The real story of Nokia’s sale to Microsoft

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The Nokia of old is dead! Last year I predicted that this year would mark the demise of Nokia, at one time the biggest cell phone manufacturer in the world. After its disastrous dithering and the resulting market failure Nokia was snatched up by Microsoft for a measly $7.2b,a fraction of its worth from just a couple of years ago (in comparison, Skype was bought for $8.6b). However, I do not think that Microsoft really wanted to buy Nokia, rather it was forced into this move by Nokia’s dismal performance, and the fact that Nokia carried 90 per cent of all Windows Phone sales. Microsoft had no choice but to purchase the flailing smartphone maker in order to save its position in the market.

There are several theories about the reasons for Nokia’s speedy demise and the subsequent sale;
Partnering with Microsoft
Nokia was destroyed by its (mis)marriage to Microsoft and its flailing Windows Phone OS,  a process speeded up by its CEO Stephen Elop and his famous ‘burning memo’ in which he prematurely sentenced Symbian to death. This only seems correct on the surface; the Board decided to look for an alternative to its ageing (and a market dud) Symbian operating system while pulling the rug under MeeGo and Maemo, two operating systems still in development. It was obvious that Nokia’s own Board did not have any confidence in the company’s ability to develop a worthy competitor to iOS and Android. A nascent Windows Phone seemed like a good idea at the time. It backfired.
Failing to adopt Android
Just because Samsung has succeeded in this it does not mean Nokia would, there are score of other manufactures that do not make any money selling Android based devices even if their products are wrapped in a really nice packaging and loaded with advanced hardware (HTC One for example). Samsung could have pulled this off due to the economy of scale and its financial might which stems from its other divisions, from consumer electronics to ships. Samsung is also a fast follower and it doesn’t really need to innovate; Google is doing it for them.
Had Nokia adopted Android early as Samsung has, and innovated quickly with the hardware, price segmentation, etc., than yes, Nokia’s brand and history would have kept them either ahead of Samsung or at least a still major player.
The question though, is could they have been competitive with Samsung when manufacturing becomes the main differentiator. I don’t think so.
Nokia created the market. Nokia always led the innovation. Samsung always had to follow. That enabled Nokia to operate with decent margins. But in the new Android world where Google does the innovation in software it’s not clear at all that Nokia would be a better competitor than Samsung.
Under that scenario, Nokia would have kept its work on Maemo and MeeGo (which it executed way too slowly and way too poorly). Adding Android to that mix would not have been a recipe for dominance of the Android market.
The Nokia Board clearly lost confidence in Symbian/Qt/MeeGo strategy before they decided to go with Microsoft.
Software is a lot harder than people give credit for. If your company wasn’t really great at it already, you aren’t going to become great at it over night. And you can’t hire Chinese cloners and use commodity parts like you can for hardware.
Just look at the Android “skins” (HTC Sense for example). None of them are better or more efficient than the bare Android. The customers are annoyed by all of them – they take away from the user experience factor.
And that’s just having to develop a “skin” with the rest of the Android ecosystem coming along for the ride. Trying to build it ALL from scratch AND put together an entire ecosystem is simply beyond the top 3 players.
But even the others managed to pull off a good operating system and managed to pull it off quickly (i.e. MeeGo, Tizen, Firefox…) you’d still have the ecosystem problem. It’s not just about having a great OS, but an integrated set of services and apps, music, movies, and TV.
But even then they would still have to compete with against Apple and Google.
Unlike Nokia, Samsung has the resources but not the talent (yet). And as master of Android, Samsung doesn’t have the incentive.
But, while Samsung’s unit share dominance is safe it’s profits are not. Samsung will have the fate of the PC manufacturers. Even by remaining the most profitable non-Apple manufacturer, it’s margins will erode to razor thin. Look for a further shakeup with the Chinese HTC, ZTE, Huawai, Coolpad et. al. They are not all going to survive.
So, do you still think that if Nokia had chosen Android they would have out-executed Samsung?
Failure to predict the market trends
And this is what Nokia simply ‘did not get’. It is a victim of its own hubris and a belief that due to its sheer volume and market share it was invincible. That Nokia was a ‘king of the hill’ was and still is a common belief held by not just by Nokia’s Board but also by many bloggers and tech writers.
But that assumption could not be more wrong!
In 2007 Nokia was virtually excluded from the USA market and totally excluded from the Japanese market, top two mobile markets in the world by value and volume. How can you be king of the hill if you market share is virtually zero in the top two markets? Even then, prior to the onslaught of iPhone, Nokia was failing in the top markets and was being beaten by the likes of RIM, Palm, and Microsoft in the US market.
During that time Nokia, just like Ericsson, had one advantage; GSM, ITU, and ETSI cartel which helped it to the top at the expense of Motorola, Qualcomm and Asian manufacturers. As a result it also boosted many mobile European companies.
With the arrival of iPhone which ushered an era where UI, user experience, and a rich ecosystem is more important than radios and protocol, the whole thing crashed like a house of cards. Simply put, as the world was moving away from feature to smartphone Nokia was left with no product to compete with the big boys from West Coast and their in-house software. Its feeble attempts at Memo or Meago were scraped before they even reached the final stage of development.
Its old Symbian phones with five lines of text and two menu buttons were considered smartphones, before Apple showed the world what a smartphone was. Thus, Nokia’s failure in smartphones was predictable back in 2008. What was not predictable was how rapidly the market switched from feature phones to smartphones, therefore killing the entire Nokia mobile division.
First, Apple started stealing high value customers, operator by operator as they rolled worldwide. First AT&T, then Bell Canada, than O2, culminating with DoCoMo and soon China Mobile.
Second, Android and the advanced Android OEMs came on the scene and had a credible iPhone copy for the operators that Apple couldn’t serve. That further marginalised Nokia in advanced markets.
Third, the low cost Asian manufacturers launched low cost Androids, which was the last place Nokia was hiding.
There was no plausible scenario under which Nokia could have escaped and maintained their “so called leadership”. None.
Until the next mobile disruption it is Samsung, which is selling the most, Apple making the biggest profit, and Microsoft gradually eking its way into mobile business. The market is already split between Apple and Samsung (Google really). The vast majority of other OEMs is going the way of the PC market. It’s not a good business to be in. It’s one of commoditization and razor thin margins. One can wonder just whether or not Samsung will be able to successfully play in both markets.
Nokia cannot.
Microsoft, owning the remnants of Nokia may be able to do so (long shot) into a mid-tier player, simply because Microsoft has time and money to throw at it, and because Microsoft knows software and UI.
So Nokia of yore is dead. Who is next? Or better yet, who can disrupt Apple and Samsung?

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1 Comment

  • December 1, 2014

    Damien

    Any company which ends up in bed with MS does not wake up in the morning. Too bad for Nokia, one of the best brands in the business is now gone…

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