Rise and Fall of Nokia (2014)

The Extraordinary Rise and Rather Undistinguished Decline of

REVISED DRAFT VERSION February 2014 Solely for distribution to: Critical Perspectives on Management

A Briefing by Rolf Strom-Olsen and Serena Mujtaba Do not redistribute without permission

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The Rise & Decline of Nokia The Finnish Company that built a Global Brand In 1990, Nokia was a storied, but fairly obscure firm known to few outside of Europe. By the end of the decade, it had become the dominant global brand in mobile telephony, an example of how a company could transform itself in the Information Revolution. After the architect of this remarkable transformation, Jorma Ollila, stepped down in 2005, his successor, Olli-Pekka Kallasvuo, at first seem poised to build on this success. But in 2010, with its market share, stock price, and earnings all in sharp decline, Kallasvuo abruptly departed the company. In short order, the new CEO, Stephen Elop, announced a major and dramatic shift in focus to renew Nokia’s presence in the market amidst widespread sentiment that the company was in major decline. The strategy failed, and in 2013 the company sold its mobile device business to Microsoft at a fraction of its former value.

What happened? 1865-1920 The Forestry Era

1920-1980 Global Focus

Nokia’s Success Strategy Throughout its existence, Nokia has established itself as a key competitor in a diverse range of industries, whilst still maintaining its founding values. Nokia’s success was based upon developing strategic capabilities gained from competitive advantages in its previous business endeavors and applying them to new fields: adaptability, strategic flexibility and customer focus.

1980-Today Mobile Information

Let’s wait for the Revised Edition… “As Nokia’s success indicates, it is vital to embrace change and adapt to the future, even when it requires a thorough transformation. … When CEO Jorma Ollila and CFO OlliPekka Kallasvuo opted for Nokia’s global focus strategy in 1992, they bet the future on new emerging industries and markets and began to divest all noncore properties. Most bold strategic decisions encompass both constructive creation and creative destruction. The lesson? Acknowledge the facts and never shun bold strategic decisions. The bolder the decision is, the greater are the potential rewards. Risk comes with the territory. - Dan Steinbock, Winning across global markets: how Nokia creates strategic advantage in a fast-changing world (San Francisco: Jossey-Bass, 2010), p. 36.

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1865-1920 – The Forestry Era During the 1860s Finland experienced a tremendous boom in the lumber industry. In 1865, Fredrik Idestram, an engineer, and Leo Mechelin, a leading parliamentarian, seeking to exploit its commercial potential, established a small forestry company. Funded by private investors, the company took its name from the local Nokia River, close to where the first lumber mill was built. Over the next 30 years, Nokia expanded to include a large lumber mill, a pulp factory, a large paper factory, an electrical power generator as well as multiple other facilities. Nokia’s diversification strategy dates back to the very origins of the company.

1920s-1960s – Global Focus Nokia evolved from a family-owned business into a public company after the end of World War One. This development allowed Nokia to focus both on opening new markets and the expansion of old ones. One of these expansions was in its electrical power generation line. Nokia merged with two independent companies, ‘The Finnish Rubber Works’ and ‘The Finnish Cable Works’ in 1967 to form the Nokia Corporation, ‘Oy Nokia Ab’. This merger was both practical and strategic and allowed for the new corporation to focus on four major business divisions: forestry, rubber, cable and electronics.

Balanced Market Expansion A trade agreement was established between Finland and the Soviet Union in the 1960’s. This agreement encouraged Nokia to export much of its product line to the Soviet Union, and enjoy benefits against competing companies. The acting managing directing of the time, Bjorn Westerland, stated that it would be an unwise move and strategic mistake to depend on the Soviet Union being their sole customer. Hence, Nokia insisted that any sales made to the Soviet Union had to be balanced by the sales of goods seen across Europe, Asia, and Africa, as well as the domestic market.

