This is why it's so much fun to do business with the mobile operators

"Quite frankly, we’re happy that we’re not first to market with the iPhone."--Dennis Strigl, Verizon COO, 2007 (link)

"I don't think Verizon needs the Nokia and Microsoft relationship."--Tony Melone, Verizon CEO, 2011 (link)

There's a backstory to this.  Verizon sells CDMA phones, a technology which Nokia dropped years ago.  Microsoft jerked Verizon around on the availability of the Kin phone last year.  So Verizon doesn't love either company.  On top of all that, Verizon has always been a lagging adopter of new phones.  It has a reputation for doing more testing than the other operators, and doesn't mind being late on a product or technology.

Still, the quotes are very revealing of an almost subconscious arrogance that I often see in operators around the world.  They view their customers as possessions who are allowed to buy only the phones that the operator chooses to offer.  The operator sits in the middle and extracts money from everyone.  What Melone's really saying is that Microsoft and Nokia will have to pay him a lot of money in order to have the opportunity to sell phones to Verizon customers.  Never mind what the customers might want; all that matters is what the vendors do for the operator.

This is why the operators love the increasing competition between smartphone platforms.  It gives them that much more leverage to play them off against each other.

Picture yourself as a smartphone company trying to deliver a great new phone to customers.  What do you do about these restrictions?  It puts a lot more pressure on your financials and your ability to execute -- you need to create a strong brand through heavy marketing, and create products so iconic that people will demand them.

And if you're a phone customer looking to choose whichever phone you want?  The situation varies around the world.  In some places, phones have to be sold separate from mobile service.  That gives the greatest customer choice.  In many areas, you can buy a phone and then switch SIM cards to use a different network, but you lose the operator subsidy on the phone.  So it costs you hundreds of dollars to exercise freedom of choice.  But Verizon doesn't even support that level of choice, so you are stuck with only the phones that Verizon allows you to buy.

The options for Verizon customers:  Change operators (if you can find another one with coverage in your area).  Change the law to mandate free choice of phones.  Or change countries.

Impact of the Nokia-Microsoft Alliance: Welcome to the Five-Platform World

Like a big collective cow, the blogosphere is continuing to chew on the Nokia-Microsoft announcement.  It seems to be one of those rare events that forces people to stop, step back, and reconsider their assumptions.

I think it's impossible to say today what impact the Nokia-Microsoft alliance will have, because we don't know how well Nokia will execute.  If Nokia executes poorly, there won't be any change at all -- both Microsoft and Nokia will continue to gradually decline in mobile.  If Nokia executes well, I think the impact could be pretty big.  Not asteroid-killing-dinosaurs big, but a very large meteorite, with effects felt worldwide.

For the purposes of this note, I'm going to assume that both Nokia and Microsoft will execute well.  That's a risky assumption -- they would not have formed this alliance if they had been executing well in the past.  But for today we'll give them both the benefit of the doubt.


How many platforms can we stand?

Ignore the hype from Nokia about the "third platform."  The reality is that we're on track to end up with four or five significant smartphone platforms in the US and Europe: Apple, Android, RIM, Windows Phone, and HP/Palm if their new products are excellent.  Japan as usual will be very different, and I don't think all five players will be equally active worldwide.

You might ask if the market can accommodate five platforms.  There's a school of thought that says the smartphone market is destined to go the way of the PC market -- eventually almost everyone will coalesce on a single platform that has the most applications and licensees.  If that's how smartphones are destined to work, nobody seems to have told the customers.  Platforms with small numbers of apps (RIM in particular) have continued to sell well.  Also, back when I was at Palm and we had far more apps than any other mobile device, it didn't let us destroy Pocket PC, or RIM, or Symbian.

I think apps do matter in smartphones, but so far they appear to matter less than they do in PCs.  Without any apps, a PC is useless, whereas most smartphones ship with a lot of functions built in: voice telephony, texting, e-mail, browser, camera, etc.  Third party apps are more gravy than steak, at least for now.

