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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.

 

Why the Lumia will not save Nokia

A day later we have the first reviews of the new Nokia models – the big Lumia and the cheaper Lumia.

The judgement from analysts appears to be favourable overall: Intuitive user interface, great camera and solid build. We need to balance this against the fact that both are in need of some weight loss, but the conclusion is that the phone is a credible offering. So, Nokia have a chance of rebuilding their success with this?

Absolutely not.

How can this be the case?

The phone is pretty good. Nokia is an established global manufacturer and it offers something innovative to the market.

Yes, yes and yes. And the answer is still the same. These will not save Nokia.

Instead of looking at what a load of geeks think, look at what market analysts are saying (those who advise whether to invest in a company or not). At the end of the day, Nokia was trading DOWN by 15.9%. Nokia launches its most important products – ones that will determine whether it has a future – and the analysts sell rather than buy shares?

Why?

Nokia launches a great phone, the geeks love it, and the shares get hammered?

To make sense of this we need to only remember one fact. Analysts (predominantly) buy/recommend shares of companies that meet one condition – they are expected to make more money in the future than they do today.

Thats it. Owning shares is about making money. Nothing else.

If the company promises and delivers spectacular growth, then the share price will quickly increase. Slow increases in growth result in slower rising share prices, and falls in growth will drop the share price. It is that simple. It is about growth.

Making money for shareholders requires companies to increase profit, from generating more revenue, from greater sales. Internal costs and a number of other factors play into this, but essentially it is whether the company has something that is going to sell by the bucketload for a good profit.

And the analysts don’t think that Nokia is going to sell loads of these. If it does, there are questions of whether it can do this at a margin that is expected.

The analysts are right.

So why will Nokia not sell loads of these. Two words: Apple and Android.

Next week Apple announces a new iPhone. This is predicted to sell more than all the other iPhones sold to date combined. Apple will not just sell iPhones by the boatload, it will do this at a higher profit level than anyone else can come close to.

If that wasn’t bad enough – this week Google announced that Android has 1.4m activations per day. That is 1.4 MILLION new Android devices being switched on and registered. Every day. 1.4m, again, and again … And the number is increasing every week. Not just phones, but also tablets. Tablet sales may slow, but they are there and they are growing. Nokia doesn’t have a tablet. Microsoft will launch Windows 8 next month, and this will increase tablet sales, but this will not help Nokia. Even if Nokia did announce a tablet, it is hard to see how it could compete against the iPad and the increasingly crowded and low profit Android marketplace.

Against the behemoths of Apple and Android, Nokia is simply irrelevant.

The other point that is often missed though is that it is not just about the phone, but the ecosystem. Apple doesn’t just have one source of revenue, but several. From the phone itself (the iPhone is the most expensive mainstream smartphone), from the phone contract (Apple gets more than anyone else), from accessories, from content and application purchases (30% goes to Apple). Let’s be clear about this – Apple has built a 21st Century money making machine. And it is only just starting to scale this. With potential moves into TV and emerging markets, there is still a lot of potential growth left.

Google’s Android ecosystem is nowhere near as mature or profitable, but Google also has other businesses that Android compliments – not least of all search. All that data from hundreds of millions of phones provides the intelligence to keep Google search secure in first position as well as providing a global market that will pass a billion users in the next couple of years.

So, despite making a very good phone, the maxim ‘too little, too late’ appears to be perfectly apt.

The hardest job in the world … Windows phone product manager

If you are a Windows mobile/phone/whatever 7 or 8 Product Manager, life cannot be easy.

Android announced 3.7m activations over the Christmas weekend of 24th and 25th December 2011

Apple are estimated to have activated 4.58m iOS devices on Christmas Day alone

… and Windows Phone 7 … no data yet, but it is a world away from these figures

Fact: Windows phone is getting a kicking.

These figures cover not just phones but tablets as well, but that doesn’t really matter, because the core fact is that millions of dollars and billions of data points are heading to Apple, Google and the Android ecosystem, not to Microsoft. Yes, I know that Microsoft makes some money from IP licensing fees, but that is missing the point. The mobile platform machine is in full swing, generating cash AND data for Microsoft’s competition. This is not just a problem for today, but also for the future as Google and Apple leverage the platform insights and the data to improve services and create walls around their platforms.

But Microsoft seems unable to halt these two juggernauts in mobile.

Why?

These sales figures are all the more amazing given that Microsoft had a head start of several years on both of these companies and at one time had a 20% share in certain markets with Windows Mobile.

But in a year that has seen RIM and Nokia face collapsing market shares and rock bottom investor confidence, Microsoft has a major challenge ahead in mobile.

An article by Jay Yarow from Business Insider summarises the problem very simply – It’s That The Phones Aren’t That Great. Spot on Jay.

What Microsoft has done has allowed itself to lose the low end of the market (to Android), whilst the user experience, platform and ecosystem simply isn’t good enough to win the high end and effectively compete with Apple. Microsoft may think it can compete. It can’t. Not yet.

Where Microsoft is now is the one place that Harvard Professor Michael Porter famously described as being, ‘the one place you don’t want to be’. The reason is that you can make good products, have good service, and a competitive price, but fail spectacularly. You fail to lead on any area, have no distinguishing innovation and throw money into marketing and development and see absolutely no effect.

