Business | Nokia at the crossroads

Blazing platforms

It is not just the world’s biggest handset-maker that has lost its edge. So has Europe’s whole mobile-phone industry

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APOCALYPTIC language fuels the technology industry as much as venture capital does. But Stephen Elop, Nokia's new boss, may have set a new standard. “We are standing on a burning [oil] platform,” he wrote in a memo to all 132,000 employees of the world's biggest handset-maker. If Nokia did not want to be consumed by the flames, it had no choice but to plunge into the “icy waters” below. In plainer words, the company must change its ways radically.

On February 11th, at a “strategy and financial briefing” in London, Mr Elop is due to announce the change he has in mind. The main question is whether Nokia will continue with its own operating system for smartphones, team up with Microsoft or perhaps even make a bet on Android, the fast-growing system developed by Google. There has even been talk that Mr Elop, the Finnish firm's first American chief executive, will fire senior managers and move the firm's headquarters to Silicon Valley.

This would be an astonishing upheaval for what was one of Europe's hottest firms. Behind Nokia's woes lurks a dismal reversal of fortunes, not just for the Finnish company but also for much of Europe's mobile-phone industry. In the 1990s Europe appeared to have beaten even Silicon Valley in mobile technology. European telecoms firms had settled on a single standard for mobile phones. Handsets became affordable, Europe was the biggest market for them and the old continent's standard took over the world. “Europe was the cradle for innovation and scale in mobile”, says Ameet Shah of PRTM, a management consultancy.

This changed with the emergence of smartphones, in particular Apple's iPhone, which appeared in 2007. Nokia still ships a third of all handsets, but Apple astonishingly pulls in more than half of the profits, despite having a market share of barely 4% (see charts, below). More Americans now have smartphones than Europeans. As for standards, Verizon, America's biggest mobile operator, is leading the world in implementing the next wireless technology, called LTE.

Cheap as chips

Nokia, along with the rest of Europe's mobile industry, is also being squeezed in both simple handsets and networking equipment. Cheap mobile phones based on chips from MediaTek, a company based in Taiwan, are increasingly popular in developing countries. By some accounts this system and its users now account for more than one-third of the phones sold globally, Mr Elop wrote in his memo. And at $28 billion in 2010, the revenues of China's Huawei almost equal those of Sweden's Ericsson, the world's leading maker of gear for wireless networks.

At its most fundamental, this shift is the result of Moore's Law, which holds that microprocessors double in computing power every 18 months. The first generations of modern mobile phones were purely devices for conversation and text messages. The money lay in designing desirable handsets, manufacturing them cheaply and distributing them widely. This played to European strengths. The necessary skills overlapped most of all in Finland, which explains why Nokia, a company that grew up producing rubber boots and paper, could become the world leader in handsets.

As microprocessors become more powerful, mobile phones are changing into hand-held computers. As a result, most of their value is now in software and data services. This is where America, in particular Silicon Valley, is hard to beat. Companies like Apple and Google know how to build overarching technology platforms. And the Valley boasts an unparalleled ecosystem of entrepreneurs, venture capitalists and software developers who regularly spawn innovative services.

Nokia had some additional problems to deal with. The firm realised its world was changing and was working on a touch-screen phone much like the iPhone as early as 2004. Realising the importance of mobile services, it launched Ovi, an online storefront for such things in 2007, a year before Apple opened its highly successful App Store.

But turning a Finnish hardware-maker into a provider of software and services is no easy undertaking. Nokia dallied and lost the initiative. Historically, Nokia has been a highly efficient manufacturing and logistics machine capable of churning out a dozen handsets a second and selling them all over the world. Planning was long-term and new devices were developed by separate teams, sometimes competing with each other—the opposite of what is needed in software, where there is a premium on collaborating and doing things quickly.

Olli-Pekka Kallasvuo, Nokia's boss from 2006 until last September, was keenly aware of the difficulty. To get an infusion of fresh blood Nokia bought several start-ups and was reorganised to strengthen its software and services. And it tried to turn Symbian, its own operating system for smartphones, into a platform in the mould of the iPhone and Android. “But just like Sony, Nokia has not found a way to shift from hardware to software,” says Stéphane Téral of Infonetics Research.

To allow Nokia finally to shed its hardware skin, Mr Elop, a former senior executive at Microsoft, was brought in—and apparently given what Mr Kallasvuo never had: carte blanche. This is why most observers expect him to carry out thorough changes, concerning in particular the operating system on which Nokia intends to bet its future. The firm has to move fast if it wants to have a chance to create a third platform for mobile software and services next to Android and the iPhone.

Nokia is unlikely to throw in its lot with Android. The software may be open-source, but it comes with strings attached—notably Google's mobile services and advertising. This would reduce Nokia to being a device-maker and render obsolete many of its investments in services. Nokia could go it alone with MeeGo, a technically advanced but still incomplete operating system it is developing jointly with Intel, but some think that is unlikely. Or it could bet on Microsoft's new mobile operating system, Windows Phone 7.

Investors seem to prefer the Windows option. When rumours began swirling early this month that this was what Mr Elop was planning, Nokia's share price, which has dropped by two-thirds since early 2008, surged by nearly 7%. Teaming up with Microsoft would indeed have benefits, says Ben Wood of CCS Insight, another market research firm. Given his background, Mr Elop could surely make such a partnership work. And it could help Nokia make a comeback in America, where its market share is in the low single digits. On the other hand, argues Mr Wood, Windows Phone 7 has not been a huge success so far. It would also take at least six months before the first “Windokia” phones hit the shelves—a long time in a fast-moving industry.

Other bits of Europe's mobile-phone industry are already showing signs of revival. The revenues of ARM, a British firm, may only be in the hundreds of millions, but most microprocessors found in handsets and other mobile devices are based on its designs. Ericsson now generates 40% of its revenues with services, for instance by managing wireless networks around the world. And on February 7th Alcatel-Lucent unveiled technology that reduces the size of a wireless base station from a filing cabinet's to that of a Rubik's cube.

But for a full comeback, Europe will have to wait for an entrepreneurial culture like Silicon Valley's. This may not be as hopeless as it sounds. The beginnings of such a culture have taken root in recent years, and some successful start-ups have sprouted. One of the most popular games for smartphones, for instance, does not hail from the Valley but from Finland. “Angry Birds” has been downloaded more than 50m times since its release in December 2009. It is so addictive that compulsive players have been asking their doctors for help in kicking the habit.

This article appeared in the Business section of the print edition under the headline "Blazing platforms"

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