A Two-Year Report Card: The Nokia/Microsoft Partnership

When Stephen Elop took the helm of the struggling mobile handset giant Nokia on the last day of summer in 2010, his to-do list was short but daunting: revamp the corporate culture of a Finnish institution and reinvent the business for a new age. Quickly.  Less than five months later, he would appear in front of investors at a swanky London hotel to announce a bold shift in strategy. In the lead-up to the event, a memo was leaked in which Elop likened Nokia’s predicament to being aboard a burning platform.

Still, Elop’s leap went further than many had expected. Nokia announced it was forming a strategic alliance with Microsoft (which also happened to be Elop’s former employer) in an attempt to create a third mobile ‘ecosystem’ to challenge Apple and Google Android devices. This would come at the expense of Nokia’s own Symbian operating system (see burning platform) and the Meego mobile OS which was being developed jointly with Intel. Microsoft CEO Steve Ballmer joined Elop on stage to help spell out the case for the move. “This partnership with Nokia will dramatically accelerate the development of a vibrant, strong Windows Phone ecosystem,” he predicted. Observers were also cautioned not to expect an overnight transformation. 2011 and 2012 would be “transition years,” counseled the Nokia press release.

As the Finnish handset maker entered 2013, it stunned observers by announcing that it had achieved underlying profitability in the fourth quarter of 2012 thanks to better-than-expected sales of its flagship Lumia smartphone.

Nokia wasn’t due to issue its fourth quarter and full year results until January 24th, but details of these accomplishments were made public two weeks in advance. Investors rewarded the company with a healthy boost to the stock and talk of a turnaround began in earnest.

For Elop, the timing was fortuitous. He’d said the transition would take two years, and two years on he needed something to show for all of the pain the company had endured.

Still, there was a caveat: the next quarter wasn’t shaping up to be quite so strong. Two weeks later, Nokia announced plans to cut its dividend for the first time in over 20 years to preserve cash. Market enthusiasm cooled once again.

So has the company truly turned a corner? Is the bet on Windows Phone finally proving its merits? Can Nokia and Windows indeed create a vibrant third ecosystem that will thrive and evolve to one day challenge smartphone leaders like Apple and Samsung? To mark the second anniversary of the Nokia Microsoft alliance, Informilo decided to put together a report card to assess progress.

“Two years is a really important milestone and my assessment would be that Nokia is probably not as far along the road as it had expected to be,” says Ben Wood, Chief of Research at CCS Insight . “It’s proved a lot more challenging to get traction around Windows Phone than they had anticipated.”

The technology research firm Gartner recently published data showing that while Nokia’s handset sales improved in the fourth quarter, thanks to the launch of new Lumia Windows Phone 8 models and a good response to its Asha mobile phone line, its share of the total market continued to drop from 23% in Q4 2011 to 18%, the lowest it’s ever been.

Gartner’s data also shows sales of Nokia smartphones in 2012 dropped 53.6% from the previous year. Hardly the trajectory Elop had been looking for when he cast off from that burning platform.

Ten months ago, the head of mobile at IHS Screen Digest Ian Fogg penned a warning that Nokia’s Windows Phone strategy was on the brink of failing. The recent hoopla around Lumia sales has failed to impress him. “Nokia has markedly little momentum with Windows Phone shipping 4.4 million in Q4, the launch quarter for Windows Phone 8. The launch quarter for Windows 8 itself. It’s quite a small number,” he tells Informilo.

By comparison he points out that Sony, historically a much smaller player in the mobile market and now firmly in the Android camp, shipped 8.7 million smartphones in the same quarter.

“Although Nokia has made some headway with Windows Phone, it’s very modest headway in a market that is moving very quickly and where Nokia’s competitors are selling smartphones in ever greater numbers,” says Fogg.

Data from Strategy Analytics shows that Nokia retained its position as the world’s third-largest smartphone vendor in 2012, but its share in the competitive upper end of the market dwindled from 16% to 5%.

The company’s latest portfolio of Lumia smartphones has drawn praise for standing out from the crowd. The flagship Lumia 920, for instance, comes in an array of arresting colors, and features a sleek polycarbonate casing in addition to the things Nokia is known for: impressive camera technology and reliable maps. A significant improvement on previous efforts, agrees analyst Linda Sui, but not yet the hero model that will take down the iPhone or Samsung S3.

“I have a nickname for the iPhone and I call it the Hotel California phone,” jokes CCS Insight’s Wood. “Once you’re in, it’s very difficult to leave. Once you spend a ton of money on apps and accessories and then you’ve got Apple TV and an iPad and everything else, before you know it you’re worshipping at the iTemple and it’s difficult to find another religion.”

Gartner mobile analyst Carolina Milanesi is somewhat more optimistic. “I think they have reached the turning point. They have now the foundation done and need to build on it and fast,” she says. She concedes, though, that Nokia and Microsoft have likely not made as much progress as they’d hoped to in terms of creating a competitive third ecosystem.

The very term “ecosystem” implies a fertile landscape where seedlings can sprout and flourish. In the mobile space, it is the apps that produce the oxygen responsible for the vitality of the environment.

“Microsoft has done a decent job but it’s taken them 18 months to get to 125,000 apps. BlackBerry has launched BlackBerry 10 with 75,000 apps and the expectation of having 100,000 within 12 weeks. And they seem to have won the hearts and minds of the developers more effectively than Nokia has been able to,” says Wood.

“To be a smartphone platform, it needs to have wide app support,” agrees Fogg. “An ecosystem needs to be a certain scale or the third-party developers won’t bother to support it. Without their support, there will be fewer apps….It becomes a virtuous circle if you do it right, which is what’s happening with Google’s Android and Apple and it becomes a vicious circle that goes in the exact opposite direction if you don’t get that critical scale. And at the moment Windows Phone 8 is sub-scale. It just isn’t there.” What’s needed now, he says, is growth that bears a resemblance to a hockey stick.

Of course, recent history demonstrates just how quickly things can change in the mobile sector. Gartner data shows Nokia’s share of the global handset market peaked in the fourth quarter of 2007 at over 40%. This was the same year that the iPhone was launched and Android was unveiled. In just over five years, the newcomers have become the industry’s dominant forces and Finnish company that’s been iterating since it was founded as a paper mill in 1871 is seeking yet another successful reinvention.

Can a shift like we’ve seen over the past five or so years happen again? “The market is more complex now, which makes it more stable,” says Gartner’s Milanesi. “It takes more than a good product to get successful. In the good old days you had one hit and you got to the top even if just for a few quarters. Think of Sony-Ericsson and Motorola.”

Asked for a prediction of where Nokia will be in a year’s time, Wood ducks. “I just don’t know. I’ve been sitting here quarter on quarter for the past two years trying to look into the crystal ball and predict Nokia’s future,” he says. “What I will tell you is, Nokia’s 2013 portfolio is their most important set of new products that they have ever delivered.”

Two years on, the Nokia/Microsoft alliance is intact and is clearly making some progress. But realizing the vibrant and competitive ecosystem the companies envisaged at the outset will depend on what they do next.

 

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