nokia

Nokia Goes Android – Part II

 

Next week, we might see Nokia’s entry-level feature phones replaced by a low-end device running Android Open Source Project software. The phone may just be a fantasy, but the dilemma facing Nokia’s feature phone business is quite real: Embrace Android or be killed by it. 

Nokia will announce an Android phone! So says the persistent rumor, started about three months ago by an @evleaks tweet, and followed by more details as weeks went by. Initially code-named Normandy, the hypothetical feature phone is now called Nokia X, and it already has its own Wikipedia page and pictures:

Nokia X

Nokia is on the path to being acquired by Microsoft. Why introduce an Android-based phone now? The accepted reasoning is simple…

  • Even though it doesn’t generate much revenue per handset (only $42), Nokia’s feature phone business is huge and must be protected. Nokia’s Form 20-F for 2012 (the 2013 report hasn’t been published, yet) shows its phone numbers compared to the previous year:
    • 35M smartphones (-55%) at an average price (ASP) of $210 (+ 11%)
    • 300M feature phones (-12%) with an ASP of $42 (- 11%)
  • These 300 million feature phones — or “dumbphones” — keep the Nokia flag waving, particularly in developing economies, and they act as an up-ramp towards more profitable smartphones.
  • Lately, dumbphones have become smarter. With the help of Moore’s Law, vigorous competition, and Android Open Source Project (AOSP) software, yesterday’s underfed, spartan feature phones are being displaced by entry-level smartphones. Asha, Nokia’s offering in this category, has been mowed down by low-end Android devices from China.
  • Nokia can’t help but notice that these AOSP-based feature phones act as a gateway drug to the full-blown Android smartphone experience (and much larger profits) offered by competitors such as Samsung, Huawei, and Motorola’s new owner Lenovo.
  • So Nokia drops its over-the-hill Symbian software core, adopts Android, adds its own (and Microsoft’s) services, design expertise, and carrier relationships, and the result is Nokia X, a cleaner, smarter feature phone.

That’s it. Very tactical. Business as usual, only better. Move along, nothing to see.

It’s not that simple.

There’s an important difference between the Android Open Source Project (AOSP), and the full Android environment that’s offered by Samsung, LG, HTC and the like.

The Android Open Source Project is really Open Source, you can download the source code here, modify it as you see fit for your application, add layers of services, substitute parts…anything you like.

Well, almost anything. The one thing you can’t do is slap a figurative “Android Inside” sticker on your device. To do that, you must comply with Google’s strict compatibility requirements that force licensees to bundle Google Mobile (Maps, Gmail, YouTube, etc.) and Google Play (the store for apps and other content). The result isn’t open or free, but smartphone makers who want the Android imprimatur must accept the entire stack.

As an added incentive to stay clean, a “Full Android” licensee cannot also market devices that use a different, incompatible version (or “fork”) of the Android code published by Google. A well-know example of forking is Amazon’s use of Android source code to create the software engine that runs its high-end Kindle Fire tablets. You won’t find a single instance of the word “Android” on these devices: Google won’t license the name for such uses.

(For more on the murky world of Android licensing, bundling, and marketing agreements, see Ben Edelman’s research paper: Secret Ties in Google’s “Open” Android.)

The hypothetical, entry-level Nokia X can’t offer an entire Android stack — it can’t be allowed to compete with the higher-end Lumias powered by Microsoft’s Windows Phone — so it would have to run an “unmentionable” Android fork.

Even without the “Android Inside” label, everyone would soon know the truth about the Android code inside the new device. This could give pause to software developers, carriers, and, the more curious users. “Where is Microsoft going with this? Won’t the Android beast inside soon work its way up the product line and displace the Windows Phone OS?”

Microsoft will make soothing sounds: “Trust us, nothing of the sort will ever happen.  Nokia X is a purely tactical ploy, a placeholder that will give Windows Phone enough time to reveal its full potential.” We know how well attempts to create a Reality Distortion Field have worked for Microsoft’s Post-PC denials.

The Redmond not-so-mobile giant faces a dilemma: Lose the Asha feature phone business to aggressive forked-Android makers, or risk poisoning its Windows Phone business by introducing potentially expansionist Android seeds at the bottom of its handset line.

Several observers (see Charles Arthur’s penetrating Guardian column as an example) have concluded that Microsoft should follow Amazon’s lead and accept the “Come To Android” moment. It should drop Windows Phone and run a familiar Embrace and Extend play: Embrace Android and Extend it with Bing, Nokia’s Here Maps, Office, and other Microsoft properties.

Critics, such as Peter Bright, an energetic Microsoft commenter, contend that forking Android isn’t feasible:

“Android isn’t designed to be forked. With GMS, Google has deliberately designed Android to resist forking. Suggestions that Microsoft scrap its own operating system in favor of such a fork simply betray a lack of understanding of the way Google has built the Android platform.”

Dianne Hackborn, a senior Android engineer (and a former comrade of mine during a previous OS war) contradicts Bright in great point-by-point detail and concludes:

“Actually, I don’t think you have an understanding of how Google has built Android. I have been actively involved in designing and implementing Android since early on, and it was very much designed to be an open-source platform… Android creates a much more equal playing field for others to compete with Google’s services than is provided by the proprietary platforms it is competing with. I also think a good argument can be made that Android’s strategy for addressing today’s need to integrate cloud services into the base platform is an entirely appropriate model for a ‘real’ open-source platform to take.”

In the end, Microsoft probably doesn’t trust Google to refrain from the same games that Microsoft itself knows (too well) how to play. Microsoft used its control of Windows to favor its Office applications. Now it’s Google’s turn. The Mountain View company appears set to kill Microsoft Office, slowly but surely, and using all means available: OS platforms and Cloud services.

None of this draws a pretty picture for Microsoft’s mobile future. Damned if it introduces Android bits at the low end, damned if it lets that same software kill its Asha feature phone business.

JLG@mondaynote.com
@gassee
———————-
PS: Almost four years ago, I wrote a light-hearted piece titled Science Fiction: Nokia goes Android. It was actually less fictional than I let on at the time. In June 2010, I was asked to give a talk at Nokia’s US HQ in White Plains, NY. I was supposed to discuss Apple but I declined to spend too much time on that topic arguing that the Cupertino company was too “foreign” to Nokia’s culture. Instead, I made two suggestions: Fire your CEO and drop your four or five software platforms — Symbian and Linux variants — and adopt Android. Nokia’s combination of industrial design expertise, manufacturing might, and long-standing, globe-spanning carrier relationships could make it a formidable Android smartphone maker.

The first recommendation was warmly received — there was no love for Olli-Pekka Kallasvuo, the accountant cum attorney CEO.

The second was met with indignation: “We can’t lose control of our destiny”. I tried to explain that the loss had already taken place, that too many software platforms were a sure way to get killed at the hands of monomaniacal adversaries.

Three months later Kallasvuo was replaced…by a Microsoft alum who immediately osborned Nokia’s smartphone business by pre-announcing the move to Windows Phone almost a year before the new devices became available.

—–

Microsoft Mission Impossible

 

You’re Microsoft’s new CEO. How do you like staring at the abyss between two mutually exclusive ways of making money? The old business model, Windows and Office licensing, is going away. The Devices and Services future puts you in direct competition against the likes of Google and Apple as well as former licensing vassals such as HP and Dell. Can you take the company to the other side, or will you fall to the bottom of the business model transition canyon?

Life used to be simple and immensely profitable at Microsoft. As its name implies, the company started as a supplier of microcomputer software. Simplifying a bit, it all started with the BASIC interpreter, which found its way into many early personal computers including the Apple ][. After that came DOS, the operating system for IBM’s Personal Computer; and Multiplan, an early foray into desktop productivity. DOS begat Windows, and Multiplan was succeeded in steps by the full Office suite. Through a series of astute business and lawyerly maneuvers, the Windows + Office combo eventually spread to virtually all PC clones.

This made Microsoft the most successful software company the world had ever seen, and its founding CEO, Bill Gates, became the richest man on the planet. In 2000, the company’s market capitalization reached $540B (approximately $800B in today’s dollars). As this Wikinvest graph shows, Microsoft dwarfed all other tech companies:

msft_graph1

(At the time, the NASDAQ index of mostly tech stocks stood a little above 4,000, it closed at 3,792 this past Friday.)

