Could the alliance with Microsoft kill Nokia?

The last two years have seen Nokia’s market share and company value completely crater.

It has gone from being the global leader, to a company struggling to survive and define its future. The writing was on the wall a long time ago, but the last two years have  seen an implosion of every corporate metric, apart from losses, which continue to escalate.

The cause of this is pretty straight forward. Nokia made lousy smartphones. Simple as that. The world wanted smartphones; Nokia’s offerings didn’t make the grade, so they didn’t sell.

– The Blackberry was more secure and suited to enterprises.

– The iPhone redefined usability (something Nokia was never great at) – and provided a usable ecosystem of content (again something that was always terrible with Nokia devices).

– And Android provided a free credible operating system to every OEM who wanted it.

Symbian was acceptable for a while, but iOS and Android showed that a new OS was needed.

Nokia was slow to respond and the marketplace was never going to wait.

MeeGo, Nokia’s next generation OS never matched iOS and was dogged by a failure to deliver. The decision to kill this had a logic, but it also carried a risk which Nokia could lose control of its own future … and it has.

So Nokia was left as a company that could make good hardware, but failed dismally on the software.

Given this, the decision to focus only on Windows mobile seemed sensible. It provided a credible mobile OS, protection from legal attacks (Microsoft knows about IP and protects itself well) and the chance to ally with a major force in computing.

But … what seems to have been missed in many of the discussions is that this decision brought trade offs too.

A strategy is not just defined by what you do, but also what you don’t do (or no longer have the option to do).

– Nokia was unable to make phones to benefit from the Android juggernaut (and be a part of the 1.4m daily activations)

– Nokia is reliant upon Microsoft for new features to be implemented and adopted (and Microsoft is not agile)

– Nokia is dependent upon Microsoft release cycles for updates and the ability to counter competition it faces (as opposed to threats Microsoft faces)

– Nokia is reliant upon approval from Microsoft to develop its ecosystem … you could argue that it doesn’t own the ecosystem anyway. It is just a functional part of Microsoft’s ecosystem.

Nokia has stated that it wants to own and develop its ecosystem. By partnering with Microsoft, this will not happen. Whatever Nokia thinks – Microsoft wants to own the ecosystem. It will agree to allow Nokia to be a key partner, but owning the ecosystem? Absolutely not.

So, does the dedicated alliance with Microsoft provide Nokia with an overall positive or negative result?

Nokia has a partner that is committed to help keeping it alive through challenging times, but the company health is still very poor with an uncertain and worrying outlook. It may be saved for now, but is this at the expense of its long term viability and critically, its independence?

Judging by any accepted measure: revenue, cash flow, market share, handsets shipped, customer satisfaction, partner confidence, share price … Nokia is in big trouble. To reverse this position would require massive sales of Lumia phones – globally, at a price point that provided Nokia with viable, attractive and sustainable margins. It is this last bit which is hard to see happening any time soon. With Android having 1.4m activations per day – it is clearly the market leader – at least in the lower end of the market and for sheer numbers. With Apple about to launch the iPhone 5 next week and iOS 6 later this year – it is hard to see how the growth of Apple will be impacted. To most consumers, the iPhone is the default choice and Nokia offers little to change this. In fact, if you include the ecosystem as a key decision factor – Nokia is not a serious competitor at all. The Lumia scores well on usability with many reviewers, but a search of phone discussions will show that the Windows 8 interface and tiles do not appeal to everyone. And Nokia has no ability to offer anything else.

Even if Windows phone does gain traction in the market, other OEMs are watching this carefully. Several competitors including Samsung have announced Windows 8 phones (even if they didn’t actually have one built yet). So, should the Lumia start to sell and find that people want Windows phones, it will face increasing competition from other manufacturers. This is exactly what Microsoft wants to happen, directly in contrast to what Nokia wants.

The truth of course is that Nokia was in trouble before the Microsoft alliance. The failure of its R&D teams, the lack of focus on a changing market, the lack of discipline in delivering innovation were all clearly evident before the former Microsoft executive, Stephen Elop took his role as Nokia CEO. The board at Nokia must have known what Elop would do. There was only going to be one strategy when you appoint from the Microsoft top tier, but was this the right strategy?

Elop was right in pointing out that Nokia had a burning platform, but doing this publicly before he had the answer ready to sell was certainly not a smart move. All it did was undermine Nokia, accellerate the collapse of sales and lose confidence with consumers, partners and developers.

By allying with Microsoft, Nokia took a huge risk – because in doing so it forgoes some of the strategic options that may have helped its position.

But was there a better option?

– Could Nokia have delayed or downplayed the Microsoft announcement and delayed the implosion of Symbian sales. Absolutely. This would not have changed the ultimate collapse of Symbian, but may have slowed this down and kept confidence with partners until Windows powered phones were shipping.

– Could it have developed an Android phone, that although it would mean entering a crowded market, would have potentially slowed the growth of Samsung, delivered much needed ongoing revenues and kept its brand and reputation relevant. Absolutely. Margins would be lower, but revenues, jobs and manufacturing capabilities could have been protected. This was never a viable long term strategy, but for the short-medium it term offered a pragmatic strategic option. Unlike Samsung, Microsoft, Apple or Google, Nokia does not have a diversified portfolio of businesses, able to sustain an unprofitable part whilst the core survives. With Nokia, phones are the core business. Perhaps this is one area where Elop was the wrong choice. Would another CEO have recognised the danger of the Microsoft partnership and demanded more independence? I think so.

– Could Nokia have continued to develop MeeGo? Against Apple and Android, it is hard to see this being credible, but as a way to demonstrate innovation, build intellectual property and provide some worst case scenario resilience and autonomy, there is a logic to this. Not at the massive scale it was, but certainly as a niche OS, particularly if this was focused on a particular vertical or industry.

So was the decision to ally with Microsoft the right one?

It depends on what you measure and when.

Nokia is still alive … just.

But if you measure a company’s health by its share price – which is crude but valid – then to go from almost $40 to $2.46 in less than 5 years could never be judged a good outcome.

The story isn’t over, and we have seen other companies recover from similar weak positions, but the outlook is not good. Perhaps allowing customers to actually buy the product that you have just announced would be a start.

As with all market leader failures, the merit of strategic choices and the rejected options will remain the mainstay of MBA Case Studies for years to come. Of course, it is not over – but with the big announcement made, the new phones being announced (not launched), it isn’t looking good.

UPDATE: Sep 3rd 2013. Just under a year after this post was made, Microsoft announces they are buying the phone business of Nokia. Stephen Elop will step down from Nokia and rejoin Microsoft.



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