1970s-1980s – Acquisition Spree Finland was gaining a reputation of being the “Nordic Japan”, aided by its rapidly developing telecommunications industry, including Nokia. During this period, Nokia appointed a new managing director, Kari Kairamo, who had a new idea’s about how to transform Nokia: rapid expansion. Nokia had yet to reach broadly into international markets, and Kairamo believed that mobilizing Nokia’s key strategic assets – its technologies, accumulated customer information, brand name, reputation and culture – would be the way forward. Nokia decided to increase its research into electronics as well as acquire operations across Europe, which resulted in a revenue base of $2.7 billion with 27,600 employees and a market capitalization of more than $1 billion. Amongst the companies acquired were Scandinavia’s largest television manufacturer Salora Oy, Ericsson Group’s Data Division and Finland’s largest electrical wholesaler. Nokia also became the third largest television manufacturer in Europe. At this point in the history of Nokia, the corporation had become large enough to gain international recognition, but not strong enough to dominate its competitors. Nokia refocused its efforts to develop the strength of its brand image through the different market niches in which it enjoyed significant presence. This was to be the start of “its willingness to listen to the customer – a great competitive asset that would become legendary a decade later.” (Dan Steinbock, 2010).

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1980s to today – Mobile

Information The rapid expansion of Nokia led to a 65% debt-to-equity ratio and an internally sprawling organisation. By the mid-1980s the company consisted of eleven industrial groups, each with its own vision for the future. By 1986, Nokia owed $2.6 billion of debt, and was in need of a major restructuring. A new CEO was appointed Simo Vuorilehto. Vuorilehto deemed it imperative to maintain Nokia’s core focus; his primary step was to divest all of Nokia’s non-strategic businesses. Despite its earlier growth, the later 1980s were a challenging period for Nokia. It witnessed sharp falls in its revenues and share price after a national recession and the collapse of the Soviet Union, which had been an important market. In 1992, Vuorilehto stepped down as CEO and was replaced by Jorma Ollila, previously the head of the company’s fledgling mobile phones division. Shortly after his appointment, Ollila made a critical decision that would end up transforming Nokia from a diverse industrial European conglomerate into the main global player in the fast-growing mobile telephony market. Helped by the early adoption of cellular infrastructure in Finland, which was leading to rapid penetration of mobile telephony in the local consumer market, Ollila saw that mobile telephony was on the threshold of a major shift, moving from a high-end good to massconsumer item, much like, for instance, the automotive market in the 1920s or the television market in the 1950s. Ollila decided to refocus Nokia around its mobile handset division and over several years the company divested itself of most of the assets that did not correspond to this new ‘core.’ Ollila stressed three attributes he considered key to Nokia’s success: product innovation, flexibility and rapid responsiveness. At the same time (the mid 1990s), he divested Nokia of almost all its remaining noncore assets to focus on building value behind the ‘Nokia’ brand in order to establish itself as a leading player in the burgeoning consumer wireless handset industry. This important - and risky strategic decision coincided with the worldwide deregulation of the telecommunications industry.

The Vision of Nokia to 2000

Wireless Focus

Global Brand

Telecom Oriented

The Nokia Insight Nokia is widely credited for having been the first company to recognize that cellular telephony was becoming a staple consumer good, and to adjust its position towards each domestic market accordingly.

Strategy for Success in 2000 1.

Concentrate on fewer business areas, but expand worldwide.

2. Encourage managers to act locally in foreign markets, and to develop understanding of local needs and consumer preferences. 3. Learn how to best market products and establish brand image in small and fragmented niche markets. 4. Focus exclusively on the wireless marketplace, particularly in highgrowth areas of terminals (handsets) and infrastructures (base stations and switches). 5.

Leverage financial and managerial resources to gain a foothold in key emerging markets, such as China.

A Deregulated Market: •

During the late 1990s, the Telecommunications market was deregulated worldwide.

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Nokia make a quick and key strategic decision to establish business relations with telecommunication start-ups internationally.

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This strategic move was in keeping with the Company’s entrepreneurial mindset of placing its shareholders interests at the forefront of future expansion opportunities.

