One false step and you’re dead. Or worse: You’re the walking dead. This is what awaits CEOs who mismanage a product transition and allow the existing revenue stream to run dry before the promising new product shows up.
This is known as the Osborne Effect, named after Adam Osborne, the prolific inventor, entrepreneur and writer, and founder of the eponymous Osborne Computer Corporation. In 1981, Osborne introduced a machine that was, in effect, the first commercially available portable computer, the Osborne 1:
Sales took off, reaching 10,000 units per month. This might not sound like much by our smartphone standards, but thirty years ago it was a truly phenomenal success.
This wasn’t enough for our fearless entrepreneur. In 1983, he told anyone who’d listen: Just you wait! I have two superior models in the works, the Executive and the Vixen.
Customers took his advice. They stopped buying the current model and waited…and waited… In 1985, the company ran out of cash and went bankrupt.
Hence the verb: To osborne one’s product is to kill the current model, and its revenue, by prematurely announcing a more attractive replacement.
(Some, such as the redoubtable Robert X. Cringely, contend Osborne wasn’t osborned, but merely outcompeted. I was at Apple in Cupertino at the time, and have a clear recollection of our collective gasp of surprise when Adam Osborne started touting the unavailable products that killed the Osborne 1 revenue.)
With this in mind, let’s turn to Nokia’s latest wave of troubles: the transition from its old Symbian smartphone OS to Windows Phone 7. (We’ll also look at Microsoft’s very cautious approach to its own perilous transition to the next generation of Windows and to another attempt at securing a position in the tablet market.)
Last Monday, Nokia issued yet another profit warning. Blaming “competitive dynamics” and “pricing tactics,” the company declared its previous revenue forecast invalid and shed doubt on its ability to generate a profit in its Devices business. It also flatly told Wall Street it would no longer “provide annual targets for 2011.”
Translated into plainer English: We expected Android and Apple to take the high-end business while we’re working with Microsoft on our Windows Phone 7 devices, but we were surprised by a the swarm of low-cost Android phones. We don’t know how bad it will get, but…Just you wait!…we have “increased confidence” in our ability to deliver Microsoft-powered Nokia smartphones sometime “beyond October.” And we might be working on a MeeGo device as a “research project”.
Investors were not convinced and the stock plummeted, -20% in a week:
But that’s only half the story or, if you prefer, half of the drop in share price.
Consider the 40.7% drop since February:
The stock peaked on February 8th, just days before the Feb 11th announcement of the MicroNokia “strategic partnership”. Summarizing the corpospeak:
- Nokia adopts Windows Phone 7 as its smartphone OS
- Nokia gets unspecified customization and financial advantages
- Microsoft gets the world’s largest cell phone maker as an OEM
And with the announcement, CEO Stephen Elop osborned Nokia. Customers and, more important, carriers were told the legacy OS was dead and a Nokia Windows Phone 7 device was ten months (or more) away.
No one on the Street believed Nokia’s assurances that the company’s “traditionally strong carrier relationships” would guarantee continued sales of Symbian devices. The May 31st profit warning confirmed investors’ fears. Nokia had run straight into an army of handset makers who offer a wide range of devices powered by Android, a platform with a virile present and an exciting future.
In the now famous February 8th Burning Platforms memo, Elop tipped his hand. Yes, he makes a valid point: This isn’t a platform war, it’s an ecosystem war. But he also makes two crucial mistakes: He blames Nokia employees (“we have lacked accountability and leadership”), and then he implies that Nokia is open to all possibilities as they enter a domain that is forced upon them by the competition (“Our competitors…are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyze or join an ecosystem”).
A mere three days later, Elop stands on stage with his former MS boss and tells the world that Nokia has joined the Microsoft ecosystem. Elop’s puzzling and undiplomatic behavior doesn’t sit well with observers and drives some to conspiracy theories.