So maybe the magic number is two platforms.  In marketing, many experts believe customers can hold only two major brands in their heads for any market: a leader and a challenger.  Think Coke and Pepsi, Hertz and Avis, Airbus and Boeing.  On the other hand, there are plenty of markets which have dozens of competitors.  Automobiles, for instance.  You can have huge numbers of successful brands there because the market is heavily segmented -- Rolls Royce doesn't compete with Mini Cooper.

I believe the number of smartphone vendors and platforms is going to depend on the actions of the smartphone companies themselves.  If they treat smartphones like a single consolidated market, a shakeout is probably inevitable.  If they segment the market, creating brands and devices that serve different groups of customers differently, I think there's room for all the platforms to survive.

Unfortunately, at this point most of the smartphone companies are focusing only on slavishly copying Apple.  Even RIM, a company with differentiated communicator products, is trying desperately to turn them into iPhone clones.  That's a great strategy to ensure commoditization and market dominance by Apple.

Since we're giving Nokia the benefit of the doubt today, let's assume they create differentiated products that help to segment the market.  I think that would stimulate other handset companies to do the same thing, leading to a relatively stable multiplatform world.

Here's what that means to the rest of the industry...


For the Android licensees, there will be intense competition for shelf space

In a five platform world, I think it'll be hard for all of the Android licensees to survive.  Picture your typical Verisprint store a couple of years from now (Vodorange if you're in Europe).  It probably carries three iPhone devices, because Apple has diversified its line.  There are a couple of RIM devices with keyboards.  We're assuming Nokia and Microsoft are successful, so there are a couple of Nokia smartphones on display.  Since we're giving the benefit of the doubt, we'll also assume HP has paid big comarketing dollars to get two of its devices shelved.  That's nine smartphones.  How much space is left for Android models?  I figure maybe two or three devices, split between Samsung, HTC, Motorola, SonyEricsson, LG, etc.  Life gets very uncomfortable for a couple of those companies.

Or maybe they get lucky and a RIM or HP gets knocked out of the picture.  That would leave space for more Android vendors.  But the Android licensees can't control that -- they're counting on Google to drive one or two of the other handset platforms out of business.  Is Google prepared to fight that sort of alley knife-fight against an HP or RIM, companies that might otherwise be Google partners? 

Android was a fun product for Google when all it meant was bleeding Microsoft.  But it eventually made Apple into an enemy, and now Nokia.  HP is next, and RIM will come after unless it licenses Android.  Is that the lifestyle Google wants?  I doubt it.

By the way, I think the Android shelf space problem is one of the reasons why Nokia went with Microsoft rather than Google.  Nokia has more control over its fate as a Windows Phone vendor, and it knows Microsoft is willing to do anything to win.


What happens to the other Windows Phone licensees? 

It's really hard for me to picture them sticking with the platform in more than a token fashion.  They avoided Symbian because it was a stacked deck in Nokia's favor; I think Windows Phone now looks the same.  The only way they'd invest more is if Nokia's WinPhone products started to take off strongly in a couple of years, and they were afraid of being left out.  I presume that's what Microsoft is counting on (it's how they dealt with IBM in PCs).


Can HP really be the fifth platform? 

HP is by far the weakest of the five mobile platforms.  Although it has a great legacy, it has neglected its developers tragically and its products are late.  The recent HP event shows it still has a legacy of goodwill in Silicon Valley, and you can't count out the world's largest PC company.  But HP's success depends on great execution.  If its products are timely and deliver on their promises, I think it has a good shot.  I am especially impressed by the things HP wants to do to link its products together (another on the long list of things Microsoft fumbled years ago).

But can HP execute?  It's been steering a zigzag course in PCs.  For several years it invested heavily in differentiation, and hired a lot of former Apple staffers.  But in the last year it laid off many of those people, killed its advertising campaign, and focused on Acer-style price competition.  Now suddenly HP is talking like it wants to go back to being a differentiated premium vendor.  That sort of inconsistency will be deadly when competing directly with the other smartphone platforms.

I can't figure out if the HP guys are Jedi knights or middle-aged paunchy men playing with plastic swords.  Based on history, I'm about 60-40 in favor of the plastic swords.


