2/11/11

Nokia: Now Comes the Hard Part

Wow, what a week!

Before I get to all of the happenings in tech, I want to acknowledge that the real news this week is coming out of Egypt.  Nothing happening in our industry is significant compared to that.  All I can say is that I hope the people of Egypt get the government they want, without bloodshed.

While the fates of nations get played out on the world stage, the tech industry has been having its own little revolutions via press release.  The big news at the start of the week was that the world's largest PC company, HP, said it's going to make its own PC operating system.  That's stunning, and deserves a lot more discussion than it's gotten so far.  The relatively light coverage was driven by HP's decision to bury the announcement at the end of a two-hour device preview.  It's a huge change, a massive threat to Microsoft, and if HP can execute it will affect every other tech company.

Of course, the phrase "if HP can execute" is a very big if.

Then just this morning, Nokia and Microsoft announced a sweeping, broadly-worded alliance in which Nokia joins the Windows Phone ecosystem.  I think Nokia wants to be to Windows Phone what IBM was to MS-DOS in the early years: the lead licensee that makes it a standard and dominates hardware sales.  Presumably Nokia has a plan to make sure it doesn't end up roadkill the way IBM did.

The announcement is very vague, and describes a "proposed" partnership.  In other words, the executives have decided to work together, but the details are not yet settled.  That's typical for huge alliances like this; the CEOs sit down and trade business elements back and forth like poker chips.  After the announcement, their managers get to work out the details of what the alliance really means.  Some of the expected areas of alignment won't work out, and some other things will be added.  So we should expect the Microsoft-Nokia alliance to evolve over the next few months.  But the intent seems pretty clear, and it's about as sweeping as it could be short of merging the two companies.

Key points in the announcement:

--Nokia adopts Windows Phone as its smartphone OS.  I think the implication is that Symbian and MeeGo both move to the back burner with lower levels of investment.  As far as I can tell, Nokia is gradually getting out of the OS business.

--Nokia will participate in the development of Windows Phone.  The details of what Nokia would do here are unclear, and my guess is they haven't been fully defined yet.

--Microsoft and Nokia will coordinate the marketing and road map for Windows Phone.

--Bing is now Nokia's search engine, and Microsoft adCenter is Nokia's advertising service.

--Nokia Maps gets used by Microsoft (details unclear).

--Nokia's content and app store will be merged with Microsoft Marketplace.  Is this a way of saying Ovi merges with Marketplace?  I bet that hasn't been worked out.

--Nokia has split its Devices organization into a Smartphones business (Symbian, MeeGo, and Windows Phone) and a Mobile Phones business that drives low-cost feature phones.  It's not clear what the OS will be at the low end.  This is the third org structure for Nokia's phone business in the last four years.

This thing is like a Homeric saga.  Thirteen years ago, Nokia championed the Symbian initiative in order to keep Microsoft out of mobile phones.  Meanwhile, Microsoft embraced the Chinese mobile phone companies in order to drive Nokia into the sea.  Instead, both companies got battered by Google and Apple.  Now much humbler and weaker, they have decided to work together.


Unanswered questions

There are going to be a lot of these, but the two that I'm most anxious to hear Stephen Elop address are:

What happens to Qt?  I couldn't find any mention of it in the Nokia press releases.

Does Nokia have IP ownership over the features it codevelops with Microsoft?  If not, how does Nokia avoid being commoditized by Windows Phone clones?


Will it work?

That's the other big question, and no one can answer it right now.  I've lived through some whopping corporate alliances over the years, and they often fail.  Reading through the Microsoft-Nokia press release gave me flashbacks of the IBM-Apple deal that produced Taligent.  The wording, the vagueness of the details, and the miasma of mild desperation clinging to both partners is very familiar.

(If you don't remember Taligent, it was a visionary joint venture by Apple and IBM in the 1990s to create a new PC operating system.  It consumed huge amounts of money and talent from both companies, and produced nothing of value.)

The difference is that neither Apple nor IBM had to make Taligent work.  It was not central to the future of either company.  By contrast, if Nokia really does ramp down development of Symbian and MeeGo, it will have no choice but to make Windows Phone work.  Microsoft is in a little less of an existential crisis, but with HP moving away, it really needs a big win somewhere, and as far as I can tell Nokia is its only shot at renewed relevance.

For Nokia, the upside of this deal will come from redirecting its resources.  Instead of spending a huge amount of time and money creating OS plumbing that customers can't see and don't value, Nokia should be able to put a lot more effort into creating apps and devices and middleware that delight customers.  This could be an incredibly liberating experience for Nokia, triggering a renaissance in its innovation.  But it won't happen unless Nokia makes the alliance work.  Execution is everything.

The next year will be painful and humbling for Nokia.  The company dreamed of ruling the entire tech world, and Stephen Elop is killing that dream.  Many Nokia fans online had bought into the dream, and we're going to hear screaming from them.  To make matters more difficult, all of the pain will happen up front, as projects are canceled and people get laid off.  The benefits won't be visible until the new products ship, and phone development takes a very long time.

In a comment on my post about Nokia earlier this week, Doug Turner pointed to the "Finnish consensus culture" as part of Nokia's problem (link).  I agree about the problem, but I think that culture could be turned to an advantage.  When there is a consensus, Nokia can move quickly and firmly.  So a key to success for the new strategy is creating an internal consensus at Nokia on the need to let go of the OS, and to adopt some different business processes in the smartphone team, in particular the institution of the dictatorial product manager. 