How about another approach? Make the Microsoft deal, work on a couple of devices, and keep it a secret. Even, perish the thought, subcontract development to an enterprising Asian OEM in order to ship the next generation devices ASAP. From the memo:
“Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us.”
When everything is ready, announce it and ship it with appropriate bombast.
In the meantime, rumors would have swirled: What are they up to? A new version of Symbian? A MeeGo tablet? We all expect a new CEO to kickstart new and exciting projects.
So what really happened?
I think the explanation is simple: Microsoft demanded an immediate announcement. They needed a PR coup. With no Phone 7 OS sales to speak of, Microsoft had no revenue to lose and the perception of adoption by the biggest cell phone maker to gain. (After the NokiaSoft announcement, Microsoft got an instant boost of phone credibility.)
How did Ballmer convince Elop to expose Nokia to the Osborne Effect? Was it the “worth billions” concessions? Given the depth of the hole Nokia now finds itself in, the number must have been a large one.
Contrast this with Microsoft’s careful previews of Windows 8. You can see a “canned” demo here, and, from last week’s D9 Conference, a “live” version here. Very nice UI, clearly drawing inspiration from the innovative Windows Phone 7 work.
I also encourage you to watch Steven Sinofsky interviewed on stage by Walt Mossberg and Kara Swisher (video here).
Beyond the slick demo, what do we hear? Continuity.
Sinofsky, the Windows Division President, repeatedly reassures us: Underneath Microsoft’s new touch-enabled tablets, we give you the tried and trusted Windows that hundreds of millions of customers rely upon: Office apps, networking, an approachable file system (a subtle dig at the iPad), a mouse and keyboard if desired. Everything.
This gets roundly criticized by MacWorld’s Jason Snell and Daring FIreball’s John Gruber. They see Windows 8 as fundamentally flawed because it hasn’t learned the from-scratch lesson of the iPad. Windows 8 brings old baggage into a new world. It’ll be complicated, slow, and eat batteries while the “fresh” iPad is simple, pristine, fast, fluid and offers great battery life.
As expected, our two critics are taken to task by Jared Newman:
“Microsoft doesn’t have to copy Apple’s strategy for Windows 8 to succeed. In fact, copying Apple would be a fatal mistake. Instead, Microsoft should be charting new territory with Windows 8, and that’s exactly what’s happening.
What Microsoft demonstrated on Wednesday is exactly what I want in a computer — a lightweight tablet UI that’s meant for casual computing and a powerful, classic Windows that allows me to work. I’m tired of carrying around my iPad and laptop together. I want one device that does everything.”
This is exactly the Microsoft party line: The best of the PC and the tablet in one device.
I have sympathy for both sides. Yes, Microsoft could do well by following the iPad lead…but there’s no way Microsoft can take the plunge into a really different platform. (They did it for Windows Phone where there’s no legacy business to protect, but they can’t with the “real” Windows.)
Microsoft knows better than to osborne itself. The company has consistently stuck to its “Windows Everywhere” mantra and, no less consistently, has made sure that every new version of Windows offers strong backwards compatibility. It hasn’t always work perfectly — see Windows Me or Vista — but the Windows + Office business has been Microsoft’s Golden Goose for decades.
For Microsoft, there is no Post-PC market. As Ballmer insisted when asked about the iPad: It’s a PC — minus the mouse and keyboard!
Grand strategic considerations aside, there is, of course, the small matter of implementation — and what Android and iOS will do next. Sinofsky has promised more details at Microsoft’s Developer Conference this coming September, we’ll have to wait until then.
And while we wait, we’ll watch how Elop gets Nokia out of its self-inflicted osborning.
Asymco’s Horace Dediu isn’t optimistic about Nokia’s prospects. In a recent post titled “Does the phone market forgive failure?”, he lists the handset makers who “hit the rocks”, in terms of profitability. None seem to have recovered. Let’s hope Nokia is the exception.
