Nokia has brought in Microsoft business head Stephen Elop as its new chief executive, but can he make a difference as the company struggles to compete in the smartphone market?
Appearing on CNBC in July, Olli-Pekka Kallasvuo was in combative mood. The Wall Street Journal had quoted anonymous sources suggesting he would be sacked from his position as chief executive of the Finnish handset maker Nokia by August.
“Obviously there has been a lot of speculation on my position… This speculation is detrimental,” Kallasvuo said. “It’s not good for Nokia and I feel it needs to be brought to an end one way or the other.”
This morning, it ended. Kallasvuo, appointed in 2006, is out, to be replaced from 21 September by Stephen Elop, one of Microsoft‘s five division chiefs, in charge of its business division.
Nokia’s decision to replace its chief executive with a non-Finn – and a Microsoft executive at that – is a make-or-break decision for the company’s future in the fast-growing smartphone market. After years of untroubled growth in which it has dominated handset sales and made handsome profits, the wheels abruptly came off when first Apple with its iPhone and Research in Motion (RIM) with its BlackBerry, and latterly a slew of manufacturers offering touchscreen handsets using Google’s Android software, have skimmed the profits off the top of the smartphone market – leaving Nokia fighting for the commodity end with Asian handset makers.
Asymco, a Scandinavian consultancy run by Horace Dedlu, who examines the mobile market, thinks that Nokia has become the prisoner of what was until three years ago a hugely effective business model. Nokia isn’t in trouble, it argues. But nor will it be able to turn around quickly.
“The reason Nokia can still coast with poor products is that they have a vast distribution network,” Dedlu noted this week. “I don’t know the exact distribution, but let’s assume that half their phones go through carriers and half through distributors who resell unlocked phones world-wide. Carriers will continue to carry the phones because they slot into well-established portfolio slots, and distributors will continue to distribute because the product is competitive in markets where there are no other unlocked smartphones at the same price.”
The effect of that inertia took a little while to show on Nokia’s finances – but when it did, it was dramatic. For 2007, Nokia’s revenues were €51bn (£42bn) and its profits €7bn. In 2008 revenue stayed static at €50.7bn, but profits halved to €3.7bn. Then in 2009 they collapsed: revenues fell to €40.9bn and profits collapsed to €260m, including a €913m loss in the third quarter – the first time in more than a decade that the company had recorded a quarterly loss. Nokia was not mortally wounded; it was suffering a thousand tiny cuts which were bleeding it dry.
The rumours of restiveness among the executives had been swirling since April, but the abrupt nature of the decision, just days before the Nokia World exhibition in London at which the company and its partners will show off their wares, shows that Nokia’s board thinks there is no time to lose to refocus the company.
The question is whether Elop, 46, is the “Steve Jobs-like” figure that the research group Gartner suggested in the summer Nokia needs.
Yet many companies would love to have Nokia’s problems. It sells more mobile phones, and more smartphones, than any other company in the world; it has pulled ahead of its former rival Ericsson (whose handset efforts have slumped into a joint venture with Sony which barely makes money and has seen shrinking sales). Until 2007 it seemed to have the smartphone market sewn up. Motorola, which had had a runaway hit with its Razr phone, had disappeared from view as it struggled to produce a new design that users would buy.
Then Apple upset the mobile handcart. The iPhone was not really a phone in the way that Nokia thought of it; it was a pocket-sized portable computer with a permanent mobile internet connection. Crucially, Apple made no concessions to mobile carriers; it simply refused to let them dictate what software was installed on the phone, or set data usage limitations. It began selling in huge numbers – and sucking the profits, as well as the cool factor, out of Nokia.
The problem got worse as RIM benefited from an iPhone “halo” which boosted its sales (you could type more easily on its physical keyboards). Then Google’s Android joined the race with its open-source software, which any handset maker could tailor as they wished – and, crucially, could also tailor to mobile networks’ wishes.
That meant that the profits from the model Nokia had established, of building one group of phones which carriers could tailor and sell, and another that shops could sell direct to customers, were under attack. It didn’t have an iPhone; and Android meant a lot of me-too iPhones, shutting Nokia out of that market.
Analysis of the mobile phone market shows that since Apple’s entry into the smartphone market, it and RIM have swallowed up 65% of the available profit in the sector – compared to RIM’s 7% before 2007. In that sense, the biggest beneficiary besides Apple of the iPhone is RIM. The biggest losers, by contrast, have been Nokia and Microsoft (which is simply abandoning its decade-old Windows Mobile operating system for a new one, Windows Phone 7, due for launch imminently).
Nokia’s – and Elop’s – problem now is to determine how it can attract customers with compelling new handsets, while keeping its existing buyers among the carriers happy, while fighting off the triple threat from Apple, RIM and Android, which have prevented it breaking into the US smartphone market in particular. It is possible that Elop will conclude that the only way forward is a radical shift – such as adopting Android in order to gain its benefits while hanging on to carriers. Alternatively, he may think that Microsoft’s Windows Phone 7 offers the best solution. And it may be significant that in Microsoft chief executive Steve Ballmer’s signoff email on Elop’s departure he said that he will “look forward to continuing to work with him in his new role at Nokia”.
One thing is certain though: if Nokia continues as it is, it will be reduced to a commodity also-ran within years.
Who is Stephen Elop?
Previously CEO of Macromedia, the company originally behind Flash and Dreamweaver; he oversaw its sale to Adobe Systems in 2005. He then took over Adobe’s global sales operation, before becoming chief operating officer at Juniper Networks until being hired away away by Microsoft in 2008 to replace long-term Microsoft executive Jeff Raikes.
The Business division that Elop headed runs possibly the safest monopoly in the computer world: Microsoft’s Office suite, which is used as a standard throughout businesses and governments around the world. Last year its revenues were $18.6bn (£12bn) – and profits $11.8bn. The rollout of Office 2010, the latest version, saw unexpectedly slow sales. Even so Office remains Microsoft’s safest cash cow.
His comments on his appointment to his new job will be seen either as his epitaph, or a warning: “I have a great deal to learn about Nokia, and a great deal to learn about Finland.” Nokia’s board and its employees will now be wondering whether he will like what he learns – and how much he will change.
For Microsoft, Elop’s departure leaves a significant hole. He is the second of five divisional presidents to leave this year; the other was Robbie Bach, who oversaw the development of the Xbox gaming console, which has become a strategic and profitable business for Microsoft. Steve Ballmer, Microsoft’s chief executive, sent out an email on Thursday evening indicating that the move had caught the company by surprise: “Stephen leaves in place a strong business and technical leadership team … all of whom will report to me for the interim,” it notes.
That leaves Ballmer with direct responsibility not only for the mobile strategy, but also now its office products, giving it not one but two crucial businesses where his choice of appointment could determine Microsoft’s success – or failure – in those fields in future.