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This allowed for a significant, but also destabilising growth.

High Value Added

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Nokia’s Restructuring:

Nokia 2000

Nokia Networks

Nokia Mobile Phones Nokia Communication Porducts Nokia Ventures Organization

As early as 1997, Nokia realized that the future of mobile telephony would lie in its integration with the Internet. Ollila’s vision for Nokia was that of becoming a pioneer in Internetenabled telephony, whilst maintaining Nokia’s current position as the growing global giant of mobile handsets. Ollila’s move was seen as bold, and one that could jeopardize Nokia’s stance as a global leader in cellular communications. Nonetheless, Ollila believed the company’s goal of expanding global market share was dependent on manufacturing what he felt consumers would increasingly demand: a mobile phone combined with Internet capability. This made the move into an unpredictable and increasingly competitive technological market unavoidable. It would also make Nokia the early dominant player in a market segment that would come to be called “Smartphones”.

Pre 1997, Nokia’s business strategy was one that focused upon globalisation, which proved successful in the creation of a strong brand name, recognizable in both international and domestic markets. Nokia had become a household name from the US and Germany to China and Brazil. Nonetheless, a growth model based upon establishing a brand name rather than the development of new technology was unsustainable. Nokia recognised this and restructured its growth plan accordingly, centering its future strategy around two fundamental features of the information revolution: the internet, and consumer demand for greater levels of mobility.

Nokia Research Centre

Nokia’s New Business Framework: 1997 onwards A move into the mobile digital economy would be no easy task for the cellular communications leaders; it called for a cash-rich company willing to increase significantly their R&D expenditures to service a market that was constantly and rapidly changing, and one that was becoming increasingly more competitive. Nokia decided to concentrate on two key areas’ that they believed to be the most crucial advances of the Internet age: 1.

The development of a 3G Cellular System

2. The mainstream implementation of the wireless applications protocol (WAP) A 3G Cellular System:

Wireless Applications Protocol:

3G was intended to be a harmonized worldwide frequency spectrum allowing for cellular devices to handle not only voice data and telecommunications, but also the transfer of information and computing through the internet, from mobile or fixed locations. In essence this cellular system was to be the 3rd generation of a mobile phone. If successful, analysts’ forecasts showed 3G having more than 2 billion users worldwide by 2010. Nokia’s intent was to establish a first-mover advantage by establishing strategic coalitions and alliances in an industry, which had yet to really exist. Given the extensive delays in rolling out 3G networks, this did not prove to be a successful strategy in the long run.

Nokia was one of the founding members of the wireless applications protocol (WAP), an open standard that allowed for Internet-based services to be used by mobile phones and other wireless terminals. WAP coincided with the introduction of Bluetooth; an open standard for short-range communications amongst equipped electronic devices. These features both featured into, what was at the time, Nokia’s most high-tech Internetenabled phone: the Communicator. With a best-of-industry device, worldwide brand recognition and a 33% market dominance, technological companies were keen to develop strategic coalitions with Nokia. The business potential of the technological industry was reflected in the rapid rise of Nokia’s share price: in late 1999, Nokia’s market capitalization was $160 billion. By July 2000, it has almost doubled in value to more than $250 billion.

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The Rise to Market Dominance By 1999 the strategic vision of Nokia’s CEO was producing extraordinary results. Ollila was widely hailed as a visionary of the information revolution and Nokia entered the business lexicon as an outstanding example of how a company could undertake successfully to re-engineer itself. In less than a decade, Nokia had become the global leader in mobile telephony. Between 1995 and 1999, as the market for mobile handsets grew exponentially, Nokia enjoyed an outsized growth in both sales and profits. It was expanding rapidly from its European market base into both North American and developing markets. As the company prepared to cross the threshold into the 2000s, Nokia overwhelmed its nearest competitors and seemed poised for continued, unimpeded expansion. Looking to the new millennium, top executives at Nokia started to articulate a vision for the company, which only a few years before would have seemed unimaginable: a 40% global market share.

