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Nokia's 15-year tango to avoid Microsoft

For want of a smart(er) phone, €50bn was lost

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Analysis If you want to understand the existentialist despair of many Nokia staff today, then you need to understand how thoroughly its entire business has been about avoiding Microsoft.

This is soaked into its identity, its culture, and its business model: Nokia has defined itself differently. But the economics underpinned everything. Nokia spent tens of billions of Euros over 15 years to avoid becoming a Windows licensee, for one over-riding reason. The reason hasn't changed.

Windows Mobile licensees scrape by on profit margins of less than 10 per cent, and possibly closer to 5 per cent. Nokia's own devices command over 30 per cent margin. (Apple's gross margin for iPhones is estimated to be close to 60 per cent, leaving plenty of room for a managed decline.) And you can't support an €8bn-a-year R&D habit on 5 per cent margins, unless you sell an awful lot of phones.

There are one or two wrinkles to this, but these complications don't derail the main proposition. Yes, Nokia's market position and buying power give them an advantage over rivals (I've heard 10 per cent), but life as a Windows OEM still leaves a greatly reduced pot of money at the end of the day. And Nokia's Minister for Economic Affairs seems to agree – expecting 20,000 redundancies from Nokia's decision to abandon its own (Symbian and Meego) platforms, and moving to Windows. That's a huge chunk out of Nokia, which has 60,000 employees in its phone business. Finland will be a different place after today.

Nokia envisaged all this more than 15 years ago, having seen Wintel devour the margins of once proud computer companies such as Digital, IBM and Compaq. They found it wasn't worth the effort to differentiate their PCs from the competition, in what had become a commodity business. Nokia vowed to be the master of its own fate, and develop its own platforms. These it would share with anyone who felt the same way. Nokia also believed phones were personal, and embodied lots of personal choices. Phones weren't necessarily commodity items, and perhaps small differences such as design, ease-of-use and reliability mattered to the end user – more than price, the overwhelming consideration in a commodity market. So without ever declaring war, Nokia became the anti-Microsoft flagship for the entire industry.

Nokia saw its suspicions justified when Microsoft leapt into the mobile business in 1997, asking $55 per device in royalties for a CE licence. As Charles Davies mused here recently, it was really Microsoft who created Symbian, Nokia and Ericsson's willingness to try something new, an alliance to retain value. Symbian was one of the casualties of Nokia's switch to Windows today, along with Qt, most of Nokia's services, and the years-long Linux development effort.

Bill Gates was in no doubt when he saw the establishment of Symbian as the mobile industry's great anti-Microsoft move, and set out to destroy it. Microsoft did whatever it could to derail Symbian, from buying its browser, to hiring its executives (and even hiring sympathetic analysts). It didn't play the patent card as Gates suggested, perhaps because in phone patents it needed Nokia's more than anyone needed its own.

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