Can Nokia’s partnership with Microsoft mark a comeback for both companies?

LUMIA 920Nokia was the world’s number on cellular phone maker for more than fourteen years in a row As recently as 2008, it commanded about forty percent of the global market share. The odds are, you owned or knew someone who owned a Nokia phone. After all, if you look at the top thirteen best-selling phones of all time, all bar one are from Nokia. But with the advent of the smartphone – and in particular Apple’s iPhone launch in 2007 – things took a turn for the worse and the brand now faces an uncertain future.

The Finnish telecommunications giant’s share price fell from $39.71 in November 2007 to just $2.77 at the time of writing, while its market share for mobile phones has halved to around 21 percent. As of this year, Samsung now makes more mobile phones while other manufacturers of cheaper phones cut into Nokia’s sales at the budget-end of the market.

To try and reverse this slide, Nokia brought in a new CEO, the former Microsoft head of business division, Stephen Elop, in 2010. He was paid a $6 million signing-on bonus, along with a $1.4 million annual salary to get them back on top. Unfortunately for him, the first time he made the headlines was when a staff memo he wrote in early 2011 was leaked. “The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience. Android came on the scene just over two years ago, and this week they took our leadership position in smartphone volumes. Unbelievable.” This was just one of the points raised in the now famous missive. “We poured gasoline on our own burning platform,” he continued. “I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven’t been delivering innovation fast enough. We’re not collaborating internally. Nokia, our platform is burning.”

Brutal as his assessment was, it was also correct. Nokia was losing ground rapidly despite spending $40 billion on research and development over the past decade — nearly four times the amount Apple spent in the same period. So Elop got rid of the Symbian operating system it had previously used in its smartphones in favour of a partnership with his old employers Microsoft.

And last month, at a major launch in New York, the latest – and most important – phones in this collaboration were released: the Lumia 920 and 820. Even the invite to the event stated what everyone knew: that that the launch was, “one that will determine the future of the company.”

The phone itself was undoubtedly a major step up from previous smartphone attempts and has some potentially outstanding features. But there in lower Manhattan, Elop was quick to get to the more fundamental point, describing his strategy for the Windows phone with this key quote: “We recognised the industry had shifted from a battle of devices to a war of ecosystems.” This, he believes, is the heart of the tech war taking place as competing companies look to “connect the next billion people to the Internet.”

“We recognised the industry had shifted from a battle of devices to a war of ecosystems.”

Elop’s plan to grab more territory in this ecosystem therefore rests as much on the operating system as much as on the hardware itself. Windows phones currently have roughly three percent of the global market, while Apple iOS has 16 percent and Google’s Android has around 68 percent. But later this month the highly anticipated Windows operating system will launch. Windows 8 – whether you like it or not – will be everywhere soon, on millions of PCs all around the world as the default Microsoft OS. Its new tiled interface should transfer easily to smaller screens, and extending it to phones will make the phone’s system familiar to millions before they even pick it up. Blamer  claimed there could be around 400 million devices using the same user interface as on the new Nokia phones within a year.

As a privileged partner of Microsoft, Nokia benefits from its expertise and market share, even if it means they are unable to keep everything in house as Apple does. It also means dealing with the allegations that Elop is a cuckoo in the nest looking after interests of Microsoft as much as Nokia.

When Esquire spoke to Marco Argenti, Nokia’s senior VP of Developer and Marketplace, he was quick to praise the significance of having Elop on board to help secure integration with Microsoft. “He made an assessment of the platform at Nokia and took a very bold approach towards it,” he said. “That changed the way this company operates. Stephen simplified our strategy — just eighteen months ago a deal was inked on paper and now you can see the next generation of device.”

We shouldn’t forget that it’s also a big moment for Microsoft itself. Earlier this year it was overtaken by Apple as the most valuable company of all time after years of dominance. Microsoft’s peak value was way back in 1999 at the height of the dotcom boom and, in terms of innovation, it has been lagging behind for some time now.