For the mobile operators, all of this produces immense happiness

Sometimes it's better to be lucky than good, and the Nokia-Microsoft deal is a huge stroke of luck for the operators.  They have always wanted the handset vendors to be barefoot and pregnant, too weak and divided to fight with them for control over phone customers.  A five-platform world is immensely attractive to them because the platforms can be played off against one another.  If RIM gets too uppity, you can just tip the product mix toward HP, or vice-versa.

The downside of this for the operators is that five platforms are a lot more work to support.  So they'll have conflicting temptations -- carrying more platforms gives them more leverage, but adds to their costs.  I think the biggest operators will choose the leverage; Verizon proved that it's not healthy to be cut off from a successful platform, and you can never tell which one is going to be successful next. 


For app developers, there will be more pain

The prospect of a five platform market is a nightmare for developers.  It's already hard to support two platforms (Apple and Android); the idea of supporting five is a logistical nightmare.  Most developers will focus on one or two, but that limits their potential revenue because the available market is smaller.

This situation favors large established developers that can afford to do ports to all the platforms.  Unfortunately, large software companies are usually the slowest to innovate, so I fear the net result of a five-platform world is likely to be less innovation in mobile apps.

There will probably be intense interest in cross-platform development environments that let a developer write once and deploy anywhere.  The platform companies will resist, and probably governments will eventually get dragged into the debate as they are asked to define what constitutes restraint of trade in an online app marketplace.

The one silver lining might be if the platform vendors start to compete for developers by giving them benefits -- for example, by loosening restrictions in their app stores, and taking a smaller cut of revenue.  I hope that will happen, but it's not enough to make up for the fractured development platform.


What it means to Nokia: A chance to survive

Although Europe is really a collection of nations rather than a single place, there are a few things that seem to tug on heartstrings across many European countries.  The Eurovision song contest is one, Airbus is another, and Nokia is a third.  It represents European style and marketing prowess, and it proves that people in Europe can lead a high-tech industry.  So the deal with Microsoft represents far more than a business deal; it feels like a betrayal of a European jewel at the hands of a rapacious American company.

It's important to understand what the alternative was for Nokia.  If the company had continued at current course and speed, the decline in gross margins would have put it close to breakeven this year, and it would have started losing money in 2012.  Things were already so bad that restoring 10% operating profit this year would require laying off about a third of the company.  Obviously the cuts won't be that severe because Elop is aiming at a multiyear recovery, but the numbers show how close Nokia was to a death spiral in which spending cuts and revenue declines start reinforcing each other.

Nokia was like a plane rapidly losing altitude.  If you don't pull back on the yoke in time, there's nothing you can do to avoid hitting the ground.  The company was very close to that point.

I believe Nokia's directors knew this when they hired Stephen Elop, and his charter was to restructure the company radically before the problems became unsolvable.  In that sort of situation, you don't ask what products you ought to save.  You figure out how much money you can spend, you make a prioritized list of everything you do, and you start cutting from the bottom of the list until your activities fit into the budget.

I think when Elop and the board did that exercise, all of Nokia's OS business was below the line.  They just couldn't afford it.

Although stepping back from OS is emotionally devastating to many Nokia employees and fans, I don't think it's necessarily bad for the company.  Operating systems are like plumbing; they don't actually add much value to the building, but if they're built wrong they can destroy it.  Symbian advocates talked persuasively about its superior power management and ability to run on low-cost hardware, but as far as I can tell that was never reflected in higher margins for Nokia smartphones.  Most Symbian users didn't even know the OS was there, and if they had they would not have paid extra for it.  Symbian was enormously complex and difficult to work with, and it cost Nokia a fortune.  According to Nokia's annual reports, it paid about $800 million when it bought Symbian, and it reportedly employed at least 2,500 Symbian engineers (link).  Those engineers probably cost about $500m a year, or about $5 per Symbian phone sold.