Back then, Windows + Office licensing was the only money pump that really mattered. Everything else — all other software products and even sales of enterprise servers — either depended on Microsoft’s huge PC installed base, or didn’t move the needle. Hardware and entertainment lines of business were largely immaterial; online activities weren’t yet the money sink we’ve seen in recent years.

According to the company’s 2000 Annual Report, the combination of the “Windows Platforms” and “Productivity Applications” accounted for $19.3B in revenue ($9.3B and $10B, respectively). That’s 84% of the company’s $23B total revenue and, even more important, 98% of Microsoft’s Operating Income!

Moving to Q1 2013, the market capitalization picture has drastically changed:

msft_graph2

Google is in many ways becoming Microsoft 2.0, Oracle has grown nicely, and Apple is now on top.

What happened?

Mobile personal computing happened. Smartphones and tablets are displacing conventional PCs, desktops, and laptops.

To put it even more succinctly: the iPhone did it.

When Steve Jobs stepped onto the stage at MacWorld in January, 2007, there were plenty of smartphones on the market. Windows Mobile, Palm Treo, Nokia, Blackberry… But Apple’s iPhone was different. It really was a personal computer with a modern operating system. While the iPhone didn’t initially support third party apps, a Software Development Kit (SDK) and App Store were soon introduced.

Android quickly followed suit, the Smartphone 2.0 race was on, and the incumbents were left to suffer grievous losses.

Riding on the iPhone’s success and infrastructure, the iPad was introduced, with Android-powered tablets not far behind. These new, mobile personal computers caused customers to Think Different, to re-examine their allegiance to the one-and-only PC.

As these products flooded the market, Microsoft went through its own version of the Stages of Grief, from denial to ultimate acceptance.

First: It’s Nothing. See Steve Ballmer memorably scoffing at the iPhone in 2007. Recall ODM Director Eddie Wu’s 2008 predication that Windows Mobile would enjoy 40% market share by 2012.

Second: There is no Post-PC…”Plus is the new ‘Post’“. Smartphones and tablets are mere companion devices that will complement our evergreen PCs. The party line was eloquently asserted two years ago by Frank Shaw, Microsoft’s VP of Communications:

“So while it’s fun for the digerati to pronounce things dead, and declare we’re post-PC, we think it’s far more accurate to say that the 30-year-old PC isn’t even middle aged yet, and about to take up snowboarding.”

Next comes Bargaining: Microsoft makes a tablet, but with all the attributes of a PC. Actually, they make two Surface devices, one using an ARM processor, the other a conventional Intel CPU.

Today comes Acceptance: We’re indeed in a Post-PC era. PCs aren’t going to disappear any time soon, but the 30-year epoch of year after year double digit growth is over. We’re now a Devices and Services company!

It’s a crisp motto with a built-in logic: Devices create demand for Microsoft services that, in turn, will fuel the market’s appetite for devices. It’s a great circular synergy.

But behind the slick corpospeak lurks a problem that might seriously maim the company: Microsoft wants to continue to license software to hardware makers while it builds a Devices business that competes with these same licensees. They want it both ways.

Real business model transitions are dangerous. By real transition I don’t mean adding a new line of peripherals or accessories, I mean moving to a new way of making money that negatively impacts the old one. The old money flow might dry up before the new one is able to replace it, causing an earnings trough.

For publicly traded companies, this drought is unacceptable. Rather than attempt the transition and face the ire of Wall Street traders, some companies slowly sink into irrelevance. Others take themselves private to allow the blood-letting to take place out of public view. When the curtain lifts some months later, a smaller, healthier outfit is relaunched on the stock market. Dell is a good example of this: Michael Dell gathered investors, himself included, to buy the company back and adapt its business model to a Post-PC world behind closed doors.

Microsoft can’t abandon its current model entirely, it can’t stop selling software licenses to hardware makers. But the company realizes that it also has to get serious about making its own hardware if it wants to stay in the tablets and smartphone race.

The key reason for Microsoft’s dilemma is Android. Android is inexpensive enough (if not exactly free) that it could kill Redmond’s mobile licensing business. (Microsoft might get a little bit of money from makers of Android-powered hardware thanks to its patent portfolio, but that doesn’t change the game.) This is why Microsoft offered “platform support payments” to Nokia, which essentially made Windows Phone free. And, now we have the belated, under duress acquisition of Nokia’s smartphone business, complete with 32,000 angry Finns.

(Microsoft is rumored to have approached HTC with an offer to dual-boot Windows Phone on HTC’s Android handsets. It’s not very believable rumor — two competing operating systems on the same smartphone? But it has a satisfying irony: In an earlier incarnation I saw Microsoft play legal hardball against anyone who tried to sell PCs with both Windows and another OS installed at the factory…)

Another example of trying to keep one foot on each side of the abyss is the Surface tablet. Microsoft tried to create a hybrid “best-of-both-worlds” PC/tablet, complete with two different UIs. I bought one and found what many experienced: It doesn’t have the simplicity and agility of a genuine tablet, nor does it offer the classic workflow found on Windows 7. We’ll have to see how helpful the upcoming Windows 8.1 is in that regard.

So… What about our new CEO?

  • S/he finds a company that’s in the middle of a complicated structural and cultural reorganization.
  • The legacy PC business is slowing down, cannibalized by mobile personal computers.
  • Old OEM partners aren’t pleased with the company’s new direction(1). They have to be kept inside the tent while the Surface tablets experiment plays out. Success will let Microsoft discard Legacy PC makers. Failure will lead Redmond to warmly re-embrace its old vassals.
  • The Windows Phone licensing business lost its clients as a result of the Nokia acquisition.
  • Integrating Nokia will be difficult, if not a slow-moving disaster.
  • The Windows Phone OS needs work, including a tablet version that has to compete with straight tablets from Android licensees and from Apple.
  • Employees have to be kept on board.
  • So do shareholders.

How would you like the job?

JLG@mondaynote.com

(1) HP’s Meg Whitman now sees Microsoft as a competitor — and introduces a Google-powered Chromebook. What we think this will do for HP’s Personal Systems Group revenue and profit is best left unsaid.

Microsoft Directors Have Much Explaining To Do

 

Blaming Steve Ballmer for Microsoft’s string of mistakes won’t do. Why did the Board of Directors keep him on the job for thirteen years, only to let him “retire” in the midst of several dangerous transitions — without naming a successor? What does this say about the Board’s qualifications to pick Microsoft’s next CEO?

For more than a decade, a team of physicians has been ministering to a patient who was once vital and robust, but now no longer thrives. Recurring diagnostic errors, stubborn inattention to symptoms, improper prescriptions haven’t yet killed the object of their care but, lately, the patient’s declining health has become so obvious that the doctors, now embarrassed and desperate, have scheduled a heart transplant.

Now comes the test: Would you entrust the patient’s future to such a confederacy of dunces?

With this metaphor in mind, let’s contemplate the record of Microsoft Directors since Steve Ballmer assumed the mantle 13 years ago, and ask if they’re qualified to appoint a successor.

Consider the Directors’ obdurate passivity while they watched the company miss opportunities, take one wrong turn after another, and fail to execute crucial transitions. Search was conceded to Google; digital music (players and distribution) is dominated by Apple; social networking belongs to Facebook, Twitter, and LinkedIn; the smartphone market is handed over to Google’s Android and Apple’s iPhone; tablets from the same duo are now bleeding the Windows + Office Golden Goose; Windows Vista and now Windows 8; Surface tablets… Even the once mighty Internet Explorer browser has been displaced by Google’s Chrome running on all desktop and mobile platforms.

Blaming (and forgiving) the CEO for one or two mistakes is reasonable. But if these missteps were entirely Ballmer’s fault, why did the Directors keep him at the helm? This raises the question: How much of the company’s value did the Directors themselves let Google, Apple, and others run away with? Is Microsoft’s Board a danger to the company?

The latter question comes in sharper relief when looking at the timing and manner of Ballmer’s exit.

ballmer

On July 11th, Ballmer announces a major company reorganization. More than just the usual medley of beheadings and redistribution of spoils, Microsoft was to restructure itself away from its old divisional arrangement and move towards the type of functional organization used by companies such as Apple. In addition, the new company motto became Devices and Services, evoking a virtuous circle: Best-of-class branded devices would sell more great Microsoft services, while the latter would give a boost to Microsoft devices.

