Prologue

This is my last post on Nokia history. The previous chapters are “seeds of disaster” and “the strategy change that did not save a company“. The previous parts have listed Nokia’s woes but they did not dig up the events that were causing all that trouble. This time we get to list that part.

THE DISRUPTION

In previous chapters we have seen the end result that took place after the dust settled. The mobile market has been split to Apple-Google duopoly where Apple serves the highest end of spectrum gathering highest margins. Android ships on virtually every other phone on the planet – on over 80% of the devices sold now. Some of the Android phones are based on Android Open Source Project (AOSP), especially in China, but still majority of devices run Google’s own version.

This wasn’t always the case. Until end of 2010 Symbian was the most used platform but in year 2010 Android grew like a rocket and at end of the year drove past Symbian on a fast lane. And we’ve heard that Nokia lost over a quarter of its market share – 11 percentage points – in just six months during second half of year 2010. That is a result of the rise of Android – sure – but I haven’t so far explained the full cause behind the rise of Android and I apologize. In order to understand what made all that happen, we cannot just look at year 2010 or 2009. We have to go further back.

This all starts during years 2005-2006 in United States where mobile carrier AT&T was having problem making their business profitable in squeeze of Verizon, T-Mobile and Sprint. CD-Host – a loyal commenter of this blog – wrote long time ago an excellent summary of the events and I’ll add it here with as little modifications as possible:

AT&T’s mobile strategy was a money loser. Customers weren’t willing to pay AT&T more than they were willing to pay Sprint even though AT&T’s network was more expensive to maintain. Customers weren’t willing to buy expensive services from AT&T because they either wanted those expensive services more reliably from Verizon or T-mobile exclusives. [1]

All the carriers were going to do a move to 3G and it was to going to require tremendous capital. There was simply no way that with AT&T’s subscriber base they could afford to make that move and remain on par with Verizon. Financially the right move probably would have been to sell their towers, pocket the money and exit the market focusing on wired services and becoming a reseller of Verizon wireless services. But if that were the case that Verizon had a corporate monopoly they might very well find themselves losing their wired business to Verizon as Verizon could offer an integrated wired / wireless service sometime in the future that AT&T wouldn’t be able to match. [1]

AT&T absolutely positively needed to leap frog their competition in some way. This was a unique moment. Essentially – cutting through the complexities of subsidy -… what they did was they paid Apple $5b / yr to build them a phone better than any other phone on market, and they would turn around and sell that phone at cost of manufacture, i.e. not including the $5b subsidy. But they would use that phone as a hook so they could heavily oversubscribe their data service and use that revenue from their oversubscribed data service to build out a data infrastructure capable of supporting the customer base they just attracted, that is a data network comparable to Verizon’s. [1]

I don’t think there were many carriers anywhere in the world that could afford to make that sort of aggressive play. That is unique to America. [1]

AT&T’s strategy worked wonderfully. iPhone immediately became the flagship phone for AT&T. AT&T oversubscription strategy led to AT&T having way more customers than they could support with their existing data network. Their reputation for quality was in the toilet, worse than Sprint’s. But the iPhone was so cool the customers stayed with AT&T, and were willing to pay a price comparable to Verizon. So AT&T had huge net profits that they sank back into rapidly expanding their network: 2007-2011 the AT&T data network grew 20,000%. [1]

Remember that AT&T choose this strategy because they were desperate and non profitable. Verizon was conversely the most profitable. Verizon, however at this point now had to speed up their conversion from 2G to 3G so that they would stay ahead of AT&T massive investments in infrastructure. Their entire brand depended on having a better network than AT&Ts so they couldn’t allow a situation where by 2011, 2012, 2013 AT&T was the carrier with the best network or they would become an also-ran and lose their business. Worse for Verizon, Apple customers are Verizon customers. The people who like quality and are less price sensitive are precisely the kinds of people that choose Apple and precisely the kinds of people that choose Verizon. Verizon knew they had a narrow window and had to act aggressively. [1]