Communications analysts CSS Insight has estimated that 700 million smartphones will be shipped in 2012, which means they will take over from the PC as the most common computing device. Microsoft really needs this to be a success, and is not relying solely on Nokia to ensure that. Windows 8 will also run on Samsung, HTC and Acer phones as well as its own tablet, a device that it hopes will challenge the iPad.

The partnership with Microsoft clearly has benefits to those who join with the giant. It was revealed during the Samsung vs. Apple hearings that Microsoft has a cross-licensing agreement with Apple not to sue each other as long as the design of their respective hardware can be differentiated. And given that Nokia has a huge patent library of its own, when the verdict in the Apple v Samsung patent case was announced the Nokia share price rose 7.7 percent.

But being only one of several partners to the tech giant also has its drawbacks. “Our biggest opportunity is to differentiate,” Argenti stressed. “We stand out from the sea of sameness that you see everywhere. It’s a unique operating system that doesn’t look like anything else.” Soon after Argenti spoke to us, however, the new HTC phone was released. It looks very similar and runs the same Windows 8 system. Of the HTC announcement, Nokia spokeswoman Mona Kokkonen would comment dryly: “This is more good news for the Windows Phone ecosystem.” It was a reminder that its partner is also in bed with several of its rivals.

It will take time to judge whether Nokia’s grand plan will work where it matters most – in the marketplace. And especially in regions like the Middle East where Nokia was previously dominant. Straight after the Lumia launch, its share price dropped 11.3 percent. Nokia declined to comment to Esquire on the drop, but it was largely attributed by analysts to the refusal to announce price and availability details. In Q4 for “some” regions is all they would say. The firm later announced that the launch would be September 26th with the Middle East following in mid-November, meaning we’ll almost certainly see it via the grey market first.

“growth is driven not just by new models, but by new markets and that has to be done right.”

Argenti wouldn’t be drawn on differing release schedules, merely stating that “growth is driven not just by new models, but by new markets and that has to be done right.” So we may see the softly-softly approach in this part of world, despite Nokia’s need to secure new users.

Where does that leave the features that would potentially tempt a Middle Eastern buyer such as the City Lens feature? “It’s part of the platform and wherever you have Nokia
maps you will have City Lens marking points of interest,” Argenti said, but wouldn’t elaborate on how detailed it will be, let alone whether it will be as interactive as the one for the United States. If it’s like, then there will still be things that need fixing if it’s to be useful in this part of the world.

Of course they’re not alone in that. The iPhone 4s was all about Siri, which still doesn’t really work in this region, thus negating the point of upgrading from the previous model. Argenti, however, is convinced that Nokia’s strong regional representation will ensure that its apps work here. “We have people on the ground in the Middle East and we will be working with developers to make sure they make sure they are adopted.”

Regional niggles aside, the success or failure of this phone will, as the launch invite pointed out, “determine the future of the company”. What that might future might be is hard to tell as the phone itself is excellent, but it’s not the only excellent phone on the market. The new slogan for the Nokia Lumia 920 (“It’s time to switch”) is seemingly an open admission of its lesser status and that its job now is to try and bring people back. It won’t be easy persuading people to put down their iPhones or Samsung Galaxys or even HTCs – especially as the latter now runs the same new Windows 8 software.

The idea that companies can be too big to fail is clearly not true. From Borders Books to Blockbuster, huge companies fail if they don’t keep up with the times. Some analysts predict doom and gloom for Nokia, with speculation that the low share price makes it vulnerable to a takeover. Its market cap, however, is still over $10 billion, meaning that if Microsoft (as is rumoured) was to launch a takeover it would have to pay even more than it did for Skype last year. With the patents that it holds, together with other intellectual property, it has valuable assets worth an estimated $6 billion, even if thousands of staff are being laid off, jobs are being shipped to Asia and the stock price is worryingly low.

The future is still to be decided but, as Forbes pointed out, “the sad truth is, Nokia might be worth more dead than alive.”

For Esquire Magazine – Nokia 1, Nokia 2, Nokia 3

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