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19 Comments
“Let’s hope Nokia is the exception.”
Why would we hope Nokia is the exception?
I think it would be very interesting if Nokia crashes and burns. It would also be interesting if their plan works and they are able to successfully transition to WP7.
“As expected, our two critics are taken to task by Jared Newman:”
Gruber’s response is worth the read: http://daringfireball.net/2011/06/ice_water_enthusiast
It isn’t Cringely that says they were “out competed”, it’s Mike McCarthy who was actually at Osborne. So, who we gonna believe?
I think it’s the difference between an upstart strategy/mistake and an incumbent/monopoly mistake. The upstart feels/worries their current offering isn’t compelling enough, and touts their future. They can turn this from a mistake, if they execute and deliver on-time and on-spec. Too often they don’t. As an upstart they possess little reputation, and this misstep costs them all of it.
The incumbent worries that their next won’t be as profitable/dominating as their current OR is complacent, assuming that they’ll succeed no matter what. This can be comforting confidence in a well-charted course or arrogance ignoring changed reality. But, again, the real test is execution. The example in my mind isIBM – still a large, profitable company but nowhere near its dominant self of the 60s-80s.
Another brilliant article from my favorite blog.
I think if Nokia survives this transition and starts shipping innovative WP7 and Win8 based products – they will be a very formidable competitor to Apple and various Android makers. Hardware design wise, Nokia is probably 2nd only to Apple. They bring a lot to the table here, in a way that HTC, Samsung, and even HP simply cannot. I personally cannot wait to see what they cook up with Mango, and down the road with Windows 8.
“But he also makes two crucial mistakes: He blames Nokia employees… and then he implies that Nokia is open to … ‘how we either build, catalyze or join an ecosystem.’ ”
.
These “mistakes” were necessary to justify the massive disruption, the discontinuation of his predecessors’ efforts to build out a modern ecosystem. It is reasonable to question whether the desperately unequal partnership with Microsoft WAS indeed the best course, but it is also reasonable to argue that he was hired to do just that, i.e., that any alternative would have breached his contract with the Nokia board.
.
It is also true that if Nokia were merely sitting in Busineess As Usual mode today, Android phones would be gutting the sales of their “mainstream” feature phones. Horace D argues that dealers and the blogosphere/cognoscenti see the abandonment of Symbian and tilt customers towards some future direction, but I think retail sales are far too opportunistic to be heavily driven by that. And there really never was that much hope that Symbian would catch up, anyway.
One of the best opinion pieces I’ve read on this subject. Well done.
What percentage of Nokia’s shares did Microsoft had bought when the agreement was announced (Feb 11th)? By the drop of its price it seems the other shareholders think the ogre is good at swapping value.
http://www.brandhub.com/blog/can-nokia-rise-once-again/
Well, some pundits have asked why Microsoft announced Windows 8 at this time. Could MS be trying to get consumers to stop thinking about Chrome and Android? From all accounts, Windows 7 has been getting fairly good reviews and MS osborne’s it for an OS that may not ship for 18 months.
“Let’s hope Nokia is the exception.”
sfmitch had the right response to that: Why hope that Nokia is an exception? If they sink with this, their technologies will find homes elsewhere, as will their talented employees. Life will go on.
Besides, a Nokia win here implies a Microsoft win. Who in the world needs that?
Separately, let’s not forget how Research in Motion Osbourned itself by announcing that the Blackberry OS is a dead-end and the future is QNX on it’s smartphones.
Gruber’s response is only interesting because of the astonishing levels of defensiveness and retraction.
I was excited when the rumors about a Microsoft / Nokia partnership began to stir, that excitement turned to worry when the “Burning platform” memo was leaked, and that worry turned to, well, unbelief, when they announced the death of Symbian.