Nokia share price, 1995-2000 $35 $30 $25 $20 $15 $10 $5 $0 Apr-91

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Nokia’s balance sheet, 1995 - 1999

Global market share of mobile handsets, on the eve of the new millennium

Investors had reason to cheer: a US$10,000 investment in Nokia in mid-1995 would have been worth over $160,000 US by 1999. Unlike many darlings of the tech boom, Nokia’s rising share price was buttressed by substantial increases in their bottom line. With its substantial investment in R&D and new manufacturing facilities, the pattern of growth seemed “The key challenge of technology companies today is how we renew ourselves. The technological cycles are shorter. We must build on our discontinuities and turn them into our favour.” -Nokia CEO, Jorma Ollila, talking at Stanford Graduate School of Business, 2001.

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Nokia in the New Millennium –

unsustainable expectations? Between 2000 and 2007, Nokia continued its ascendancy as the world’s dominant mobile handset manufacturer, but not without some bumps along the way. By 2002, 1 out of every 3 phones sold around the globe was a Nokia handset. Its traditional dominance in the Western European market had now gone global; despite intensifying competitive pressures from Asian manufacturers, it had become the number one brand in every major market. By 2002, the architect of Nokia success, Ollila, predicted that within a year, Nokia would cross the 40% threshold of global market share.

“We have gained global handset market share in 2002, bringing us even closer to our target of 40 %.” – Jorma Ollilia

Nokia - Global Handset Market Share 40% 35% 30% 25% 20% 15% 10% 5% 0%

Even as Ollila was predicting greater dominance for his company, Nokia was showing signs of strain. First, its rapid growth had challenged its traditional corporate structure clouding the effectiveness of its internal decision making, and creating problems of internal organization. Up until 2002 its massive US$21 billion mobile telephone business was a single unit in the company. Second, despite considerable investment in R&D, Nokia was being increasingly pressured by growing competitive forces in the market place. Companies like Sony Ericsson, Motorola and Samsung were squeezing Nokia both in terms of market share and profit margins through innovations such as colour screens, CDMA Technology and cameras. Mobile telephones were becoming ‘feature-rich’ and more costly to make, even as prices were falling. Furthermore, Nokia’s investment in 3G Technology was stymied by its slow adoption by major carriers in the USA and Europe.

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2005

In August 2005, Nokia announced a change in leadership. Although the company was poised to post strong sales and earnings numbers, there were clearly challenges. The share price had been languishing for almost four years and, in 2004, the company had stumbled as a result of the internal restructuring, an increasingly competitive marketplace, and a slumping telecom industry in general. “Nokia’s market share went from roughly 38% worldwide in 2003 to 30% in the first nine months of [2004]. In Europe… the deterioration was even more dramatic, with market share plunging from 51% in 2002 to 32.6% in 2004. … Its stock has dropped 14% over the past 18 months … [and] Wall Street is now deeply divided about Nokia's future, and some analysts are convinced the company will share Motorola's fate as another faded tech star.” Has Nokia Lost It?”, Fortune, January 24, 2005

With Olilla’s target of a 40% global market share now more elusive than ever, the architect of Nokia’s extraordinary rise to global prominence gave up the top spot.