Nokia went into the OS business because it was afraid of depending on someone else's plumbing.  Now it's betting that Microsoft is weakened enough that it'll actually cooperate with Nokia.  Microsoft will reportedly end up paying Nokia more than a billion dollars to adopt Windows Phone (link), and Nokia can reassign the Symbian engineers to tasks that will actually differentiate Nokia's products.  The deal with Microsoft could end up being not a surrender for Nokia, but a liberation.

But as I've said before, it all depends on execution.  For the folks inside Nokia, things will feel worse before they feel better.  The layoffs are still to come, and until then it will be hard for employees to focus on their jobs.  Even after the layoffs are done, it will be a lot of months before Nokia can ship new devices designed to take advantage of Windows Phone.  Until then, Nokia is unlikely to reverse its gradual loss of share in smartphones. 

When I first held a Nokia n97, I was lost in admiration at how beautifully the hardware was put together.  Everything from the shape of the case to the motion of the sliding hinge screamed elegance.  Then I tried the software and I wanted to toss it out a window.  Nokia's smartphone task is now very simple: produce some great devices like the n97, marry them cleanly with Windows Phone, and partner with Microsoft to get them distributed as broadly as possible.

If Nokia targets those products at real customer needs, and differentiates them from the iPhone rather than just trying to top it, it has a good chance of creating the multi-platform future it's talking about.

It's not as much fun as conquering the entire tech industry, but it's a lot better than going broke.  And it's probably the only choice Nokia had.

Mark Thoma on Social Insurance

Mark's postings are reliably good, but today's is especially good:

...There is a need for social insurance. I had hoped this recession would show people that it can happen to anyone, that high moral character is not enough to protect you from the vagaries of the market system. One day a job can be gone, morals or not, savings can evaporate as a result, and all those years of doing the right thing -- putting a little away each month for the future -- provides little protection against financial ruin when there are no jobs to be found.




Don't get me wrong. I think it's good to make people aware of the amount of government services they consume, and that such awareness could help some in getting support for social insurance and other programs. So I'm not saying that making people aware of their own use of these services has no value. But I really do think the key to more widespread support is to make people aware of the need for social insurance, and the fact that insurance -- by it's very nature -- means that those people unlucky enough to need it will often consume more than they put in (just as would be the case under fire insurance if your house burns down), while others will consume less. That's how insurance works and we shouldn't resent those unlucky enough to need it.



The key here is to overcome the belief that the majority of people using these services are "gaming" the system to get handouts they don't deserve. If we are going to successfully defend the social insurance system, it is this belief that must be countered. Of course such behavior goes on, there will always be people who try to take advantage of any system that is put in place (in the public or private sector), but this is not the predominant feature of these programs. The share of "deadbeats" is not large, it is relatively small given all the good such programs do, and that's the message that needs to be delivered. The social benefits clearly exceed the costs of providing these services, but it will be tough to make this case convincingly -- the opposition can always find isolated cases where people take advantage of the system and surround them with negative publicity. This has been a successful strategy, and it will take a concerted effort to counter overcome such efforts.

Four quick points about Fannie-Freddie Reform

(1) Why have an explicit guarantee?  If TARP should have taught us anything, it is that there are implicit guarantees everywhere; it is better to be up-front about the fact that the government does provide backstops in times of crisis.

(2) How to price the guarantee?  Mark Zandi has a good explanation.  The hard part is going to be to keep fees up in times of low defaults.  In the early part of the last decade, Fannie and Freddie were criticized for earning excess profits on their guarantee fees, for the simple reason that defaults on prime mortgages essentially didn't exist in the 1998-2005 period.  Complaining about Fannie-Freddie's g-fees at that time would be akin to complaining the State Farm enjoys excess profits when Florida goes a year without a hurricane.

(3) In the absence of government intervention in the market, the long-term fixed-rate prepayable mortgage will likely go away.  These mortgages are expensive to households, but they also provide a level of certainty that helps households manage risk.  Households are already facing more risk than before (defined benefit pensions, anyone?), so I am not sure it is a good idea to add even more.

