embrace Android. Companies in this category include Samsung Electronics and HTC. Unless Nokia bounces back strongly enough to reclaim its leadership of the smartphone segment, Microsoft will eventually rue this combination.

Nokia is hoping to use Windows OS to create a “third option” for smartphone buyers, giving them an alternative to Android and Apple iOS. It's a worthy endeavor, and the company might eventually succeed. In fact, I concede that having that option would be good for the market because it would break the emerging Android-iOS duopoly.

But Nokia will do this at a very high cost, at the same time it needs to revitalize operations, boost market share, and convince investors it is on a growth path. Nokia's management has a fiduciary duty to improve shareholder investment and not embark on a voyage of boosting a flagging product merely to avoid embracing the market winner. Apple iOS is not an option for Nokia or any other Apple competitor. Android, on the other hand, was made for everyone willing to drop the go-it-alone strategy that doomed Symbian.

Investors don't seem convinced, either, that Nokia can make this work. Its share price sank almost 10 percent following the announcement of the Windows OS transaction, while shares in Microsoft and Apple rose in pre-market trading. The market has spoken. This is not a good deal for Nokia, and its future remains as uncertain today as it did before Elop last September joined the company from Microsoft. Here are the main points of the Nokia-Microsoft deal and the management shakeup announced by Nokia:

  • Nokia would adopt Windows Phone as its principal smartphone strategy, innovating on top of the platform in areas such as imaging
  • Nokia would help drive the future of Windows Phone. Nokia would contribute its expertise on hardware design, language support, and help bring Windows Phone to a larger range of price points, market segments, and geographies
  • Nokia and Microsoft would closely collaborate on joint marketing initiatives and a shared development roadmap to align on the future evolution of mobile products
  • Bing would power Nokia's search services across Nokia devices and services. Microsoft adCenter would provide search advertising services on Nokia's line of devices and services
  • Nokia Maps would be a core part of Microsoft's mapping services
  • Symbian becomes a franchise platform
  • MeeGo becomes an open-source, mobile operating system project
  • As of April 1, Nokia will have a new company structure, which features two distinct business units: Smart Devices and Mobile Phones. They will focus on Nokia's key business areas: high-end smartphones and mass-market mobile phones

What do you think? Take our new poll: What’s Best for Nokia?

15 comments on “Nok-Win a No-Win Combination

  1. Hawk
    February 11, 2011

    Symbian was not the problem and Nokia adopting Windows OS will not make its problems disappear. That's the bottom line. I noticed the company is making management changes and planning job cuts, etc. I believe we have not heard the last of Nokia's reorganization. The other shoe will soon drop.

  2. Parser
    February 11, 2011

    It is a very interesting blog. From strictly business point of view Nokia alliance with Microsoft gives Nokia ability to cut jobs and lower development costs. Wall Street should embrace that. It did not happened. Certainly, there are other forces, which paint Nokia in gloomy future. Should they expand on Symbian? After all iOS and Android are based on Unix and Linux, which are old operating systems, modified to fit current and future devices. Nokia has a large number of followers who do now want to learn new OS but want new hardware. This will break with MS Windows. How they are going to convince them to switch. Spending money on advertisement instead of developing their own OS. MeeGo is not going to make much of the dent despite its good idea due to lack of support from processor and hardware manufactures. 

  3. bolaji ojo
    February 11, 2011

    Parser, Right on all points. Additionally, was Symbian the only problem Nokia had? Did Apple win solely because of the operating system or did it offer iPhone buyers a unique experience and different hardware than Nokia and Motorola were offering? Apple is winning not only on the OS front but also because of the aesthetic offered by its products. The Mac is pleasing to the eye, whether you like Apple or not. So is the iPod, the iPhone and the iPad.

    Can anyone name a single Nokia product that has so captivated the market? The shift to Windows may address one problem but it will not solve the design problem. Google is recognized as the innovative company and Android built on that. Apple is in the same category. Nokia, by the way, is an extremely innovative company with thousands of patents in its name but a Nokia phone won't make anyone swoon and that's a problem Windows OS cannot solve.

  4. seel225
    February 11, 2011

     

    Bolaji,

    I completly agree with you, Stephen Elop has pulled down Nokia shares by embracing Windows Phone operating system. I feel Nokia plus Windows phone is a deadly combination which is never gonna succes.The mediocre strategy could follow in the foot steps of a company like Motorola, which struggled long time to make winning devices until it adopted Andriod operating system.

    Nokia still expects to sell an additional 150 million devices on symbian operating system.I am jus wondering who will buy the outdated phones?.

    I feel this strategy is not good for Microsoft too because, in the long term it will loose support from the other manufacturers, like Samsung, LG and HTC, etc. They will focus even more in Android phones, in fear that Nokia may have some sort of privileged treatment. 

     

  5. AnalyzeThis
    February 11, 2011

    I think you did a great job summing this up!