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2006: A new CEO

Olli-Pekka Kallasvuo In keeping with the tradition of promoting Finns steeped in the corporate culture, Nokia named Olli-Pekka Kallasvuo as the new President and (in 2006) CEO. As Nokia’s CFO, Kallasvuo had worked at Ollila’s side from the beginning, and had gone on to help boost the company’s presence in the North American market. With deep knowledge of both the company’s internal operations and the larger handset market, he seemed the perfect choice to help the company reinvigorate itself and get back on track. Early results were promising. A number of operational improvements and better market focus, helped propel Nokia forward after its 2004 stumble. Through the first half of 2006, Nokia’s global market share rebounded to more than 35%. The bottom line (already robust) grew impressively and the company handed out generous bonuses to its burgeoning workforce, almost one in three of whom worked in research and development. When Nokia released its final year results for 2006, it could show (and boast about) sales up 20%, net profit up 19% and earnings per share up 28%. Lurking behind the figures, however, were some signs of the future for Nokia. Sales increased most significantly in developing markets: China (Nokia’s largest market), India, Indonesia and Brazil. In Western Europe, and especially America, sales were largely flat. The lucrative North American market constituted just 8% of sales; Europe, always Nokia’s biggest market, fell from 42% to 38%. The shift could be seen in the profit margins from the company’s handset division. As high as 23% at the end of the 1990s, margins had fallen in 2005 to 17. 3%. In 2006, they fell again, to 16.6%. The developing market was rich ground for Nokia, but there was not as much money to be made.

Nokia results, 2006

Nokia markets, 2006

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A Sudden Market Shift The landscape for mobile telephony shifted literally overnight in January 2007 when Steve Jobs unveiled the first iPhone at the Macworld Expo. “Every once in a while a revolutionary product comes along that changes everything… we are calling it iPhone… a leapfrog product that is way smarter than any mobile device has ever been.” – Steve Jobs At these words, the partisan crowd cheered loudly. Nokia executives did not share their enthusiasm. When it launched in June 2007, more than a quarter of a million iPhones were sold in two days and Steve Jobs’ lofty rhetoric from January was about to become a reality; this was a revolution. But at Nokia, the new product seemed barely to register: “A mobile executive who visited Nokia late in 2007 … suggested that the iPhone was doing something remarkable to the market. “Look,” he said, “I can even give it to my threeyear-old and he knows how to use it.” “We don’t make smart phones for three-year-olds,” Kallasvuo shot back contemptuously. [Microsoft was similarly unperturbed, Steve Ballmer dismissively calling the iPhone “the most expensive phone in the world! And it doesn’t appeal to business customers, because it doesn’t have a keyboard”] The visitor left convinced that Nokia now had a serious problem: not only was its rival grabbing its potential market, but it didn’t realize how dangerous that rival was.”*

As the iPhone continued to gain momentum, Nokia’s response was “been there, done that, bought the tshirt”. Many of the novelties introduced by Apple were already, in fact, part of the Nokia stable. As early as 2004, the company had rolled out platforms to support online music and gaming through its phones. In early 2007, these were consolidated into Ovi, Nokia’s own online environment (equivalent to the App Store); it acquired the digital map provider Navteq a few months later to offer location-based services. As for the ballyhooed “multi-touch” technology, which allowed the iPhone to dispense with everything but a screen, Kallasvuo sounded a note of particular ennui: “The touch screen as such is of course not owned by anybody. We brought it to market five to seven years ago, and we will have touch screens on our S60 [Symbian] phones next year."* Yawn. *“Olli-Pekka Kallasvuo: Nokia: The most global company there is.” The Independent, September 9, 2007.

One Nokia engineer, Horace Dediu, did see the iPhone as a threat and worried that Nokia would be caught flatfooted. After watching Jobs’ Macworld presentation, he jotted down a remarkably prescient timeline of Nokia’s response to what he saw as a competitive threat. Not until 2014, Dediu predicted, would Nokia have a response to the iPhone. Horace Dediu’s Timeline: Nokia’s response to the iPhone

2007

•  No response … no perceived threat of any kind. Apple is not considered a competitor.

*Arthur, Charles. 2012. Digital wars: Apple, Google, Microsoft and the battle for the Internet. London: Kogan Page., pp. 163, 171)

2008 2009 2010 2011

•  Plans made to respond with press releases… Apple considered a competitor only in high end multimedia.

•  Product development teams asked to begin roadmapping some of the hardware features that would keep Nokia ostensibly competitive. Apple not considered a competitor except in high end converged devices.

•  Realization that iPhone is a threat from new dimensions (user experience). Planning begins on reshaping the software base as a market-driven (not technology-driven) asset. Apple begins to be evaluated as a competitor in devices and services.