Verizon could not have an oversubscription strategy like AT&T’s since their brand depended on reliability. So instead they were going to shift their customer base gradually over till essentially their entire customer base was on 3G, while not having a situation where they were oversubscribed and unable to provide a quality experience. In terms of network services, that was easy. Just overcharge their customers for some services, provide varying levels of subsidies for their 3G customers to create the shifts and adjust based on whether the conversion were going too slow or too fast. [1]

On the handset side of the business they saw AT&T’s strategy as reckless in the extreme. The American carriers had always wanted to make sure handset manufacturers were utilities. Americans should think of themselves as a Sprint customer that uses a Samsung, as a T-mobile customer that uses a sidekick. AT&T out of desperation had created a situation where their customer base, tens of millions of Americans thought of themselves as Apple customers getting carrier services from AT&T. Verizon in their relationship was going to make sure the traditional relationship was maintained. [1]

On the other side of the game, handset manufacturers were equally amazed of the move AT&T had done. The Globe And Mail had excellent insider story about BlackBerry and we can not take this tour into history without it.

BlackBerry (at that time RIM) founder Mike Lazaridis was at home on his treadmill and watching television when he first saw the Apple iPhone in early 2007. There were a few things he didn’t understand about the product. So, that summer, he pried one open to look inside and was shocked. It was like Apple had stuffed a Mac computer into a cellphone, he thought. [2]

To Mr. Lazaridis, a life-long tinkerer who had built an oscilloscope and computer while in high school, the iPhone was a device that broke all the rules. The operating system alone took up 700 megabytes of [storage] memory, and the device used two processors. Unlike the BlackBerry, the iPhone had a fully Internet-capable browser. That meant it would strain the networks of wireless companies like AT&T Inc., something those carriers hadn’t previously allowed. RIM by contrast used a rudimentary browser that limited data usage. [2]

I said, “How did they get AT&T to allow [that]?” ‘ Mr. Lazaridis recalled in the interview at his Waterloo office. ‘ “It’s going to collapse the network.” And in fact, some time later it did.‘ [2]

Publicly, Mr. Lazaridis and Mr. Balsillie belittled the iPhone and its shortcomings, including its short battery life, weaker security and initial lack of [secure] e-mail. That earned them a reputation for being cocky and, eventually, out of touch. “That’s marketing,” Mr. Lazaridis explained. “You position your strengths against their weaknesses.” [2]

Internally, he had a very different message. “If that thing catches on, we’re competing with a Mac, not a Nokia“, he recalled telling his staff. [2]

Taking this together with the speed of conversion Verizon’s strategy meant a diversified pool of handset manufacturers all making high end smartphones receiving enough subsidy so that about 1 million Verizon customers a month would switch over from dumb phones to $600 smartphones. Smartphones faced a chicken and egg problem on pricing though. Most customers didn’t see smartphones as enough of an advantage to pay $500 more for a more capable phone. To get them to switch Verizon would have to make AT&T’s iPhone subsidy levels available to all the handset manufacturers. In other words Verizon was going to create a market where effectively every smartphone manufacturer was able to sell their product at hundreds of dollar less than what they cost to make and still make a profit. [1]

Eventually though Verizon needed to get out of the heavy phone subsidy business. You cannot forever subsidize your smartphone conversions via your dumbphone customers if you are converting them all over. Which meant Verizon needed to create a situation where customers would eventually see smartphones are worth much more money. [1]

So now we see the basic problem that created “ecosystems”. Verizon needed to sell 100 million people on handsets that cost hundreds of dollars more than dumb phones. Given natural pricing their customers would choose dumb phones. Verizon could for a short period of time narrow that difference but ultimately they couldn’t maintain the distortion as they ran out of Peters to pay their Pauls. That is – Verizon had to over the next 5-10 years create smartphones that become so integral that least the enterprise customers and the top of the consumer market was getting hundreds of dollars in extra value from them. [1]

On the enterprise side the answer was obvious. They would need companies whose long term goals were getting revenue other places and could thus create value add from smartphones that was huge without it being reflected in the costs. For enterprise RIM was a good choice, they were moving towards selling enterprise services and server solutions. Verizon quickly boosts their relationship with RIM. Same with Microsoft and the subsidies help move Microsoft units. [1]

That left consumer.