A week later, on July 18th, Microsoft releases pedestrian quarterly numbers, the lowlight of which is a $900M write-off attributed to very poor sales of Surface PC/tablets

On August 23rd, Ballmer announces his sooner-than-planned retirement — sometime in the following 12 months. No word of a successor.

And, to top everything off, on September 3rd, with Ballmer on his way out, the Board approves the emergency acquisition of Nokia’s handset business, complete with 32,000 angry Finns. (We’ll discuss their misdirected anger in a future Monday Note.)

A drastic company reorganization makes sense. Instead of one more turn of the optimizing crank, Microsoft acknowledges that it needs to Think Different.

Writing off unsold inventory is the sensible recognition of a problem; it removes an impediment by facilitating a fire sale.

There was a clear and present danger for Nokia’s handset business to fail, or to become the walking dead. Microsoft bought it to avoid the possible collapse of the Windows Phone platform. In theory (i.e., ignoring cultural realities), the acquisition gives Microsoft more control over its smartphone future.

All rational moves.

But letting Ballmer go right in the middle of two huge and complicated transitions — and without immediately appointing a successor? On its face, the timing and manner of Ballmer’s exit defies common business sense. It also raises questions about the Board’s failure to adequately plan for Ballmer’s succession. Supposedly, Succession Planning is a key component of good Corporate Governance. In plain language, a Board of Directors is obligated to identify and groom successors for key positions, starting with the CEO.

Which raises a few more questions.

Microsoft undertakes two risky, company-redefining moves: a profound structural and strategic reorganization, followed by its most foreign, most people-intensive acquisition ever. What was the overwhelming need to announce Ballmer’s departure – without naming a successor – right in the middle of such instability?

Considering its résumé, what makes Microsoft’s Board qualified to pick a new CEO?

And what are the parameters of the search for Mr. Right? Assuming Microsoft hires an industry heavyweight, will this individual be given the space and power to be his own woman or man, that is to reshuffle the Board? And what about the freedom from deferring to the company’s Founder?

And what must the mood be like at Microsoft? “When you receive an order, do absolutely nothing and wait for the countermanding directive.” This ancient Army saying must now be popular in Redmond. It’s not that people working there don’t care, but they just don’t know what the next CEO will want, and they certainly don’t know when. How can one not expect damaging paralysis and politicking when the CEO is let go without a successor?

All interesting questions.

JLG@mondaynote.com

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[I'll leave alone rumors such as Ford's CEO Alan Mullally replacing Ballmer. Notwithstanding the obligatory congratulations, there would be much giggling in Mountain View and Cupertino. Competent management is a necessary but not sufficient condition...see Ballmer.]

Microsoft and Nokia won’t beget a Googorola clone

 

by Jean-Louis Gassée

Microsoft, after its highly visible 2011 bet on Nokia, could have decided to go one step further and buy Nokia to become a fully integrated smartphone. That it didn’t happen doesn’t portend a great future for Windows Phone.

Last week, the Wall Street Journal outed Microsoft’s unsuccessful attempt to acquire Nokia:

Microsoft recently held advanced talks with Nokia about buying its handset business, people familiar with the matter said, as laggards in the fast-moving mobile market struggle to gain ground.

Many saw an acquisition as an inevitable next step, that by acquiring the Finnish handset maker Microsoft could “finish the job” that they started when they licensed a special Windows Phone to Nokia. It would be a blessed union of two vigilant, watchful companies: Microsoft had watched as Android and iOS made its own OS a distant also ran; Nokia, once the world’s largest cell phone maker, couldn’t help but notice that Google and Apple had killed its handset business from both the high and low ends.

But, according to the WSJ, the parlay came to a negative and apparently definitive end:

The discussions faltered over price and worries about Nokia’s slumping market position, among other issues, these people said. One of the people said talks took place as recently as this month but aren’t likely to be revived.

To call Nokia’s fall a “slump” is more than polite. The company saw its market share fall from 39% in 2009 — more than 100 million handsets per quarter — to an estimated (and angrily debated) 3% by the end of 2012.

Microsoft hasn’t done much better with its mobile software. In 2008, Windows Mobile OS held a 11% market share, even as the underlying Windows CE engine was getting long in the tooth, particularly when compared to the Unix-ish Android and iOS engines. With a modern NT kernel, Microsoft’s mobile OS was reborn as Windows Phone 8 and scored a modest 3.2% market share in Q1 2013.  This number comes from IDC, the “research” group that has assured us that come 2016, Microsoft will be the number 2 mobile OS provider with a 19.2% share:

09-table nokia

Behold the vision and precision of IDC’s psychics: Back in June 2012, they could see four years into the future and predict that Windows Phone would edge out iOS… by two tenths of a percent!

We’ve heard the Microsoft-is-buying-a-handset-maker rumors before. Starting in 2007 and recurring year after year, Microsoft was said to be eyeing RIM/Blackberry. For some, yours truly included in January 2012, the RIM story was compellingly straightforward: RIM’s clientèle of loyal, hardcore Blackberry users in businesses and governments made it an ideal fit for the Redmond giant.

Microsoft’s defenders will argue that RIM ’07 was too expensive. Priced at $200 a share (they’re running at about $14 today), RIM would have cost more than a $100B before any acquisition premium. At the time, Microsoft was valued at approximately $250B (similar to today’s $277B). Ideal or not, the match didn’t make sense for Microsoft shareholders. Then, when RIM’s price began to slide, the Blackberry was seen as having lost too much of its shine, too much of its market momentum. The company was damaged goods. (Or, as we might have forgotten, the two co-CEOs, Mike Lazaridis and Jim Balsillie, the ones who spoke in tongues, may have proved too difficult for even Steve Ballmer to deal with.)

Someday, Microsoft’s inability to grab RIM might be seen as a signal failure, a key episode in the company’s slide into irrelevance in the smartphone market. I doubt anyone will see Nokia in a similar light, as the “one who got away”.

The “MicroNokia” relationship has been challenging from the start. In February 2011, Nokia committed itself to a special partnership with Microsoft. It would ditch its operating systems (Symbian, Meego, QT) and become a beacon and standard bearer for Windows Phone 7. Money changed hands: $250M of “platform support” per quarter was sent from Redmond to Espoo in order to offset the unspecified Windows Phone licensing payments that flowed in the opposite direction.

This messy, technologically and culturally unsound arrangement only got worse when Stephen Elop, the former Microsoft exec now running Nokia, announced the switch to Windows Phone ten months before the company would end up shipping devices that ran the new (and problematic) OS. Unsurprisingly, Nokia’s revenue evaporated, leaving it with losses and a minuscule 5% market share (including Symbian-based smartphones).

Why Elop would make an announcement that effectively Osborned the business still mystifies and enrages Nokia supporters such as Tomi Ahonen who keeps calling for Elop’s head in long, irate blog posts. (In industry lore, to “Osborne” is to prematurely announce a product that so clearly obsoletes your current offering that it kills revenue. The suicidal maneuver is named in loving memory of portable computer pioneer Adam Osborne who destroyed his business by bragging that his next product would be so much better than the current one.)

I’m also mystified, but for another reason. I can’t fathom why Nokia picked Windows Phone instead of Android, whose explosive success was obvious even as early as 2010 when the company ditched its CEO. (I’m a little biased here as, in June 2010, I wrote a tongue-in-cheek piece titled Science Fiction: Nokia goes Android.)

Nokia’s excuses for not adopting Android were vague, ranging from “we don’t want to lose control of our destiny”, to Microsoft being a “stronger partner” (read: They paid us). The potential-loss-of-destiny rhetoric falls flat, especially when you look at Android’s licensing terms and see the freedom Samsung and others enjoy with their interpretations of the platform. (We’ve heard that Nokia and Google once talked, but we don’t yet know the reason for their not becoming highly visible partners.)

Today, investors say Nokia is worth about $15B, a tenth of its 2007 peak (I’m excluding the 2000 Internet Bubble number from the comparison). Even with a “25% acquisition premium”, a Nokia acquisition would cost Microsoft less than 10% of its capitalization. So, contrary to the charitable explanation offered to the WSJ by “persons familiar with the matter”, price couldn’t have been an obstacle. That leaves us with Nokia’s “slump”: Microsoft thinks Nokia would be unable to carry Windows Phone to an influential, sustainable market position.

Now, what?