•  Realization that the iPhone competes as a platform. Planning begins on repositioning Symbian/Ovi. [In fact, Nokia abandons Symbian altogether.]

-Source: www.asymco.com

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The Smartphone Revolution Meanwhile, the Smartphone revolution predicted by Steve Jobs intensified, especially after the introduction of Google’s Android OS, which rapidly became the market leader. With smartphones now being driven by operating systems as much, or more, than the hardware, the pressure to improve Nokia’s internal OS, Symbian, increased. The company dumped huge amounts of money into updating its OS. In 2010, the company committed more than €1 billion to Symbian, an effort that involved over 6,000 developers. Yet despite these efforts to improve its native OS to launch a compelling alternative top-tier device, Nokia proved unable to penetrate the smartphone market. The din from analysts, commentators, journalists and even Nokia insiders grew deafening.

Composition of R&D Spending on Devices and Services – Nokia 2010

- Source: Bernstein Estimates & Analysis

Symbian’s declining dominance: 2009-2014

Yet even as Nokia was trying to find the right formula for a compelling top-tier Smartphone, its continued expansion was larger drawn from developing markets, which centred on mass volume and low price points. This allowed the company to maintain its leading market share of the worldwide mobile operating system (OS). Measured by market share, Nokia continued to increase its presence through 2008. By the end of 2010, Nokia had experienced an important shift. For the first time in its history, the largest concentration of employees was found outside of Finland – in India and China. Moreover, sales to those two markets accounted for almost a quarter of the company’s total revenues. But the highly competitive market environment meant that margins were being squeezed.

“ The Worldwide mobile OS market is dominated by four players: Symbian, Android Research In Motion and IOS…Launches of updated operating systems – such as Apple iOS 4, Blackberry OS 6, Symbian 3 and Symbian 4, and Windows Phone 7 – will help maintain strong growth in smartphone in 2010 and 2011 and spur innovation.”

– Roberta Cozza, principal research analyst, Gartner

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“Accelerated Innovation”: Nokia’s response to iPhone & Android

In 2005, coming out of a difficult year, Nokia had reported operating profit of €4,64 billion on net sales of €34,2 billion and its largest markets (by sales) were China, the US and the UK. By 2010, it eked out an operating profit of €2,07 billion on revenue of €42,4 billion, and its largest markets were now China, India and Germany. The message for Nokia’s (unhappy) investors, employees, and the Board of Directors was clear: the company’s sales were increasingly concentrating in markets where handsets had been commoditised. A major internal restructuring of the company announced in early 2010 was intended to help the company move a rival Smartphone more quickly to market, or as Kallasvuo put it: “speed up execution and accelerate innovation.” It didn’t work. The result of the company’s “accelerated innovation” was the N8, its flagship product for 2010. Built around its newly revamped Symbian 3 OS, the device brimmed with the kind of high-end features that a company like Nokia could afford to introduce, but it lacked much of the new functionality that were now standard in top-tier Smartphones. Where Apple and Google had fostered a development network to offer consumers a host of third party applications, Nokia was contending with forward-compatibility from its legacy Symbian environment. In the words of one exhaustive (and largely sympathetic) review, “to call Symbian's thirdparty app ecosystem ‘primitive’ would be an understatement.” Consumers were demanding a high-end functionality that was simply not in Nokia’s development stable. Even before the product had launched, Kallasvuo had stepped down after losing the confidence of Nokia’s Board. The N8 was to be his last failure.

To replace Kallasvuo the board tapped Canadian-born Stephen Elop, the first non-Finn to be appointed to the top job at the decidedly Finnish company. A Nokia outsider, Elop had spent the most recent part of his career as a member of Microsoft’s senior leadership team, and headed the business division responsible for the release of Microsoft Office 2010. Olli Pekka-Kallasvi, right hand man of Ollila, longtime Nokia insider and ardent company loyalist, had held the job for only 4 years.