These will be hard ideas for Nokia to absorb, but there are precedents.  When I was at Apple, it had an incredibly dysfunctional culture that you can probably say was based in Californian cultural values of independent thinking and conflict avoidance.  The result was passive resistance so severe that the company was almost unmanageable.  Back in my pre-blogging days, I wrote about it in an essay called "Who Killed Apple Computer?" (link)  I took a lot of grief from some of my former colleagues over that article, and I am delighted that Apple bounced back from its near-death experience far more vigorously than I thought possible at the time.  But it happened only because Steve Jobs made a massive change in Apple's culture and operating practices. 

The change at Apple was far bigger than what Nokia needs to do, in my opinion.  If Nokia's employees are willing to change, I think it can bounce back too.

But I can't tell yet if the willingness is there.  Some of the comments I've seen online from former Nokia employees are jubilant.  Here's Julien Fourgeaud, a former Nokia design engineer, on the Elop "burning platform" essay: "It is a brilliant piece of communication, providing a clear description of the situation, and a clear corporate message" (link).  But then there's Tomi Ahonen, a former Nokia employee and mobile industry consultant.  Tomi has always been my touchstone for Nokia's culture.  Reading his weblog feels almost exactly like doing a meeting with Nokia, circa 2007. Tomi's reaction to the Elop memo was total denial.  He didn't just disagree with the memo's points, he believed it was a forgery.  In a very methodical, logical essay (link), Tomi said the memo sounded like the work of an ill-informed American analyst, and contained omissions and factual errors that no Nokia CEO would make.  "No way would Nokia's CEO be so deluded from the facts," he wrote.

I had a different take.  The memo sounds like something I'd expect to see from a very busy Silicon Valley CEO who knows in his gut what needs to happen, is trying to explain it to his team, and is a little bewildered that the employees can't see what he sees.  Elop's point wasn't the precise details he cited, it was how they all added up.  A computer platform is all about momentum.  If you're gaining partners and developers and customers, you are on track for success.  If you're losing supporters, you are in trouble -- no matter what other evidence you have.

In mathematical terms, you manage to the second derivative -- the rate and direction of change, not the raw numbers themselves.

Nokia's second derivative sucks.  You don't need a long analysis to understand that, you just need to look at gross margin.  As I said in my note on RIM last fall (link), the leading indicator of decline in a computing platform is erosion in gross margins, because that means you're consuming late adopters and you'll eventually run out of them.  Let's look at the gross margins of Nokia's Devices & Services business:


Forget about the big S60 installed base, forget about how cool Ovi is, forget what Symbian did in Japan.  History shows that if you wait for all of the indicators to turn red it'll be too late to save the company.  Nokia's mobile phone gross margins have been declining for three years, at an accelerating rate.  That alone is enough to justify everything Elop said, in my opinion.  It would be blindingly obvious to any exec who knows platforms.

A disconnect between Elop's concerns and Nokia's understanding of them would be a mortal danger to Nokia.  If that disconnect exists (and I can't judge that from the outside), it needs to be addressed immediately.  The only way to fix a communication problem like this is through exhaustive two-way outreach; both parties need to take ownership of the problem. 

For Nokia's employees, that means you need to recognize that your new leadership comes from a business culture that sometimes values vision and gut instinct over detailed analysis.  The assumption in the computer industry is that things change so quickly that if you wait for a full analysis you'll fail for sure, so you might as well trust your instincts and experience.  This sort of decision-making is going to seem reckless and irresponsible to data-driven Nokia, but if you want to be a player in computing you have to get used to it.  Listen supportively, ask clarifying questions (as opposed to challenging ones), and comply energetically with what you're told to do even if you don't completely buy into it.

And by the way, if you find that you can't get energetic about the new direction, you need to turn in your badge.  If you can't put in your best effort, you'll drag down the energy of the people around you.

For Nokia's new leaders, that means you need to explain in great detail the problems you see and exactly what you expect employees to do.  Keep in mind that you're asking them to do things that aren't instinctive to them, and that may go against long habits.  Even if they are eager to carry out your plans, they may need a lot of handholding before they have an intuitive understanding of what to do.  When they ask rudimentary questions even after you've explained the new strategy three times, you may feel like they're challenging you.  Maybe they are, but more likely you just haven't been specific enough.  Be patient, try again, and give lots of details on what to do.  Don't assume that anything is intuitively obvious.


The alternative to this sort of active outreach is gridlock, which really would doom Nokia.  I've seen that happen at other companies, where the CEO and the mass of employees settle into opposing camps, with the CEO grumbling that employees are resistant to change and the employees grumbling that the CEO is "a delusional psycopath (sic) who willingly suspends reality," as Tomi wrote.  Once that mindset sinks into a company, it's almost impossible to eradicate.

(My former colleague Nilofer Merchant wrote a whole book on this subject, The New How.)

So the hard work for Stephen Elop and his team is just beginning.  Identifying a strategy is relatively simple.  The real test of Nokia will be its ability to rally around that strategy and implement it.  I'd be surprised if it's not a bumpy process, including the firing of senior managers who don't buy into Elop's view, and a lot of heartache as treasured initiatives are tossed out because the company simply can't afford to do everything it wants to do.

When Steve Jobs returned to Apple, he asked for 100 days to plan significant changes in the company.  Nokia's a lot bigger than Apple was at the time, and the challenges are different, so I suggest a longer timeline.  I think Nokia probably needs four months just to get the organization aligned, and it takes 18 months to get new products to market.  So by the August break, Nokia needs to be settled into its new structure with a good plan for executing on the strategy.  And then if everything works well, I hope we'll see some very interesting new products from Nokia in Christmas 2012.

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