Nokia’s revenue keeps sliding down and, after a brief incursion into the black, it keeps losing money. Is there anything in sight that will reverse the trend? It’s doubtful that the company can try for the high end by offering better hardware than Samsung, nor can they squeeze into a low end that’s inhabited by official and unofficial Android clones that are swiftly killing off feature phones. This leaves Nokia’s future as an independent company in doubt and logically gives rise to more acquisition speculation.

And what will happen to Windows Phone? We now hear that Microsoft is paying developers as much as $100,000 to write or port an application to the platform. This is a rational move on Microsoft’s part, an attempt to create the critical mass that doesn’t seem to be able to happen naturally. But it can also be seen as desperation, an admission that Windows Phone is having trouble gaining momentum as developers and customers are embraced in a downward spiral.

One can’t imagine that Ballmer will call it a day and cede the field to Google and Apple. Personally, I admire his never-give-up attitude, always talking up the future, unfazed by past bold pronouncements gone wrong, but enthusiasm isn’t a strategy. And in the smartphone market, Microsoft doesn’t have many moves left. Regardless of the technical merits of its new mobile OS, momentum seems elusive; market forces that once worked against Windows competitors in the PC field now seem to confine Windows Phone to an insignificant market share against the two dominant and their complementary business models.

We don’t know yet how Google’s acquisition of Motorola will fare, but the Android platform is healthy enough without it. The same can’t be said of Windows Phone without Nokia, which leads one to believe there will be a forced marriage between the once proud Finnish handset maker and an ambitious player, probably Chinese — with Microsoft providing a substantial dowry once again.

In the meantime, we can count on IDC to provide fresh numbers… for 2017.

JLG@mondaynote.com

The Nokia Torture

How would you like to be a Nokia employee? Last week the bosses came up with more bad news: In order to cut 3B€ (about $3.8B) in expenses by the end of 2013, another 10,000 employees will be shown the door — this after earlier cutting payroll by 4,000 people. The news came couched in corporate doublespeak: Nokia sharpens strategy and provides updates to its targets and outlook, with a shamefully misleading first subtitle:

Company announces targeted investments in key growth areas, operational changes and significantly increased cost reduction target

Followed by a second one, finally hinting at the bad news:

Company lowers Devices & Services outlook for the second quarter 2012

In the opaque 2900-word release, management concedes business is worse than expected, with no immediate hope of improvement:

During the second quarter 2012, competitive industry dynamics are negatively affecting the Smart Devices business unit to a somewhat greater extent than previously expected. Furthermore, while visibility remains limited, Nokia expects competitive industry dynamics to continue to negatively impact Devices & Services in the third quarter 2012. Nokia now expects its non-IFRS Devices & Services operating margin in the second quarter 2012 to be below the first quarter 2012 level of negative 3.0%. This compares to the previous outlook of similar to or below the first quarter level of negative 3.0%.

In English: ‘Our smartphone business sucks, it lost money last quarter, it will lose even more money for the current quarter ending in June, probably in the 5% operating loss range, and we’ll experience similar bleeding for the foreseeable future.’

Bond-rating agencies took note and promptly downgraded Nokia’s debt to junk status, another worrisome development. Reading Nokia’s Q1 2012 numbers, we see Net Cash at 4.8B€ (approx. $6B), 24% less than a year ago, 13% less than the immediately preceding quarter. With accelerating losses, the cash drain is likely to do the same. This puts Nokia in a dangerous squeeze: It could have to borrow money at unfavorable rates, or be prevented from doing so, or be forced into liquidation.

This is how: We know Nokia has already borrowed money, about 4.9B€ (approx. $6.3B), but we don’t know what the small print on those bonds say. Creditors often put conditions (covenants) giving them the option to demand immediate repayment if the debtor’s business deteriorates too much.

Nokia’s management is worried, it shows in little signs such as the length of precautions taken in what is known as Forward-Looking Statements. These consist in lawyerly language telling us everything we have heard or read could be nullified by a number of changes in the weather, the price of pork bellies or crop failures. The practice, as often, stared with the best of intentions: Management should be free to share their views of the future without being held too strictly to their description of inherently fragile circumstances.

In February 2011, Nokia’s cautious language about 255 words. Last week, attorneys in charge of covering the backs of Nokia execs needed more than 1,400 words, listing precautions from A to K, and from 1 to 39.

Put simply, this betrays is a growing fear of lawsuits.

In the meantime, Nokia’s CEO, Stephen Elop, is “opening the second envelope”, that is firing members of his exec team, including one who imprudently followed him from Microsoft. Next time, it’ll be his turn — and too late to save the company.

Many blame Elop, but what about the Board of Directors? In 2010, when the fact Nokia was on the way down became too obscenely obvious for the Board to ignore, they fired the CEO, OPK (Olli-Pekka Kallasvuo), an accountant cum lawyer, and doubled down by hiring Elop, a Microsoft exec with zero smartphone experience and a record of job-hopping. The new CEO soon said one very true thing, ‘This is a battle of ecosystems’ and did a terrible one: He osborned Nokia’s existing Symbian-based products as he committed to a distant collaboration with Microsoft and its unproven Windows Phone system software. What did the Board do? Directors approved the move. Willfully or stupidly, it doesn’t matter, they supported Elop’s imprudent move.

Nokia, once the emperor of mobile phones, shipping more than 100 million devices per quarter, is now in a tailspin, probably irrecoverable, taking its employees into the ground.

And there is Nokia’s chosen partner, Microsoft. What will Nokia’s failure do to its future? Ballmer knows Microsoft can’t be relegated to a inconsequential role in the smartphone wars. Will this lead to Microsoft going “vertical”, that is buying Nokia’s smartphone business and become an vertically player, as it already is in its Xbox business?

JLG@mondaynote.com

Nokia: Three Big Problems

Nokia’s results for Q1 2012 are in: They’re not good. (See the earnings release here, Management’s Conference Call presentation here.)

Compared to the same quarter last year, Nokia overall revenue is down 29%, to $9.7B. And the company is now losing money, $1.8B, 18.5% of revenue. [Nokia’s official numbers are stated in euros, I convert them at today’s rate of $1.32 for 1€.]

One year after Nokia’s decision to jump of its “burning platform”, this yet another bad quarter and leaves one to wonder about the company’s future. Many, like Forbes’ Erik Savitz, think The Worst Is Still To Come.

I see three life-threatening problems for the deposed king of mobile phones.

First and potentially most lethal: Nokia is burning cash. As the chart above documents, Nokia’s Net Cash went down 24% in one year. From page 5 of the Earnings Release: “Year-on-year, net cash and other liquid assets decreased by $2B…. Sequentially [emphasis added], net cash and other liquid assets decreased by $.9B”. Here, the word sequentially means compared to the immediately preceding quarter, as opposed to the same quarter last year.
Elsewhere in the document, on page 6, we learn Microsoft provided $250M in “platform support payments”. If you back this amount out, you see Nokia’s operations have in fact consumed $1.15B, a significant fraction of the company’s $6.4B Net Cash. This cannot continue for very long and leads Henry Blodget to worry Nokia could go bankrupt in two years or less.
Henry’s view might be a bit extreme; Nokia has assets they could convert to cash, thus giving itself more runway for its recovery efforts. But, as we’ll see below, the company’s prospects in both phone categories don’t look stellar. And bad things happen to cash when the market loses confidence in a company’s future: vendors want to be paid more quickly, customers become more hesitant, all precipitating a crisis.

Second, the dumbphone (a.k.a. “Mobile Phones”) business, still Nokia’s largest, is now in a race to the bottom:

Volume is huge, 70.8M units; it dipped 16%, not a good sign. Worse, the ASP (Average Selling Price) went down 18% to $44 (33€). Mostly in developing countries, Nokia is now losing ground to the likes of Huawei and ZTE selling feature phones and smartphones, both very inexpensive. Unsurprisingly, Nokia claims they’ll counterattack with their Asha family of mobile phones. Few, outside of Nokia, or even inside, believe they can win a brutal price cutting fight against those adversaries.

Last, Nokia’s last hope: Their new Windows Phone “Smart Devices”.

As the chart above shows, Nokia’s smartphone business keeps sinking: -51% in volume compared to the same quarter last year. And, with a $189 (143€) ASP, it can’t make any significant money as $189 is about what it costs to build one.