The burning platform: Microsoft Stephen Elop, his successor, moved quickly to reposition Nokia. In February of 2011, he sent a memo around to all Nokia employees: There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform’s edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters. As the fire approached him, the man had mere seconds to react. He could stand on the platform, and inevitably be consumed by the burning flames. Or, he could plunge 30 meters in to the freezing waters. The man was standing upon a “burning platform,” and he needed to make a choice. He decided to jump. It was unexpected. In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times – his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a “burning platform” caused a radical change in his behaviour. We too, are standing on a “burning platform,” and we must decide how we are going to change our behaviour.

This, it turned out, was part of a one-two punch. Two days later, Nokia announced that it had signed a strategic agreement with Microsoft to license exclusively that company’s mobile platform. Symbian and Meego, the platform that had absorbed billions of euros of R&D investment, were to be phased out of the company’s smartphones and Nokia would instead become the hardware provider for what was, in essence, a Microsoft-driven ecosystem. Reaction was swift and severe. Nokia’s shares dropped 14% the same day and upwards of a 1,000 Nokia employees registered their dismay through an impromptu wildcat strike.

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A closer look: Nokia 2011 The argument After the sudden and dramatic events of February 2011, Nokia’s fall from grace was much discussed. In media and analyst reports, it was often remarked that Nokia was blindsided by Apple and the meteoric rise of feature-rich Smartphones at the top end of the market. Under this reading of the company’s fate, Nokia was either unable or unwilling to recognise the threat posed by Apple (and later Google) to the Smartphone market. As a result, the company was forced into desperate measures to compete in the new ecology triggered by the iPhone and Android.

Does this argument hold up? Note the quotation above from Charles Arthur’s Digital Wars: “not only was [Apple] grabbing its potential market, but it didn’t realize how dangerous that rival was.” The key word here is potential. The widespread impression that Nokia ended up bleeding market share as a result of Apple’s dramatic intrusion into the top-tier segment is simply wrong. Nokia had never had much of a presence in this market. By the time the Apple and Android had started to take hold of the US market in 2008, Nokia’s North American sales were already in steep decline. So neither Apple nor Android handsets usurped Nokia’s market, as much as they made it yet more difficult for the company to expand into this lucrative space.

Lost investment? MeeGo & Symbian MeeGo: Under the new strategy, MeeGo becomes an open-source, mobile operating system project. MeeGo will place increased emphasis on longer-term market exploration of next-generation devices, platforms and user experiences.

Second, Nokia may have been blindsided by Apple, but it is worth looking at how the company was trying to position itself with respect to the segment before the Apple announcement. As early as 2006, Nokia had recognised that its strategy going forward would require the company to meet head-on the challenges from competitors like Apple. “Comparison with our own industry is not adequate any more,” Kallasvuo told the Economist in the spring of 2006, more than a year before the launch of the first iPhone. “We need to look at this in a much wider way. The convergence of Internet and media content is happening in the way everyone predicted four or five years ago. We are more and more competing against other people, against new types of competitors. We are all converging.” [Emphasis added.] As the Economist put it, “rather than just comparing itself with rival handset-makers such as Motorola or Samsung, Nokia now considers its competitors to be Apple, Sony, Canon and other consumerelectronics firms.” -“More, more, more: Nokia's new chief wants to lead the mobilephone giant into new markets,” The Economist, May 25th 2006

The company had reacted to the rise of consumer interest in Smartphones by introducing a range of top-tier handsets designed for the European and North American markets. The company’s Nseries, launched in 2006, included a feature-rich operating environment. The N73 allowed users easily to upload pictures taken from their phone to the Internet. The N91 was essentially a musicplayer combined with a phone. And the company even brought out the now largely forgotten N770, one of the first Internet tablets. However, despite this raft of high-end products, Nokia continued to struggle in the top-tier segment (best measured by US sales where adoption rates were the highest).