Jay offers some ideas, but the challenge facing the Product Teams is deeper than the product features. It needs to define a proposition for Windows Phone in the eyes of customers. Microsoft is not competing against a static competitor, it is competing against a whole industry of providers in Android and the leader in consumer electronics in Apple. The fact today is that Microsoft, it simply isn’t a serious option for buyers, or developers.

For anyone working in Microsoft this is more frustrating that you can imagine. This is because Microsoft is not short of great innovations, ideas or smart people in mobile. Many of the features you seen in Android, in Apple phones and in a range of other mobile solutions were in Microsoft labs years ago. Microsoft labs are full of innovation. Microsoft as a company is innovative. Internally it really is. Not that you would know it as a customer.

The core problem is getting this innovation out of the lab and into products … QUICKLY. A Microsoft release cycle can (and does) take years. This delay means that career Product Managers can avoid taking responsibility for abject failures in the market by moving around and changing roles. By the time a feature has been released it is either already in the market, or has been normalised to the point of banal (read irrelevant) in an effort to avoid offending any other Product Group inside Microsoft (or more accurately any senior Exec from any other group). Lets be clear though, I am not blaming the Product Managers, I am blaming the Executive. The Exec takes the responsibility for the culture inside the company. Product Managers have my sympathy, but this is a two way street. You cannot expect support when lacklustre products fail to sell.

So, the market is dominated by two players (lets ignore RIM because everyone else is for now). It is challenging innovative, well funded agile and successful platform players.

So how do you compete in this environment?

One option is to look at one of the few consumer successes Microsoft has had … Xbox, and more recently Xbox Kinect and see if there are lessons to be learned from this.

Yes, Xbox has had significant problems with early production quality, but it handled this well and has shown with Kinect that it can introduce game-changer products and reinvigorate older platforms. What Microsoft did with Kinect is put innovation at the top of the list and deliver on this. It needs to do the same in mobile. STOP following in the tyre tracks of the competition. STOP allowing them to define the market, and start to drive YOUR innovation into your products. If you need to, commit to production. If you can partner, great, but don’t wait for partners to catch-up. Focus on winning mindshare and market-share before you worry about complete Windows system integration – you can fix this later in software updates. You need integration, but get the consumer proposition right first.

More than anything, answer this question:

The reason I should buy a Windows phone is???

Today I don’t know the answer, and neither do your potential customers. If you don’t believe me, then ask people. I did. I asked friends, and they didn’t know. I can tell you the answer for Apple and Android. I can even tell you the one for RIM. I cannot tell you the Windows Phone answer.

So how can you fix this?

Start looking at this less as a technical problem and more as a customer satisfaction opportunity.

Sell products by making things that do stuff that people want. It isn’t any more complex than that. Ok, it is, but the core point is correct. Start with the user. Live, eat, breathe, their world. And make it better. Solve their problems. Help with with their lives. And do this better than the competition. This is absolutely possible.

5 ways to fix Microsoft mobile:

  1. GET CREATIVE – Employ some designers and start buying up some top talent in the mobile space. Don’t let career old-timer PdMs prioritise features. Leverage their experience, then dump it if it isn’t working. Have some young talent challenge the old guard. Once you have a building, stop corporate Microsoft decorating it. Once you don’t it will be professional, boring, functional, dull and utterly useless as a creative space. Give budgets to managers and delegate. Build cool spaces. This is not about money, but about ownership of creativity.
  2. STAY FOCUSED – Keep the group away both physically and structurally from the rest of Microsoft as you can (I was tempted to say if Ballmer thinks it is a good idea, do the opposite). Seriously, any team needs to stay away from the rest of Microsoft as much as it can. Microsoft is a mature, fiscally disciplined and predictable well managed company. It is everything that a startup group needs to eventually be, but not at the start. Not if the cost of this is a lack of innovation and a delay in delivery (which it is).
  3. BE AGILE – Set aggressive timescales (by Microsoft standards), then halve them. Beat the competition. Simple. Be quicker. You cannot do this following a traditional Microsoft clock. Get a faster one.
  4. INNOVATE – Define metrics that reward innovation and game-changing (there is no point defining metrics that you will miss by a mile such as market share … please). Don’t focus on the product alone, innovate across the ecosystem. CHANGE THE GAME. Normal = waste of time. Look at the work by Doblin to understand this better, but don’t just make a better phone, this is not enough.
  5. TEST – Get the value propositions tested early, and keep testing them and refining them. Write the sales material (not word documents, but living demos and mockups) before you seriously commit to building anything, and test this. And test again. If no one cares or is excited, rip it up and start again. Seriously, test this. Ask yourself why would FastCompany, Wired, NYT, and a million websites want to talk about what you are doing? If you cannot answer this, no one cares. Seriously, they don’t. The most important test yet … test with kids aged 9-19. If they don’t get it, change it.

 

Microsoft is not out of the mobile game … yet, but cannot wait forever to start to get serious about addressing this.

If you need a reminder … try this: Last weekend, 7m prospective customers committed their cash and credit card details and all future revenues to your competition. How much longer before you become a viable competitor?

The clock is running.