RIM soon earned a chance to show up its new rival. RIM’s early smartphones had been a hit for Verizon Wireless, one of the biggest U.S. wireless players. Frozen out of the iPhone – Apple had signed an exclusive deal with AT&T – Verizon executives approached RIM in June, 2007, and asked if it could develop “an iPhone killer”. The product would need to have a touchscreen with no physical keyboard. Verizon would back the U.S. launch with a massive marketing campaign. [2]

RIM executives jumped at the chance. At one management meeting, Mr. Balsillie called it RIM’s most important strategic opportunity since the launch of its two-way e-mail pager. [2]

The product was the BlackBerry Storm. It was the most complex and ambitious project the company had ever done, but “the technology was cobbled together quickly and wasn’t quite ready“, said one former senior company insider who was involved in the project. [2]

The product was months late, hitting the market just before U.S. Thanksgiving in 2008. Many customers hated it. The touchscreen, RIM’s first, was awkward to manipulate. The product ran on a single processor and was slow and buggy. Mr. Balsillie put on a brave face, declaring the launch to be “an overwhelming success“, but sales lagged the iPhone and customer returns were high. [2]

The Storm had failed to give Verizon Wireless the Apple-killer it coveted, and RIM soon abandoned the product. [2]
Verizon had another approach cooking up on Kin phone, but that plan was aimed for hooking people with teenaged children to be Verizon customers. The strategy AT&T had in iPhone was able to steal customers from every category so Verizon knew they needed somethin else in addition to Kin. That effort turned even more important as Kin phone got delayed.

Google in 2005 had acquired Android Inc. to create a line of phones that would act as a vehicle to sell advertising services. Longer term that advertising revenue would allow Google to subsidize the costs of handsets and additional value added services. Short term though they had no way to get the ecosystem off the ground but once off the ground they’d be able to maintain it. [1]

Android was supposed to be BlackBerry clone with QWERTY keyboard but When Apple announced the iPhone, Google understood the change in smartphone paradigm and immediately returned the OS on drawing board. The next version was aimed to directly compete against the iPhone, which suited Verizon’s needs extremely well.

Google had a short term problem and a long term solution.
Verizon had a short term solution and a long term problem.
Moreover because Google was in the advertising business and not the handset business they didn’t post the sort of strategic threat that creating a powerful ecosystem for a handset maker would post. [1]

A marriage made in heaven. So Verizon threw their weight behind Android. Verizon built a massive marketing campaign around Motorola’s Droid phone in 2009 – at the expense of marketing dollars to support BlackBerry products. Verizon’s “iDon’t” campaign highlighted all the shortcomings of the iPhone that Android addressed with its consumer-friendly user interface. Billions of dollar in handset subsidies and advertising subsidies drove sales of Android handsets, which created an applications and services market which increased the value of Android which…… [1]

…the self-feeding system was born. Android became popular among app developers and retail found it much more pleasant than Symbian or BB OS.
Expansion abroad was inevitable. Apple landed iPhone to new markets, usually via an exclusive deal with one carrier. The phone was desirable and wanted, in fact so much it had the capability to move customers between carriers. The carrier with exclusive rights managed to steal itself the most valuable customers from the other carriers, who found themselves in the need of “iPhone killer”. Luckily at this time the answer was ready and came in form of Android. Add to this practically all big manufacturers (save Apple, Nokia and RIM) jumping to Android wagon, especially Samsung and their insane marketing budget. Then fast-forward few years.