As for the latest Lumia smartphones, the reviews have been mixed. So are sales, according to Stephen Elop, Nokia’s CEO. Going to the earnings release, I searched for the word “Lumia” in the document. It appears 29 times. — without any number attached to it, just words like “encouraging awards and popular acclaim”. Which can only mean one thing: Actual numbers better left unsaid.

Things don’t get better when, according to Reuters, mobile carriers in Europe pronounced themselves ‘‘unconvinced”, finding the new Lumia smartphones “not good enough”. It is worth noting things could be better in the US where AT&T appears to make a real effort selling Lumias, and where Verizon recently stated its interest in fostering a third ecosystem with Windows Phone devices.

Unfortunately, we also hear a puzzling rumor: Existing Lumia phones wouldn’t be upgradable to the next OS version, Windows Phone 8, code-named Apollo. Both Mary Jo Foley, a recognized authority on things Microsoft, and The Verge, an aggressive and often well-sourced blog, support that theory.

So far, in spite of the potential damage to their business, neither Microsoft nor Nokia have seen fit to comment. Should it be true, should current Lumia buyers find themselves unable to upgrade their software, Microsoft would be about to commit a massive blunder.

But why would they do this? Apparently, the current Windows Phone OS is built on the venerable Windows CE kernel. Setting veneration aside, Microsoft would have decided to use a more modern foundation for Windows Phone 8. And said modern foundation would not run on today’s hardware. For Nokia’s sake, I hope this is incorrect. The company already convinced its customer Symbian-based phones had no future. Sales plunged as a result. Doing the same thing for today’s Lumia devices would be even more dangerous.

A little over a year ago, in February 2011, Nokia’s brand-new CEO, Stephen Elop issued his ‘‘memorable” Burning Platform memo. In it, the ex-Microsoft executive made an excellent point: Having no doubt observed the rise of Google’s Android and of Apple’s iOS, he concluded Nokia was no longer in a fight of devices but in a war of ecosystems. Elop next drew an analogy between Nokia’s jumbled smartphone product line and a burning North Sea oil-drilling rig. To him, the company had no choice: instead of staying on the platform and dying in the blaze, he suggested plunging in freezing waters — with a chance of staying alive. Which, as he soon revealed, meant jumping off Nokia’s Symbian and Meego software platforms and joining the Microsoft Windows Phone ecosystem.

Today, Nokia bleeds cash, its dumbphone business in a race to the bottom, and its plunge into the Microsoft ecosystem isn’t off to a good start. What’s next for the company? Can it turn itself around, and how?

With hindsight, it appears the premature announcement of the jump to Windows Phone osborned Nokia’s existing smartphones. Their sales dropped while the market waited for the new devices running Windows Phone. Some, like Tomi Ahonen, an unusually vocal — and voluminous — blogger, think Elop should be fired, and Symbian and Meego restored to their just place in Nokia’s product line. This isn’t very realistic.

Closer to reality is Microsoft’s determination to get back in the smartphone race, almost at any cost. (For reference look at the billions the company keeps losing in its online business. $449M this past quarter.)

At some point in time, if Lumia sales still barely move the needle, Microsoft would have to either drop Nokia and look for another vehicle for Windows Phone. Or it will have to assume full control of Nokia, pare down what it doesn’t need, and do what it does for the Xbox, that is be in charge of everything: hardware, software, applications.

JLG@mondaynote.com

Lumia 800: Nokia’s Comeback?

Let’s go back to Spring 2010. Nokia friends invite me to their US headquarters in White Plains, NY, where we’ll discuss Apple with an audience of local management and remote viewers in Europe.
As the conversation proceeds, I’m struck not by what I hear but by what I don’t. They’re right to wonder about Apple, about what makes it tick…but they have an even bigger problem called Android.
I venture a few politically impolite suggestions:

1. Replace your CEO. Olli-Pekka Kallasvuo, a little too proud to be a lawyer and an accountant, is way past his “best if used by” date.
2. Drop all your aging software platforms, your Symbian S60, S^3 and S^4, your Maeemo/Moblin/Meego chimera (I didn’t say clusterf#^k). You’re doomed by pursuing so many projects…and you might want to consider that your competitors are a bit better than you are at writing system software.
3. Go Android right now. Join the winning OS team.
4. Focus on your strengths: Hardware, industrial design, manufacturing, worldwide distribution.
5. Move to Silicon Valley, that’s where the action is. The future of smartphones won’t be decided in White Plains, NY.

People don’t appear overly upset. Actually, quite a few heads nod when I mention kicking the mercurial OPK upstairs. Judging by audience reaction, the Go Android suggestion isn’t news, it’s been debated already, heatedly it seems.

I get two kinds of pushback: “We’ll lose control of our destiny!” and “How will we achieve differentiation?”

With the regard to the former, by 2010 Nokia is already past the point of controlling their destiny; sales are “gaining vertical speed”…in the wrong direction. And to the differentiation objection, I suggest that the audience share my faith in Nokia’s proven hardware strengths and in their Finnish tradition of sparse, elegant designs.
It becomes an open — if occasionally pained – exchange. My hosts are visibly as concerned as I am about Nokia’s current direction.

On my way back to the Valley, I try to put a humorous spin on the discussion: I pen a Science Fiction: Nokia goes Android piece that shows the great company waking up and turning itself around. But, inside, I know humor is the politeness of despair, and I can’t avoid a somber note at the end of the otherwise lighthearted article:

In a more plodding reality, Nokia is likely to continue on its current course, believing their problem is one of execution, of putting more faith in their sisu.
The king will be deposed, Google and Apple will divide the spoils.

A few months later, Nokia’s situation worsens, OPK is deposed and Stephen Elop, a former Microsoft executive, replaces him.

A year ago exactly, Nokia’s new CEO writes his infamous Burning Platforms memo. In it, Elop makes three crucial statements:

1. The smartphone war isn’t one of platforms any more, it is a war of ecosystems.
2. Our current system software won’t win.
3. To win the war, we’re joining the Windows Phone ecosystem via a special alliance with Microsoft.

The first point is beyond dispute. Two successful ecosystems, Google’s for Android and Apple’s for the iPhone, have settled that score.
To outsiders, Elop’s second statement is merely a frank assessment of Nokia’s failure to play in the same software league as its Californian competitors. A few insiders and fans take offense but…numbers are numbers.

Things take a turn for the worse with the jump to Windows Phone. In the abstract, the decision is defensible, but by announcing the switch ten to twelve months ahead of actual shipments, Elop has effectively osborned his current product. Who will buy Symbian-based smartphones when Nokia’s own CEO tells the world it’s a has-been platform with no future? Nokia’s fans are furious; so are the shareholders. (See Tomi Ahonen’s blog for a rich, vocal, well-argued compendium of everything wrong with Stephen Elop’s move.)

Nokia’s market share and profits drop precipitously. The December 2011 quarter shows a loss with little hope of a turnaround in the short term.

But the wait is finally over: Nokia now ships Lumia smartphones running on the latest Windows Phone 7.5 release. A Nokia friend asks if I want to try a Lumia 800, the top-of-the-line model in Europe. Having read good things about both hardware and software, I jump at the chance.

When the package lands on my desk, I ask myself The Question: Is this the phone that will put Nokia and Microsoft back in the race? By late 2011, Microsoft’s share of the smartphone market stood below 2%. Does the Lumia line of devices have what it takes to regain the ground lost to Samsung’s Android devices and to iPhones?

What follows, here, is a highly impressionistic diary, with no pretense of objectivity, chronicling a week of abuse of the Lumia 800. (I’ll skip over the phone waking up speaking Finnish, or that it arrived with a European plug for the power adapter. Not a problem, we have Google Translate and I have my own stash of euro-gizmos.) For a dispassionate and professional discussion, please turn to AnandTech’s exhaustive review (12 pages).

At first glance (literally), very good: Elegant, sleek hardware with equally elegant type on the welcome screen, followed by the clean Metro UI (Nokia UK provides a nice tour here). All it takes to get a pre-paid month-to-month subscription and micro-SIM is a short walk to the T-Mobile store.

I encounter my first problem when looking for ways to take screenshots for today’s note. The documentation is mute on the subject, and all Google can offer is that I need software developer tools. Is there really nothing for normal humans? I email my friends, I tweet nokia-connects (as recommended in a nice handwritten note that came with the phone)…still nothing. A simple two-button procedure, followed by a no-hands Photo Stream upload – in other words, the iPhone method — seems to be the type of solution to aspire to.

