Original URL: http://www.theregister.co.uk/2011/02/11/nokia_microsoft_history/

Nokia's 15-year tango to avoid Microsoft

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

By Andrew Orlowski

Posted in Mobile, 11th February 2011 17:13 GMT

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.

Everyone agrees to lose

The relationship between Nokia and Microsoft then mellowed, partly because by 2004 both parties realised they'd failed. Nokia had failed to establish a thriving smartphone mass market: the phones that were 'smart' weren't creating other markets, for content or commerce. Microsoft hadn't won a major first-tier OEM, but realised it could make a tidy but not massive business putting Windows CE in gadgets. HTC and others were happy to help; Microsoft didn't need to fight Nokia and the phone industry at every turn.

In 2005, Nokia and Microsoft signed a collaboration agreement covering a wide range of enterprise and consumer electronics technologies. Microsoft wanted its content DRM in other devices, and it wanted to firm up its its Exchange server against the encroachment of Blackberry. (RIM threatened to take email into the cloud, away from the corporate Exchange servers. In the end, that never happened.)

The years from 2004 to 2007 saw everybody – Nokia and Microsoft included – dumb down their designs in an attempt to catch the elusive mass market. The smartphone became more phone than smart. Yet the underlying economies wasn't changing. This allowed a new market entrant who could take risks, and produce a phone just "good enough" to be a phone, but offered something completely different, a new value proposition. That's just what Apple did.

Once Apple created the smartphone mass market, Nokia and Microsoft quickly found themselves in the "other" category. Nokia clung to the belief that because it was selling more smartphones than anyone else (by the analysts' definition), the company didn't have to do anything too drastic to change. But this was a category error of historical proportions.

For Nokia's smartphones weren't being used as smartphones, and they weren't an "ecosystem". Developer interest was almost zero. Content companies, games developers, retailers were all ignoring Symbian despite its apparent, illusory leading market share. The Ovi store was late, awful and empty. Yet still Nokia executives kidded themselves that the company would prevail through scale and brand. Nokia had forgotten the personal factor that underpinned their decisions in the mid-1990s. They'd become seduced by the awesome scale of the logistical machinery – buying, manufacturing, distributing – that they'd created.

I can't help thinking that Nokia's fate was sealed by a kind of "for want of a nail" decision. Perhaps if Nokia had realised what it needed to do during 2007 and 2008, it could have launched a just-good-enough smartphone in 2009. Instead, in 2009, Nokia gave us the N97 and the Ovi Store. 2010 rolled round and even Microsoft had woken up from its slumbers to present people with a modern smartphone. Perhaps if Nokia had acquired Palm's WebOS, it could have avoided the fate of becoming a Windows. It would have had to swallow a lot of pride, but not as much as it has had to swallow today – leaving behind around €50bn of investment to burn on the oil rig.

Elop's proposition is that Nokia will claw back some of the margin it will lose in the services layer. This was met with some skepticism, bordering on derision, in the analyst briefings today. I wrote earlier today (here and here) that Nokia is really now two things: a brand, and a distribution operation. That's not all: it's also an IP portfolio. There must be an even money chance that in the next five years the company will be acquired for its patents, for a fraction of its former value.®

Bootnote

For fans of surreal coincidences: A few years ago I sat opposite HP's recently appointed CTO, the splendid Shane Robison, wondering why HP didn't join the rest of the phone industry in creating smart mobile devices. I'd got it wrong, he told me. To make a phone, all HP needed was Microsoft Windows CE. This week HP announced a range of devices including new phones based on its own proprietary WebOS, while Nokia committed its future to Windows.