Nokia's Lifeline?

Its share of the smart-phone market has plummeted. Can switching to Windows save the day?

By Stephan Faris Monday, Apr. 11, 2011
    • Illustration by Jameson Simpson for TIME

    Nokia's Stephen Elop certainly has a way with words. In February, in what might have been the most brutally honest corporate memo in decades, the recently installed CEO compared his company to an oil worker trapped on a burning drilling rig, facing a terrible choice. "He was surrounded by flames," Elop wrote. "Through the smoke and heat, he barely made his way out of the chaos to the platform's edge. When he looked down ... all he could see were the dark, cold, foreboding Atlantic waters."

    Call it the parable of the burning platform. The Finnish mobile-phone manufacturer that had once been able to comfortably claim that its distinctive ringtone was the most listened-to melody in the history of music is watching its dominance go up in smoke. Since the launch of the iPhone in 2007, Nokia's share of the smart-phone market has dropped from 51% to 27%, according to the research firm Gartner. In the midrange, phones carrying Google's Android operating system have just surpassed Nokia's smart phones in sales. And a host of low-priced Chinese competitors are nipping at its heels. Brand loyalty is at an all-time low. Like the oil worker, Elop, who had joined Nokia from Microsoft in September, needed to make a dramatic decision. And like the oil worker, he decided to jump.

    The platform that Elop leaped from was Nokia's own. On Feb. 11, two days after the memo's release, Elop announced he would shelve Symbian, the proprietary platform that powered all the company's phones. Instead, Nokia will team up with Microsoft in a "deep partnership" in which each company has a stake in the other's success. With the software giant's Windows 7 operating system, Nokia's hardware expertise and both companies' suites of programs and applications, the duo will attempt to take on Apple and Google in offering a complete package of hardware, software and third-party applications. "The game has changed from a battle of devices to a war of ecosystems," said Elop.

    That war, which will be waged around apps rather than hardware, is one that experts doubt Nokia can win. The company's stock plunged 14% the day of the announcement as investment banks raced to downgrade their recommendations. In Finland, hundreds of Nokia workers walked off the job. Answering questions at a press conference two days later, Elop had to deny he was a Trojan horse sent by Microsoft. "Two turkeys don't make an eagle," crowed Google's vice president of engineering Vic Gundotra on Twitter. In the next day of trading, the stock fell another 5%.

    The partnership is a wager neither Nokia nor Microsoft can afford to lose. Last year, Nokia spent $4 billion on research and development — more than twice what Apple did but with far less to show for it. The jettisoning of Symbian, which absorbed $1.4 billion of that spending, will not just free up funds; it'll close the book on a clunky, complex operating system that was originally designed for — and is still best for — making calls. Unfortunately for Nokia, with the rise of mobile data, voice has become a less important part of the mobile business model. Before teaming up with Microsoft, Nokia considered hooking its carriage to Google but ultimately decided that doing so would be to risk losing itself among a host of established competitors. For Nokia, Microsoft's low penetration provides a perverse advantage: a software partner that is invested in Nokia's growth and a chance to define a segment of the market in its own image.

    In announcing the partnership, Elop stressed that he wants to kick off a "three-horse race," pitting his newly forged team against Apple and Google. But it's less than clear whether the technology giants actually have something to offer that would lift them above a crowded field that includes HP, Dell, RIM, Samsung, LG, Sony and many others. Nokia remains the No. 1 seller of handsets, and Microsoft is, well, Microsoft. But in the smart-phone market, both companies have struggled to grab the attention of consumers. Even though Nokia was the first firm to introduce a smart phone, in the 1990s, its complicated interface never caught on, and the company stood in shock as Apple redefined the market with the iPhone's touchscreen and app store. "Size is not a predictor of success," says Keith Woolcock, founder of 5th Column Ideas, a London-based research firm. "Size is the outcome of success."

    Last quarter, sales of smart phones outstripped those of personal computers for the first time. And when it comes to handsets, there's little question which way the winds are blowing. "Nokia has spent the last 10 years facing the wrong way in a fast-moving market," says Woolcock. Since the introduction of the iPhone, smart-phone penetration has leaped from single digits to 50% or more in the U.S. and Europe. This year, Woolcock estimates, the still nascent industry will pull in $100 billion on hardware alone. "How do you catch up with that?" says Woolcock. "You just don't."

    To make matters worse, it will be months before the partnership yields fruit. The Windows-powered phones are not expected to roll out in volume until next year, leaving Nokia vulnerable to faster-moving competitors. (Google just got a competitive boost with Amazon's launch of an Android app store, and Apple's iPhone 5, expected to be released this summer, is already generating buzz.) "Nokia is coming into the world as the last one to the party," says Carolina Milanesi, research vice president at Gartner. "What happens to Nokia's market share in the meantime? Who in their right mind is going to buy a Symbian product when you know the platform is dead?"

    Elop is right that the battlefield has moved away from the handset and into the ecosystem of apps and services. Hardware — Nokia's strength — no longer moves the market. After all, the iPhone has remained nearly unchanged since it was launched in 2007. Nokia, which has no tablet computer where programmers can expand their markets, doesn't bring much to the apps table. In Elop's parable, the oil worker survived his plunge from the platform and managed to tread water until he was rescued. In the real world, Nokia can't expect a savior to swoop in and carry it out of its difficulties. The company will have to prove it can swim faster than most experts think it can, or it'll sink, leaving only ripples to mark the place it once was.