Cognoscenti will argue over details, but I was impressed by Lumia’s email presentation and management. Setting up my Exchange, Google, and iCloud accounts is as simple and reliable as the best of what I’ve seen with Android and iOS devices. So is the polished use of type, the ease of linking and unlinking mailboxes, handling single messages, and bulk-editing an inbox loaded with spam. Office attachments read well, naturally — as they do on all leading smartphones. But while competitors read PDF docs natively, Windows Phone tells you There’s An App For That. It’s free and installs easily, as every other app I tried. But, for such a basic function, rendering PDF files, why not make it part of the device?

Surfing the Web proves less satisfying. Tabbed browsing isn’t as intuitive as on an iPhone 4S, and there’s no “Reading List” of pages you can save for later or sync with your PC. Worse, there appears to be a purplish tinge on the screen as I read Web pages and the type rendering is lackluster — I wish I had screenshots to better explain what I see. I don’t know enough about what’s under the hood to place the blame, but perhaps it’s the lower screen resolution (480 by 800 vs. 640 by 960).

Music, at least on the device I got, is also disappointing. Contrary to the claims of the Nokia Music support page, there’s no Nokia Music Streaming on my Lumia. Perhaps this is just a temporary or regional situation. Downloading music from iTunes is theoretically possible, although it seems one needs a DRM Removal Tool, followed by a batch conversion to Windows Phone music files. Spotify offers a Windows Phone application, or one can turn to the Microsoft’s Zune Unlimited Pass, both with a $9.99/month subscription. Opinion will differ as to the attractiveness of these music offerings. In any case, there’s no ‘‘iPod Inside”, as I hear an AT&T salesperson say.

The Lumia 800 features an 8 megapixel camera with a “Carl Zeiss Tessar” lens. As a test, I took side-by-side pictures using the Lumia and an iPhone 4S, both in idiot mode (auto white balance mode, auto everything else).

First, my two pigs. I found them 20 years ago in an antique shop in Arcachon, France, and christened them Victor and Charles, as in VC. This was in my early entrepreneurial days, when I thought VCs were…you know. Now that I’ve gone over to the Dark Side, I still keep them on my desk and show them to entrepreneurs who give me lip about my brotherhood.

The Lumia photo:

…and the iPhone:

To the inexperienced viewer, the iPhone 4S picture looks better

I tried another subject: Handwritten numbers on a piece of paper.

The Lumia:

…and iPhone:

Take a close look at these pictures and you’ll see that the iPhone images are marginaly sharper.

The rather dull tint of the Lumia pictures can be corrected using any decent photo processing program (I just did it in iPhoto, it works quite well). Of course, that means moving the pictures to a “real” machine.
Perhaps the dull tint is unique to the phone I got. If it isn’t, it needs to be fixed in order not to disappoint. The Autofix feature in the phone’s camera software didn’t fix the picture.

I used Microsoft’s SkyDrive, a free “drive in the Cloud” that appears as one of the sharing options in Windows Phone. It’s not as clever as DropBox, or as automated as parts of iCloud, but it works well (and reliably) on PCs, Macs, Windows Phone, Android, and iOS.

Still on the camera topic: unlike other leading smartphones, there is no front-facing camera. As a result, no video calls in Skype or FaceTime fashion.

Using Nokia-owned Navteq maps, navigation work as expected: very well.

Last item for this cursory review: battery life. The Lumia’s screen dims in a matter of seconds and shuts down soon thereafter. My unscientific impression is that the battery drains quickly if you do a lot of browsing and downloading on 3G or WiFi. A glance at AnandTech’s thorough numbers shows that this is indeed the case.

…or nearly the last item: I forgot to mention phone calls, we use smartphones for those, too. Nothing to report; voice, SMS…everything works as expected.

This is a well-made, elegantly designed, and capable phone. But let’s return to The Question: Is this the Killer Phone? Will the Lumia 800 and its siblings put Nokia and Microsoft back in contention? My answer is, regretfully, No.

The Lumia contains neither the revolutionary new features nor the fresh approach that any serious smartphone needs to compete with the two new giants, Samsung and Apple. The Korean company is very, very determined; it takes no prisoners — ask Sony. And Apple is no longer Little David fighting the Microsoft Goliath: Last quarter, the iPhone alone generated more revenue and profit than all of Microsoft.

I can’t help but retro-fantasize an alternate reality: In 2010, Nokia starts a secret project with Google and an Asian contract manufacturer. The industrial design is done in-house, the rest in collaboration. In February 2011, Elop announces a special relationship with Google — and starts shipping the device immediately. No osborning, no revenue gap.

This fantasy comes with a bonus: Google doesn’t have to buy Motorola and it gets Nokia’s patent portfolio – infringement of which Apple has paid more than $600M — as part of the “special relationship”.

Back to reality: Without a clearly superior product and a dominant ecosystem, Microsoft and Nokia are now forced to shell out big marketing dollars against richer adversaries. This isn’t going to be pretty: Microsoft can ill afford to be a bit player in the smartphone revolution and Nokia can’t keep bleeding money, squeezed between the new giants and the emerging Asian providers of entry-level devices.

JLG@mondaynote.com

Will Microsoft buy RIM or Nokia?

We continue along the lines of last week’s Monday Note kriegsspiel with the latest speculation Will Microsoft, at long last, buy RIM? The idea has been kicked around for at least five years: Days after the iPhone’s introduction in January 2007, Seeking Alpha suggested that the Xbox maker ought to buy RIM in order to build an XPhone. In retrospect, this would have saved both companies a lot of grief.

It’s early 2007 and the BlackBerry maker is riding high. With its Microsoft Exchange integration; a solid PIM (Personal Information Manager) that neatly combines mail, calendar, and contacts; and the secure BlackBerry Messenger network, the “CrackBerry” is rightly perceived as the best smartphone on the market. I love my Blackberry and once I manage to get a hosted Exchange account for the family, I show my un-geeky spouse the ease of over-the-air (OTA) synching between a PC and the BlackBerry. ‘No cable?’ No cable. She promptly ditches her Palm device. One by one, our adult children follow suit. For a brief time, we are a BlackBerry family.

But the Blackberry’s success blinds RIM executives. They don’t see – or refuse to believe – that the iPhone poses a threat to their dominance. A little later, Android comes on the scene. Apple and Google deploy technically superior software platforms that, by comparison, expose the Blackberry’s weaker underpinnings. In 2010, RIM acquires the QNX operating system in an effort to rebuild its software foundations, but it’s too late. The company has lost market share and shareholders see RIM squander 75% of its market cap.

Now, imagine: On the heels of the iPhone introduction in 2007, Microsoft acquires RIM and quickly proceeds to do what they’ve only now accomplished with Windows Phone 7: They ditch the past and build a modern system. This would have saved Microsoft a lot of time and RIM shareholders lots of money. Instead, Microsoft mocks the iPhone and brags that the venerable (to be polite) Windows Mobile will own 40% of the market by 2012.

Things don’t quite work as planned. Early 2010, Microsoft wisely abandons Windows Mobile for the more modern Windows Phone 7 (a moniker that combines the Windows Everywhere obsession with a shameless attempt to make us believe the new smartphone OS is a “version” of the desktop Windows 7).

And things still keep not working as planned. WP 7 doesn’t get traction because handset makers are much more interested in Android’s flexibility and, particularly, their price. Android’s Free and Open pitch works wonders; the technology is sound and improves rapidly; OEMs see Microsoft as the old guard, stagnant, while Google is on the rise, a winner.

All the while, Nokia experiences their own kind of “domination blindness”. In 2007 Nokia is the world’s largest mobile phone maker, but they can’t see the technical shortcomings of their aging Symbian platform, or the futility of their attempts to “mobilize” Linux. iOS and Android devices quickly eat into Nokia’s market share and market cap (down 80% from its 2007 high).

In 2010, Stephen Elop, formerly a Microsoft exec, takes the helm and promptly states two brutal truths: This isn’t about platforms, we are in an ecosystem war; technically, we’ve been kidding ourselves. Nokia’s new CEO sees that the company’s system software efforts – new and improved versions of Symbian or Maemo/Moblin/Meego – won’t save the company.