That’s how the Apple-Google duopoly came into existence.

THE PRICE OF A PHONE

As we’ve seen there really were no valid competition for Apple’s iPhone when it came to market. Apple made their phone from parts for which just the bill-of-materials (BOM) was more than the retail price of many competing phones. Mr. Lazaridis was not exaggerating when he said that Apple had put a Mac in a phone. There really was no way any of the other manufacturers could have come up with a device like that before Apple as the device would have been priced too high (the problem with myDevice).
AT&T threw high subsidy to the mix. While all the other phones were getting subsidy of $80 to $150 at the time, iPhone got subsidy that got as high as $350, which drove the price of iPhone down to the level of competing phones. At the same time iPhone offered the best available user experience for web browsing by being a bandwidth hog – another thing that carriers had never allowed other manufacturers to do. It was not just Nokia that was without proper answer – none of the existing players were having anything even close to iPhone in their portfolio.

Please do understand that there was nothing new in the subsidy model. The critical thing was the one-product favoring subsidy in a level literally several times that of competition. That’s why the multi-billion dollar support from another carrier was required for anyone that wanted to compete against Apple. This changed the market as the most wanted phones got increasingly higher price also in countries where handsets are bought without subsidies. The evolution has lead to a market where high-end handsets can indeed cost $700 unsubsidized and people still buy them.
But the change to there was not free of charge. AT&T supported Apple. Verizon supported both Google as the developer of Android and several handset manufacturers that were using Android in their phones. Nokia was not in either of the receiving ends which made it use hardware that was seriously behind the competition.

THE CHOICE OF AN OPERATING SYSTEM

Android was free. With the support form Verizon and growing popularity it had turned into “almost as good as iOS” that any manufacturer could have… And have it for free. If you don’t own a platform of your own (like Nokia and RIM did) who doesn’t choose a platform like that? Microsoft, Palm, Symbian Foundation,…… everyone trying to produce a competing OS suddenly needed to offer better than Android if they wanted to convince manufacturers to use their OS instead. And even then they would’ve needed to offer it for free.

As the Android phones grew in popularity, practically every Symbian maker outside Japan switched to Android by the end of 2010. Well everyone except Nokia that is. Considering the setup it is no wonder that Android grew past Symbian. What everyone should wonder is why it didn’t do that sooner? From developer perspective Android was clear and unquestioned number 2 platform by the time Nokia announced the death of Symbian.

app_store_app_counts_march_2011

Elopian management failed in several tasks where communicating the switch away from Symbian is one of the biggest but they were already late as others had already jumped to the ecosystem that was largest by sales and growing fastest. Therefore the big public speculation around Nokia in early 2011 was whether they were going to go Android or not. That was the main decision to make; all the failures in carrier customization, public communications and so forth come secondary. I really like how it was put by Andrew J. Scott, CEO of Rummble in December 2009:

Android is license free, it has multiple operators and MNO’s backing it. It’s reach will rapidly become very big indeed. It will overtake iPhone in 2010, it is seriously challenging incumbants; and I’d expect to see a Nokia phone running Android within 3 years (if they are still even building hardware then! 😉” [3]

THE CULPRITS

The web is full of conspiracy theories related to Nokia’s demise. My personal opinion is that we should never attribute to conspiracy theory what can be attributed to stupidity. Nokia leadership team made multiple bad decisions during the years before and after the iPhone. Trying to ignore all those and resort to conspiracy theories is plain stupid.

So conspiracy theories aside, who to blame for Nokia’s demise? In case of both Nokia CEOs we have to remember that they cannot get all of the blame alone. In conversations.nokia.com Stephen Elop answered to audience questions after Microsoft had bought Nokia D&S unit. What we should note there is this answer (to a question proposing Elop is a Trojan Horse sent from Microsoft):

As for the Trojan horse thing, i have only ever worked on behalf of and for the benefit of Nokia shareholders while at Nokia. Additionally, all fundamental business and strategy decisions were made with the support and approval of the Nokia board of directors, of which I was a member.