I would have expected a much softer launch of WP on Nokia devices. Announcing the death of your flagship product which still holds substantial market share with no real substitute in place for almost a full year seems… welll… premature…
As you said, Jean-Louis, Nokia could have waited and then launched WP devices alongside their Symbian brethren with full marketing trumpets blazing the merits and advantages of both. Nokia has always been about different kinds of devices and OS’es for different markets, so why not? And should Symbian eventually fail, well then one could at least hope that WP would have succeeded in the mean time. Just look at how S80 was pushed aside by S60. And btw. it could have been advantageous for Microsoft as well to have the rumor mill churning for half a year about a possible Nokia WP device coming out. Stir up some excitement and brain share in the tech press…
I’m personally looking very much forward to WP on Nokia devices, they could still come out with guns blazing, but they’ll have to endure months of bashing both in the press and on the stock market, hopefully that billion dollars from Microsoft will keep them in the game until then.
. Remember “One device to rule them all”? The Android tablets powered by a docking phone are a great step – a Windows 8 phone/tablet combo with backwards compatibility would be unbeatable.
RIM’s dismal 2011 performance proves that this argument is weak at best. RIM were arguably technologically “ahead” of Nokia with a more respected developer ecosystem, sexier current gen devices, the viral BBM, and, yes, a smooth transition road map to their next generation of software. But their stock and sales performance have been similarly catastrophic – they’re hemorrhaging marketshare and giving similarly dire guidance warnings.
We’ve hit an inflection point in the phone market where Symbian and Blackberry phones are seen as outdated and where new smartphone buyers (the vast majority of the market) want to buy an Android or iPhone before they walk into the store. I mean, would you really recommend a Symbian phone to anybody in 2011? Even a roughly equivalent phone like Windows Phone 7 faces an uphill battle.
@ Peter (and all the people who think M$ is a player in this game)
M$’s “Windows Everywhere” stategery (yes, I mean that spelling) has been trumpeted for more than 10 years, and it has been stillborn for all that time.
I remember they were going to put it in refrigerators, copiers, microwaves and others. They have had tablet concepts in the market for 10 years. The demand for backward compatibility and all the attendant baggage have created failure after failure for M$. This new W8 on Arm and Tablets in 18 months is just the latest vapor announcement from them.
In the 80s and 90s they could launch vaporous products and freeze their competitors in the minds of their prospective clients but their ability to do this now is very limited. Google and Apple both have a much higher/better reputation at actual product delivery. Apple in particular seems to be the innovation engine that M$ is no longer able to be a fast follower to.
Since I no longer think M$ is relevant in discussions of future technology directions, I personally don’t care if M$ makes it or not. But, if Nokia can right itself while attached to M$’s coattails, more power to them. Relevance or lack thereof leads to desperation on M$’s part as Jean-Louis says:
“So what really happened?
I think the explanation is simple: Microsoft demanded an immediate announcement. They needed a PR coup. With no Phone 7 OS sales to speak of, Microsoft had no revenue to lose and the perception of adoption by the biggest cell phone maker to gain. (After the NokiaSoft announcement, Microsoft got an instant boost of phone credibility.)”
Microsoft’s desperation is palpable. Steve Balmer (in his cult of personality/company) is trying to prevent M$ from becoming IBM, where they can hang on to legacy businesses and profit but no longer steer the industry. I reckon time will tell.
Rule of thumb: get too chummy with MSFT and die. Look what Belluzo did to Silicon Graphics. When NOK hired a MSFT reject, it was obvious to the rest of the world that NOK was way further along the path to extinction than the polar bear.
I think that the results now are a failure of the previous management – to get Symbian or Meego remotely competitive in a timely fashion.
In a company like Nokia I don’t see how Elop could develop WP7 handsets in secret and suddenly spring them upon the public and the rest of the company.
The consensus based politics of Nokia (and I guess Finland) would not make that possible.
Witness what happened in Tampere and with the CTO when they took this softly approach. I would imagine strikes and attempts and boardroom coups would be in the works if Elop had tried the other approach
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