Having removed the blinders, Elop looks for a competitive mobile OS. Android is quickly discarded with the usual explanations: We’d lose control of our destiny… Not enough opportunities for differentiation… The threat of a race to the bottom might have entered the picture as well.

This leads Elop back into his former boss’ arms. Microsoft and Nokia embark on a “special relationship” that involves technical collaboration and lots of money. It’ll be needed: By the end of 2011, WP 7 has less than 2% market share. Nokia’s just-announced Lumia smartphone is well received by critics but will it demonstrate enough superior points to gain significant share against the Android-iOS duopoly? I’ll buy one as soon as possible in order to form an opinion.

The “MicroNokia” relationship isn’t without problems. Many Nokia fans are outraged: Elop sold out, Nokia’s MeeGo was unfairly maligned, the company has lost its independence… See Tomi Ahonen’s blog for more. (And “more” is the right word. Ahonen’s learned, analytical, and often rabid posts range between 4,000 and 10,000 words.)

The Nokia faithful have a point. In my venture investing profession, we call an arrangement such as the MicroNokia partnership “buying the company without paying the price.” Right now, Microsoft appears to control Nokia’s future since, at this stage, Nokia is as good as dead without WP 7.

But doesn’t that mean that Nokia also controls Microsoft’s smartphone future? “Statements of direction” aside, there are no notable WP 7 OEMs. (Samsung and HTC ship a few WP 7 phones, but their share is infinitesimal compared to their Android handsets.) With Android growing so fast, why would a smartphone maker commit to WP 7 while Nokia holds a privileged status on the platform?

Microsoft is making smart moves against Android by using their patent portfolio to force Android handset makers to pay (undisclosed) royalties. With LG as the latest licensee, Microsoft appears to have snared 70% of Android OEMs. The (serious) joke in the industry is that Microsoft makes more money from Android than from WP 7.

But success with patents doesn’t translate into more WP 7 OEMs, which leaves us to wonder: Will Microsoft consummate the relationship and acquire Nokia, whether the entire corpus or, at least, the fecund (smartphone) bits? For years, Microsoft has claimed they’re all about choice, and when it comes to the PC, that’s true: Businesses and consumers have a wide choice of PCs running Windows. But their customers have no real choice when it comes to WP 7: It’s Nokia or…Nokia. They might as well tie the knot and call it what it is: Microsoft or Microsoft. It works wonders for Xbox and Kinect.

Going back to RIM, we hear it’s ‘’in play’’, that they’ve hired investment bankers to “look at their strategic alternatives”. In English: They’re looking for a buyer.

But who? Microsoft is otherwise engaged. So is Motorola. And forget Samsung.

With RIM’s market share dropping precipitously, and no sign of a rebound with spanking new models until the second half of 2012, who would want to risk billions in a market that’s controlled by competitors who manage to be both huge and fast-growing? Sure, RIM is still in the black, but its cash reserves are dwindling: the Cash and cash equivalents line went from $2.7B last February to $1.1B in November 2011. What’s left will evaporate quickly if revenue and profits keep dropping, as they’re likely to do for the foreseeable future.

JLG@mondaynote.com

2011: Shift Happens

Whatever 2011 was, it wasn’t The Year Of The Incumbent. The high-tech world has never seen the ground shift under so many established companies. This causes afflicted CEOs to exhibit the usual symptoms of disorientation: reorg spams, mindless muttering of old mantras and, in more severe cases, speaking in tongues, using secret language known only to their co-CEO.

Let’s start with the Wintel Empire

Intel. The company just re-organized its mobile activities, merging four pre-existing groups into a single business unit. In a world where mobile devices are taking off while PC sales flag, Intel has effectively lost the new market to ARM. Even if, after years of broken promises, Intel finally produces a low-power x86 chip that meets the requirements of smartphones and tablets, it won’t be enough to take the market back from ARM.

Here’s why: The Cambridge company made two smart decisions. First, it didn’t fight Intel on its sacred PC ground; and, second, it licensed its designs rather than manufacture microprocessors. Now, ARM licensees are in the hundreds and a rich ecosystem of customizing extensions, design houses and silicon foundries has given the architecture a dominant and probably unassailable position in the Post-PC world.

We’ll see if Intel recognizes the futility of trying to dominate the new theatre of operations with its old weapons and tactics, or if it goes back and reacquires an ARM license. This alone won’t solve its problems: customers of ARM-based Systems On a Chip (SOC) are used to flexibility (customization) and low prices. The first ingredient isn’t in evidence in the culture of a company used to dictate terms to PC makers. The second, low prices, is trouble for the kind of healthy margins Intel derives from its Wintel quasi-monopoly. Speaking of which…

Microsoft. The company also reorged its mobile business: Andy Lees, formerly President of its Windows Phone division just got benched. The sugar-coating is Andy keeps his President title, in “a new role working for me [Ballmer] on a time-critical opportunity focused on driving maximum impact in 2012 with Windows Phone and Windows 8”. Right.

Ballmer once predicted Windows Mobile would achieve 40% market share by 2012, Andy Lee pays the price for failing to achieve traction with Windows Phone: according to Gartner, Microsoft’s new mobile OS got 1.6% market share in Q2 2011.

Microsoft will have to buy Nokia in order to fully control its destiny in this huge new market currently dominated by Android-based handset makers (with Samsung in the lead) and by Apple. In spite of efforts to ‘‘tax” Android licensees, the old Windows PC licensing model won’t work for Microsoft. The vertical, integrated, not to say “Apple” approach works well for Microsoft in its flourishing Xbox/Kinect business, it could also work for MicroNokia phones. Moreover, what will Microsoft do once Googorola integrates Moto hardware + Android system software + Google applications and Cloud services?
In the good old PC business Microsoft’s situation is very different, it’s still on top of the world. But the high-growth years are in the past. In the US, for Q2 2011, PC sales declined by 4.2%; in Europe, for Q3 this time, PC sales went down by 11.4% (both numbers are year-to-year comparisons).

At the same time, according to IDC the tablet market grew 264.5% in Q3 (admire the idiotic .5% precision, and consider tablets started from a small 2010 base). Worldwide, including the newly launched Kindle Fire, 2011 tablets shipments will be around 100 million units. Of which Microsoft will have nothing, or close to nothing if we include a small number of the confidential Tablet PC devices. The rise of tablets causes clone makers such as Dell, Samsung and Asus (but not Acer) to give up on netbooks.

In 2012, Microsoft is expected to launch a Windows 8 version suited for tablets. That version will be different from the desktop product: in a break with its monogamous Wintel relationship, Windows 8 will support ARM-based tablets. This “forks” Windows and many applications in two different flavors. Here again, the once dominant Microsoft lost its footing and is forced to play catch-up with a “best of both world” (or not optimized for either) product.

In the meantime, Redmond clings to a PC-centric party line, calling interloping smartphones and tablets “companion products’’. One can guess how different the chant would be if Microsoft dominated smartphones or tablets.

Still, like Intel, Microsoft is a growing, profitable and cash-rich company. Even if one is skeptical of their chances to re-assert themselves in the Post-PC world, these companies have the financial means to do so. The same cannot be said of the fallen smartphone leaders.

RIM: ‘Amateur hour is over.This is what the company imprudently claimed when introducing its PlayBook tablet. It is an expensive failure ($485M written off last quarter) but RIM co-CEOs remain eerily bullish: ‘Just you wait…’ For next quarter’s new phones, for the new BlackBerry 10 OS (based on QNX), for a software update for the PlayBook…

I remember being in New York City early January 2007 (right before the iPhone introduction). Jet-lagged after flying in from Paris, I got up very early and walked to Avenue of The Americas. Looking left, looking right, I saw Starbucks signs. I got to the closest coffee shop and saw everyone in the line ahead of me holding a BlackBerry, a.k.a. CrackBerry for its addictive nature. Mid-december 2011, RIM shares were down 80% from February this year:

Sammy the Walrus IV provides a detailed timeline for RIM’s fall on his blog, it’s painful.

On Horace Dediu’s Asymco site, you’ll find a piece titled “Does the phone market forgive failure?”. Horace’s answer is a clear and analytical No. Which raises the question: What’s next for RIM? The company has relatively low cash reserves ($1.5B) and few friends, now, on financial markets. It is attacked at the low end by Chinese Android licensees and, above, by everyone from Samsung to Nokia and Apple. Not a pretty picture. Vocal shareholders demand a change in management to turn the company around. But to do what? Does anyone want the job? And, if you do, doesn’t it disqualify you?