Of course we could simply assume he is lying, but this is public webcast hosted by Nokia. Anything that is not true (especially if it is about BoD members) will definitely come back to him. He knows that. I say at this specific occasion we can rule out the chance that Mr. Elop is lying. And that leads to the fact that when I have been criticizing either management for their mistakes, I have talked about “management” i.e. board of directors, not just CEO.

Olli-Pekka Kallasvuo and his crew

The first part of this Nokia history was mainly about the OPK management. They faced definitely one of the biggest disruptions in mobile and the fact that they tried to build their strategy on using same (low spec) hardware for every product while selling more expensive products with more services describes how badly they understood the “PC in a phone” change around them. Cheap Androids were offering the same OS and app store as the expensive ones, just with less performance and smaller screen. The same way expensive laptops may have bigger display, better connectivity etc, but in the end same OS runs them both and you can install same programs to both.

If you want to say where Nokia really missed the boat, it was in 2005-6 in not landing that AT&T exclusive contract. Imagine if Nokia could have been selling 20m top of the line phones in a single country and the effect that would have had on Nokia’s ability to bring out new technologies. What would a $5b / yr technology have done to Nokia? How much would a $5b technology subsidy have changed their ability to innovate for the rest of the globe? [1]

The original Maemo team inside Nokia had potential in Maemo powered 770 Internet Tablet. Nokia could have landed the AT&T contract by creating a phone enabled version of it, similar to N900. I say that the original Maemo team would have been fast and flexible enough to do that. I don’t know if Nokia even was considered as a vendor. It is quite certain that Nokia management of the time would not have been willing to risk a deal like that by handing it to an agile group of engineers and designers. That is more of the style Nokia had in 90’s. In 2005 the end result would probably have been “designed by a committee” product from a slow and clumsy organization whose only purpose seems to be to prevent any innovation from happening. Like Symbian was – and like MeeGo grew to be.

Second chance that Nokia missed was to offer the same setup for Verizon. They could have easily escaped Verizon’s fear of one handset maker gaining superiority by making the Maemo OS available to other manufacturers for free. That would have been pure win as Nokia would have kept their hold on maps, music, cloud storage and app store the very same way Google does. It really wouldn’t have mattered whether others made better and cheaper phones if you owned the ecosystem behind it. Once again, if this task had been handed to proper project with free hands, this could have happened. The existing organizations were too rigid for that.

But these are big “if”s. We do not know if Nokia was even offered the chance.

Third and last big miss from OPK management was the ignorance over Android. If nothing else, Nokia should have produced a line of Android phones when it became clear that carriers have increasing interest on Android. Publicly commenting that using Android is like peeing to your pants for warmth is not helping your relations towards a carrier that has poured literal billions of dollars into Android – or toward the makers of Android for that matter. (Especially silly if you try to negotiate for co-operation with both just a few months later.)

Stephen Elop and the Board of Directors

The second part of this Nokia history covered the mistakes of Elopian management and they do get their fair share. They had high hopes that Windows Phone would turn into a third ecosystem, equal to Android. They bet on future where Windows Phone in consumer market would be widely used by manufacturers, end-users and carriers but it is questionable if that future ever was possible. Microsoft if anyone has shown what a herculean task the battle against the Apple-Google duopoly in consumer space has been during these years. And as said before, it is fair to ask if the Nokia Board even was qualified to properly analyze the situation of Nokia in late 2010.

Then there is the communication. CEO Stephen Elop made the call to go all-out with the strategy rather than trying to smooth out the transition. We know how that turned out.

Looking backwards I feel that the one and only achievement we can credit on Elopian management is the fact they managed to exit the deadlock they had gotten into by selling the handsets unit to Microsoft. Elop pocketed $25 million after the sales of Nokia handsets, prior to leaving to Microsoft. Fine. BlackBerry CEO Thorsten Heins was promised over twice the money had he been able to sell BlackBerry and yet he could not find a buyer.

