Microsoft’s purchase of Nokia comes as no surprise, when one considers how shareholder value has declined under Stephen Elop at Nokia. When Elop got the job, Nokia shares were at €8/share; now they are at €4. Nokia has gone from being the leader in the smartphone market to a bit part actor in a play where mobile operators and end-users have difficulty understanding why they should buy an Microsoft-based device over an iOS or Android one.
Stephen Elop, while at Nokia, has been a man of big words and many promises, but few results. Elop convinced Nokia shareholders to undergo a two-year transition to earn a longer-term operating profit margin of at least 10 per cent, but many were sceptical, including oursleves. A little over a year ago, Reuters journalist Tarmo Virki wrote this article expressing doubt that Elop could pull off a turnaround.
By the time Elop made his infamous “burning platform” announcement on 11 February 2011 (also called the world’s most expensive memo), Nokia had reached its height in sales of Symbian-based smartphones. Nokia sold more than 110m Symbian phones in the prior year, more than iOS and Android together. At Mobile World Congress, he told the mobile industry that Nokia would give up the world’s best-selling mobile smartphone platform which supported a multitude of new Nokia phones. The future would be Microsoft.
In practical terms, Microsoft will buy Nokia’s mobile hardware and license its patents and map services. This means that Nokia, once a global powerhouse, has been reduced to an infrastructure company with patents and Navteq maps. Microsoft’s price of $7.1bn is less than what Nokia paid for Navteq in 2007, ($8.1bn). With this acquisition, Finland has lost its one global brand, and it’s not clear what will happen to the 4,700 Finnish employees, not to mention the additional 27,300 around the world.
It’s ironic that the European Association of Communication Directors named Elop the best European CEO in 2012, observing: “Stephen is recognized for his direct and transparent communication style, as evinced by his by-now famous ‘Burning Platform’ memo. Stephen received the award in recognition of his unique communication style and commitment,which always puts his employees and customers opinions first.”
Strand Consult hopes that Elop will not be the new standard for the European CEO, otherwise, Europe will face significantly greater challenges than those we know today.
End of an era
In any case the Nokia saga marks the end of the mobile phone era and the beginning of a new age when IT and internet companies define the hardware and services of the mobile device ecosystem. A few years ago, America’s role in the mobile world was marginal, but the Microsoft deal ensures that the US has a central role in the mobile market along with companies such as Google, Apple, and Facebook.
After the 2011 Mobile World Congress Strand Consult published a research note that advised Nokia shareholders to “sell, sell, sell – and do it quickly”. Looking at Microsoft’s acquisition of Nokia now, it doesn’t change the challenges that Microsoft and Nokia have.
When Stephen Elop said in yesterday’s press release: “With this combination of talented people, we have the opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone product”, one is tempted to wonder whether Stephen Elop is now going to deliver what he promises when he comes back to Microsoft. Since he came to Nokia, he has not been able to deliver what he promised – it’s not the first time that Stephen Elop promised to accelerate results for the benefit of shareholders.
Microsoft’s acquisition of Nokia doesn’t change the fact that Microsoft still has a challenge on its hands. And the bigger question is whether Microsoft is buying a healthy business, or just an insurance policy against a Chinese takeover of the partner that drives the development of sales of Microsoft-based mobile phones. One thing is certain, and that is that the other manufacturers who make Microsoft-based mobile phones (HTC, Samsung, and Huawei) will probably consider what co-operation should look like in the future – the question is whether Microsoft will be the only manufacturer of hardware on the platform, as is case with Xbox, or if there will be a range of hardware manufacturers as with PC. We believe that Microsoft is hoping for the former, but we believe the former is more likely.
Some have suggested that Stephen Elop was a Trojan horse that Microsoft had placed in Nokia with the aim of driving down the stock price so Microsoft could buy the company cheap. We do not believe these theories, but we note that it is ironic that Stephen Elop has not delivered the results he promised. Elop will return to Microsoft and get his old email back, and will be responsible for the mobile device business at Microsoft. That Microsoft would want to continue to run the business down while it is under its own roof is unlikely.
Considering that quote from yesterday’s press release again, one may be tempted to wonder whether Elop belongs to that group of “talented people”, and if that is the case, then one should ask just where exactly his talent lies from Nokia’s shareholders’ perspective.
In the coming days, the conspiracy theories will flood the media. Strand Consult does not believe these theories, but on the other side, the theories are fuelled by the disappointment that Nokia has not delivered on what it promised, and that Microsoft’s purchase means that it has secured control over its only serious partner in the mobile space.
We believe that Microsoft has bought Nokia as an insurance to guarantee control over the distribution of their software. If Nokia had been bought by Lenovo, Huawei or another player, Microsoft ‘s role in the mobile world have been reduced to nothing in a short time. Microsoft has tried for more than 10 years to get into the mobile market, and has seen its close partner HTC shift its focus away from Microsoft’s products toward Android. Microsoft doesn’t want that to happen again, so it bought a $7.1bn hedge.
It is exciting to see how Microsoft increasingly competes with some of its partners – including the partners who make phones with MS operating systems, the partners that make PCs that are entering the smartphone market to make Android phones. The question is whether Microsoft will be the dominant firm in the mobile space as it is in the PC market, or whether it will be one of three to five platform vendors who compete for the mobile market.
This acquisition gives Steve Ballmer considerable exposure, as he will soon step down at Microsoft. There is no doubt that he will be remembered for this purchase, but time will tell whether it is a good one. Who will replace Ballmer is still uncertain. Stephen Elop probably dreams of getting the job. If he does and manages his Microsoft division the way he did Nokia, then God help Microsoft’s shareholders.
Yesterday was the day when Nokia’s Board of Directors recognized that Stephen Elop did not deliver the goods. The day when Nokia threw in the towel, the day when Stephen Elop took the plane to Redmond. But is also the day that people realized too late that Elop’s tenure has been a disaster for Nokia.
John Strand is CEO of Strand Consulting