    I agree with the investors, I don't believe Nokia can make this work and that this is not a good deal for Nokia. Perhaps a good deal for Microsoft, yes, but no blockbuster either.

    It's unfortunate that the realistic best-case scenario here still isn't very good, which is that Nokia/Microsoft join forces to… mop up all the scraps left behind by Android/iOS, which would probably mostly be on lower-end, less profitable phones for budget carriers.

    That being said, would adopting Android have solved all of Nokia's problems either? No, of course it wouldn't.

    Microsoft and Nokia may be a No-Win combination, but you could also argue Nokia is in a No-Win situation, and no matter what direction they chose… the future would not look especially bright.

     

  6. itguyphil
    February 12, 2011

    Same sentiment I mentioned in another post. What's most important is the strategy that Microsoft and Nokia are going to move forward with the even get a crumb off of Apple & Google's plate. What can they do to convince consumers and even business users to use their devices??? This shall be interesting.

  7. t.alex
    February 12, 2011

    Maybe this partnership can come out with something new. As of the status quo, it does not seem to be a good partnetship though.

  8. Mr. Roques
    February 13, 2011

    How is this partnership not in Microsoft's best interest? I don't see how they can lose from it. Is there something I'm missing?

    I completely agree on Nokia's part.

  9. Anand
    February 14, 2011

    Bolaji, Nice article. I am surprised to see so many thumbs down to Nokia-Windows partnership. I  for one am kind of optimistic about the deal. It would be even better for Nokia if it decides to give support for both windows and Android.

    I feel this deal might work because, Nokia and Windows are two brands people have been accustomed to. People still love Windows friendly features and Nokia mobiles reliability. If both of the companies get the act right , I am sure this would emerge as challenging alternative to Android/IPHONE OS.

  10. elctrnx_lyf
    February 14, 2011

    The decision by he ex microsoft employee as Nokia CEO is the last option nokia could resort to. Supporting windows may give them a short term advantage to proivide the smart phones with in industry knowm operating system But des windows mobile OS have so enough stuff to give a good appeal and performance for mobile phones. But other side choosing androd would have been a right option considering the eco system which is already been developed.

  11. Mydesign
    February 14, 2011

            Bolaji, I would like to consider the scenario in a different way. Up to the last quarter of previous decade, nokia had a major share in mobile sector. Now more and more new comers are coming to the market with new and advance features equipments. More over nokia knows well that, Android based smart phones are going to be a big hit in market and more competition for them in coming years, which will end up in losing Nokia’s grip over the market. That means the competition becomes tighter in coming day.  So in order to keep or retain their market portion, they have to fight like anything. As a part of this strategy, they are trying for different options like collaboration with market proven developers and software.

           Now, Microsoft got the first chance for a period of 2 years and later on if they happen to realize that the collaboration is not feasible, surely nokia sack Microsoft and search for another partner. Their ultimate aim is to retain the market share.

  12. eemom
    February 14, 2011

    The problem with Nokia – Microsoft partnership is that it seems desperate, even if they had an amazing strategy / product in the works that the world does not know about.  Both companies are struggling in the market so they partner to what, struggle together?  If this is viewed by the market as a last ditch effort to save Nokia's market share, consumers will quickly move away from the platform.  The only hope here is that Nokia and Microsoft leap frog the industry with a new product offering.  I am not optimistic that they will succeed.

  13. bolaji ojo
    February 14, 2011

    Toms, I agree. Nokia is still, by the way, the No. 1 global vendor of mobile phones but as you pointed out they are fighting hard now because they are worried they will continue to lose market share. The new vendors are agile and not bound by conventions. Also, they don't have the legacy products to support and their R&D budgets are not as big so overall operating expenditure is lower. I don't disagree Nokia needs to change, I just don't believe this was their best choice. It favors Microsoft heavily and the benefits to Nokia are not so clear. As you said, perhaps they'll try Windows OS for a couple of years and move on to another platform. I don't see this happening. It would be too expensive. It's possible they could add Android, though.

  14. bolaji ojo
    February 14, 2011

    eemom, my point exactly. Were they desperate? Absolutely. Nokia was losing market share while Microsoft was not winning enough vendors with Windows OS. One of them — Microsoft — gets a higher market share now by getting Nokia to kill off its own operating system while Nokia gets a chance to reduce R&D expenses in adopting Windows OS. Whatever it was that made the market reluctant to embrace either company's products is still out there and I don't for now have a concrete idea how they are addressing that problem.

  15. Mr. Roques
    February 17, 2011

    I don't think they will either. My money is on Android (with Apple in close second) and RIM left behind.

    Android has the benefit of being able (and wanting) to produce phones for every market (not just the expensive smart phone one – as Apple).

    It's currently lacking in the marketing department but they are definitely pushing. 

    Apple is not going to stay behind since they are, supposedly, planning a “cheap” iPhone but lets see how that goes (we all know Apple has been reluctant to do so in their other markets). 

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