That’s why I say it is an achievement. But I would have wanted to see a happy ending for the story, including revival of Nokia’s Devices & Services business. That we did not get.

nokia_takeaway

IN SUM

Nokia got disrupted by Apple and Apple’s fast follower Google. Many others – RIM, NEC, Fujitsu, Palm, etc – also got disrupted. Nokia, RIM and the Japanese DoCoMo OEMs were the slowest to respond and suffered the most. Samsung, HTC, LG, Motorola were fastest to respond, and did better, but only Samsung did well.

I think the best answer for “who to blame” comes from YLE (Finnish broadcast channel) document about Nokia’s fall, published in November 2013. [4] They interviewed several analysts but I want to pick up these four:

  • Andrew Hill from Financial Times
  • Tim Shepherd from research firm Canalys
  • Neil Mawston from Strategy Analytics – another research company
  • Tomi Ahonen – author, consultant and motivational speaker.
    (Mr. Ahonen worked at Nokia Networks unit from 1999 to 2001. He left over five years before iPhone came to market and almost ten years before Elop came to lead Nokia.)

Like everyone else, these four were interviewed separately – they did not know what was asked from the others or what those people had said. There were multiple things asked – about history of Nokia and past events. Last two questions were “Is it proper to say that Stephen Elop seized the power within Nokia?” and “who destroyed Nokia?“. Here are the answers:

Neil Mawston:

I think it was a combination of internal and external issues. So internally Nokia failed to address the American market as strongly as it should’ve done, and externally Apple and Android pushed down the cost of devices and improved the quality of devices with touch screen devices for example, and that had a big impact on Nokia’s performance.“

 [4]

Andrew Hill:


”I think it is very difficult to pin on one person the decline of Nokia because the very things the very seeds that made Nokia great ten years ago might also have been contributing to the complacency that led it to loose it´s way . . . I´m reluctant to put one name in the frame because I think when you have a company that large and that successful a lot of people end up being responsible for strategy good and bad.” [4]

Tim Shepherd:


”Eh, well, I think it’s an answer that has a couple different attributes to it. On the one hand it was Apple and it was Google coming into the market. But that didn’t need to destroy Nokia . . . Effectively it was Nokia’s leadership, failing to recognize the market dynamic was shifting, failing to address the problems within Nokia.“

 [4]

Tomi Ahonen:


”In my opinion yes . . . Many of these decisions seem to be against best interest of Nokia, whereas every decision made by Elop has been in best interest of Microsoft. In this aspect CEO Elop has been acting against his position as CEO, i.e. against the best interests of Nokia. . . . In my opinion it [who destroyed Nokia] was CEO Elop.” [4]

Author’s note: I wrote the entire Nokia trilogy since I heard that consultant Ahonen was going to write a book about Nokia. Knowing his track record I felt it would be good to have a checkpoint where one can compare his book to other sources and different background story.

For last four quotes I’d like to point it out that when Tomi Ahonen creates numbers for his blog or presentations, he uses Canalys, Strategy Analytics and (sometimes) Financial Times as his sources – not vice versa.
Whose version should we trust?

REFERENCES:

[1] https://dominiescommunicate.wordpress.com/2012/10/22/time-to-play-with-graphs-again-tomi-ahonen/#comments

[2] http://www.theglobeandmail.com/report-on-business/the-inside-story-of-why-blackberry-is-failing/article14563602/

[3] http://communities-dominate.blogs.com/brands/2009/12/us-west-coast-drunk-on-iphone-yes-but-android-is-not-the-answer.html?cid=6a00e0097e337c883301287637dd7e970c#comment-6a00e0097e337c883301287637dd7e970c

[4] http://yle.fi/aihe/artikkeli/2013/11/14/nain-nokia-tuhoutui-osa-ii-kasikirjoitus

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