Nokia: The company has more cash, about 10B€ ($13B) and a big partner in Microsoft. The latest Nokia financials are here and show the company’s business decelerates on all fronts, this in a booming market. Even if initial reactions to the newest Windows Phone handsets aren’t said to be wildly enthusiastic, it is a bit early to draw conclusions. But Wall Street (whose wisdom is less than infinite) has already passed judgment:

Let’s put it plainly: No one but RIM needs RIM; but Microsoft’s future in the smartphone (and, perhaps, tablet) market requires a strong Nokia. Other Windows Phone “partners” such as Samsung are happily pushing Android handsets, they don’t need Microsoft the way PC OEMs still need Windows. Why struggle with a two-headed hydra when you can acquire Nokia and have only one CEO fully in charge? Would this be Andy Lees’ mission?

All this stumbling takes place in the midst of the biggest wave of growth, innovation and disruption the high-tech industry has ever seen: the mobile devices + Cloud + social graph combination is destroying (most) incumbents on its path. Google, Apple, Facebook, Samsung and others such as Amazon are taking over. 2012 should be an interesting year for bankers and attorneys.

JLG@mondaynote.com


Mobile World Clusterf#^k — 2011 Edition

Plus ça change…et plus.

We are at this year’s Mobile World Congress, held last week in Barcelona. One of the usual suspects, AT&T CEO Randall Stephenson, stands and delivers the new and improved party line: App Stores are bad. Stephenson wants cross-platform apps delivered through the Wholesale Applications Community (WAC), whose “commercial launch’’ takes place at the conference.

At last year’s conference, carriers made similar noises, dutifully reported in this 2010 Mobile World Clusterf#^k Monday Note, and no less diligently mocked in TechCrunch

(“The Wholesale Applications Community Sounds Like a Disaster in the Making.”) Now that AT&T is no longer the exclusive iPhone carrier in the US, the App Store that used to boost their iPhone sales (with a fat $100/month ARPU) also benefits Verizon.

AT&T’s carrier-centric view of the world remains unchanged: Phones are a commodity. Their sole raison d’être is to act as a transmission medium, a hard-to-disconnect hose attached to our wallets that sucks out as much money as possible…in legal ways, of course…most of the time.

To Mr. Stephenson, a financial executive (he used to be CFO of Southwestern Bell), Apple’s App Store and its ilk violate the carrier’s birthright. Unveiled last year and re-announced last week, the path to redemption is clear: WAC, a cross-carrier, cross-platform “community.” Who wouldn’t want the security of a carrier-hosted universal application library? Simple, no?

No.

Software is the music of smartphones. Picture two musical instruments, a pipe organ and a spinet piano. Consider the organ in the picture, three keyboards, a pedalboard, the “ranks” (sets of pipes) controlled by stops along the sides:

The organ’s sonic palette is broad and deep: A wide ambitus of pitch, from the gut-wrenching near-subsonic to the hair-raising upper reaches; a panoply of timbres; infinite sustain; capable of terrifying volume…

The spinet…

Music written for an organ transcribed — cross-platformed — for a spinet…it’s just not the same. Why aim for the lowest common denominator?

Metaphor aside, restricting the features and capabilities of an app so it fits on every smartphone doesn’t inspire hardware and software innovation.

Just as important — and I’m not sure I can put this diplomatically — in matters of application software and, more generally, taste, what’s the carriers’ record? Do they think customers care more about “one size fits all” sophistry than they do about quality? Subscribers have proven their willingness to pay a premium for products that demonstrate attention to form and function.

AT&T’s “get off my lawn” attitude reeks of nostalgia for the Good Old Days when carriers dictated features and prices. The inevitable disintermediation of their business started with the iPhone apostasy and will soon expand when an unlocked smartphone from Mediatek (see Stephen Elop’s memo) running an Android derivative (OMS/oPhone or Tapas) can be had for $79 or less.

The cross-carrier/cross-platform WAC will make as much progress this year as it did in the last 12 months. Next year’s PowerPoint slides won’t need much editing.

But that was just the appetizer.

The pièce de résistance at this year’s MWC was the MicroNokia CF:

Nokia has given up on its smartphone platforms and has adopted Windows Phone 7.

  • Symbian (Nokia’s current platform) will be “harvested,” which mean Symbian will be flogged until MicroNokia handsets ship in sufficient volume.
  • Meego (a Linux derivative and Nokia’s former future) has been put to pasture…but will ship as a face-saving “research project.”
  • Qt, Nokia’s cross-platform UI framework, has been abandoned. Microsoft will provide the UI.

This is supposed to reverse Nokia’s well-documented market share and profit decline.

Last year, Nokia fired its CEO, OPK (Olli-Pekka Kallasvuo) and hired a Microsoft executive, Stephen Elop. If you click on the link, you’ll see Nokia’s future CEO with a Nokia exec, Kai Öistämö, now reporting to him. Titillating as they might be, we’ll skip the conspiracy theories, they shed no light on the MicroNokia’s future.

It’s not going to be pretty.

Nokia faces an extremely difficult business model transition. One foot in the “we own everything” boat, the other in the Windows Phone 7 skiff. The integrated business model is sinking, and the new Microsoft smartphone platform isn’t floating very well. Consumers and carriers might desert Symbian devices faster than MicroNokia handsets gain acceptance. (Actually, “handsets” is the wrong word. As discussed in Elop’s Burning Platform memo, “ecosystem” is more appropriate: devices + applications + app store + services + content distribution + carriers.)

It gets worse. Today, Nokia sells huge volumes everywhere around the world (except in the US), more than 120M phones per quarter, of which 28M are Symbian devices. How will Nokia’s business fare against the surge of unlocked $79 “Android” derivatives?

We hear Nokia’s explanation for not choosing Android: Not enough differentiation, Windows Phone 7 will give us more control over our destiny, we have a “special partnership” with Microsoft. Special, differentiated…but how? What about other Windows Phone 7 licensees? How will Microsoft succeed in creating a thriving ecosystem if one partner is more equal than the others?

Then there’s the money behind the deal. “Billions,” we’re told, but without further details. Will it be cash, considerations in kind, support, licensing rebates, marketing budget? In time, we’ll get more data.

Such alliances have a way of not working with Microsoft, whose record on the matter is terrible. On his Asymco site, Horace Dediu lists Microsoft’s failed smartphone partnerships. At the risk of belaboring the obvious, the common factor in those failures is Microsoft, its culture, its ways.

(But wait, the MicroNokia alliance is different. Stephen Elop is a cultural diplomat, he’s familiar with the Microsoft ethos, he was the executive in charge of the Office documents partnership with Nokia…)

Microsoft is no longer the successful, dominant player that it was in the PC business. It’s trying to get back into a race that RIM, Google, and Apple are winning. As a result, Microsoft is willing to provide incentives to application developers and handset makers. Big incentives.

And big incentives are justifiable. Microsoft execs realize they no longer have the upper hand, that they must use “all means necessary” to get back into the smartphone revolution, the biggest high-tech rocket we’ve ever seen, combining three engines: Cloud, Social, and Very Personal Computers a.k.a. Smartphones.

To Microsoft’s credit, another tenet of its culture is “never give up.” Like the Harvard football coach he once was, Steve Ballmer tells his troops to keep trying and trying until they succeed, and he has the resources, the money, the people — and his board’s support — to keep at it. I take issue with his wanton disregard for annoying facts, but, good faith or not, I can’t help but admire the unwavering leader and the expert showman.

Still, I doubt this MicroNokia deal will be enough to put Microsoft back in the smartphone and tablets race.

With this in mind, why not acquire Nokia and its worldwide manufacturing and distribution?  For Microsoft, this wouldn’t be a first. They went “integrated” (or, if you prefer, “Apple”) with the Xbox business and controlled the platform in its entirety. The MicroNokia marriage would be a difficult one, certainly, but it would give Microsoft more control over its own destiny. Suitable explanations would be provided: It’s a new era, we have an opportunity to become the largest smartphone maker, and (while we’re being cheeky) it’s a way to thwart the looming Google/Android licensing monopoly.

Who knows, Ballmer might change his mind. If he doesn’t, he might put yet another failed partnership on his résumé.

JLG@mondaynote.com