Nokia, North American sales, 2003-2008

With Nokia’s planned move to Windows Phone as its primary smartphone platform, Symbian becomes a franchise platform, leveraging previous investments to harvest additional value. This strategy recognizes the opportunity to retain and transition the installed base of 200 million Symbian owners. Nokia expects to sell approximately 150 million more Symbian devices in the years to come. Source: Nokia Press Release February 2011

€m

Symbian:

5000 4500 4000 3500 3000 2500 2000 1500 2003 2004 2005 2006 2007 2008

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Not just a nice phone! Blackberry Subscribers (global), 2003-2008 30 25 Subscribers (m)

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As Nokia was slipping further down the toptier ladder, it intensified its efforts to gain a significant foothold in the segment by investing heavily in R&D. Between 2006 and 2010, Nokia doubled its workforce, including a large number of software engineers and developers charged with devising new products and services for the top market segment. Products like the N-series (e.g. N95 released in 2006) brought a raft of top services to the Smartphone environment, including GPS-aided navigation and increasingly high-resolution cameras. But as the market for Smartphones was expanding in its former core markets, the Nokia brand appeared to be holding increasingly smaller traction for the top-tier consumer.

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So even before the introduction of the iPhone, the Smartphone market was proving infertile ground for the pioneer. Business customers were flocking in increasing numbers to the Blackberry device, with its secure push-email platform. And in the personal consumer market, there were more choices than ever. Nokia made nice phones, but they were never a dominant player in the top-tier Smartphone market after 2003. Although the company recognised the need to compete in this segment, they were looking increasingly like a mass-market OEM. As the Economist noted: “Nokia may strive to emulate Apple [i.e. iPod] with its most expensive phones, but the core of its business, with its efficient logistics and huge volumes, has more in common with Dell.” Ouch.

Nokia Workforce (yearly average) 140000 120000 100000 80000 60000 40000 20000 0

In 2008, Nokia finally achieved the long-sought goal of Jorma Ollila: it ended up the year holding an almost 40% global market share. But it was a pyrrhic achievement; while revenues that year held stable, the company’s profits plunged by (a poetically ironic) 40%. The trend was never reversed. In 2011, Nokia’s revenues and share price were both depressed; it essentially abandoned its Symbian OS; and it reached outside its corporate culture in the hope of finding someone who could engineer a turnaround.

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Questions, past & future

Nokia, Global Handset Market Share

So the story that Nokia fell from grace because it failed to anticipate changes in the top-tier Smartphone ecosystem does not 40% appear to be supported by the facts. Well before the arrival of 30% Apple and Android, Nokia was losing share in both US and European markets. And even though the company was criticised 20% for failing to deliver what the consumer wanted, it was not for want of recognition. It was a pioneer in developing third party 10% applications for its phones, location-based services and satellite 0% navigation, and a feature rich environment that combined music, 2006 2007 2008 2009 2010 2011 video, internet and voice in a single device. Even before the iPhone was announced, Nokia had identified the strong brands in consumer electronic devices as its principal competitors, including Apple. And it committed heavily to R&D in its efforts to bring a line of top-tier Smartphones to market. Yet for all of these efforts, Nokia never managed to turn that potential market into a real one. Instead, the company’s sales became more and more driven by developing markets like China and India. The challenges facing Nokia is made vivid in a quick review of the mobile market at the close of 2011. The profit landscape has shifted dramatically: Apple, with less than 10% market share in 2011, managed to capture almost half of the revenues and a staggering 80% of the profits generated by the mobile industry. Nokia may still be the leader in terms of global market penetration, but it has not been able to maintain the profitability of that position.

What can we learn from this? Here are the key questions to ask: • When did Nokia’s decline begin? • What were the problems it faced? • How effective was it in recognising and reacting to those problems? • Had it made provision for changes to the marketplace? • Could it have known?

Nielsen estimates of global top-tier smartphone sales by OS in 2011 (January 2012)

Rolf Strom-Olsen is Professor of Humanities at IE Business School in Madrid. Serena Mujtaba is pursuing a Bachelors in Business Administration of IE University