(4) I worry about high downpayment requirements.  It is clear that households need to put some of their own money into a house for a mortgage to be safe (gifts and grants don't count).  But while the overall homeownership rate for the US is fine, the substantial gap between whites and minorities, more than 20 percentage points, is not.  Minorities have far less wealth than whites, and across the generations, have had wealth systematically expropriated; minorities have also been discriminated against by the government in credit markets.  Massey and Denton:

In rating the home, the FHA established minimum standards for lot size, setbacks and separation from existing structures that essentially eliminated many inner-city dwellings....in the late 1940s, the FHA recommended the use of application of racially restrictive covenants...per capita mortgage spending was 6.3 times greater [in St. Louis County relative to the city of St. Louis].

I suppose in light of history, direct payments to the heirs of those who have had wealth systematically stripped away makes more sense than trying to close the homeownership gap.  But the latter seems more politically doable than the former.

Nokia: Now Comes the Hard Part

Wow, what a week!

Before I get to all of the happenings in tech, I want to acknowledge that the real news this week is coming out of Egypt.  Nothing happening in our industry is significant compared to that.  All I can say is that I hope the people of Egypt get the government they want, without bloodshed.

While the fates of nations get played out on the world stage, the tech industry has been having its own little revolutions via press release.  The big news at the start of the week was that the world's largest PC company, HP, said it's going to make its own PC operating system.  That's stunning, and deserves a lot more discussion than it's gotten so far.  The relatively light coverage was driven by HP's decision to bury the announcement at the end of a two-hour device preview.  It's a huge change, a massive threat to Microsoft, and if HP can execute it will affect every other tech company.

Of course, the phrase "if HP can execute" is a very big if.

Then just this morning, Nokia and Microsoft announced a sweeping, broadly-worded alliance in which Nokia joins the Windows Phone ecosystem.  I think Nokia wants to be to Windows Phone what IBM was to MS-DOS in the early years: the lead licensee that makes it a standard and dominates hardware sales.  Presumably Nokia has a plan to make sure it doesn't end up roadkill the way IBM did.

The announcement is very vague, and describes a "proposed" partnership.  In other words, the executives have decided to work together, but the details are not yet settled.  That's typical for huge alliances like this; the CEOs sit down and trade business elements back and forth like poker chips.  After the announcement, their managers get to work out the details of what the alliance really means.  Some of the expected areas of alignment won't work out, and some other things will be added.  So we should expect the Microsoft-Nokia alliance to evolve over the next few months.  But the intent seems pretty clear, and it's about as sweeping as it could be short of merging the two companies.

Key points in the announcement:

--Nokia adopts Windows Phone as its smartphone OS.  I think the implication is that Symbian and MeeGo both move to the back burner with lower levels of investment.  As far as I can tell, Nokia is gradually getting out of the OS business.

--Nokia will participate in the development of Windows Phone.  The details of what Nokia would do here are unclear, and my guess is they haven't been fully defined yet.

--Microsoft and Nokia will coordinate the marketing and road map for Windows Phone.

--Bing is now Nokia's search engine, and Microsoft adCenter is Nokia's advertising service.

--Nokia Maps gets used by Microsoft (details unclear).

--Nokia's content and app store will be merged with Microsoft Marketplace.  Is this a way of saying Ovi merges with Marketplace?  I bet that hasn't been worked out.

--Nokia has split its Devices organization into a Smartphones business (Symbian, MeeGo, and Windows Phone) and a Mobile Phones business that drives low-cost feature phones.  It's not clear what the OS will be at the low end.  This is the third org structure for Nokia's phone business in the last four years.

This thing is like a Homeric saga.  Thirteen years ago, Nokia championed the Symbian initiative in order to keep Microsoft out of mobile phones.  Meanwhile, Microsoft embraced the Chinese mobile phone companies in order to drive Nokia into the sea.  Instead, both companies got battered by Google and Apple.  Now much humbler and weaker, they have decided to work together.


Unanswered questions

There are going to be a lot of these, but the two that I'm most anxious to hear Stephen Elop address are:

What happens to Qt?  I couldn't find any mention of it in the Nokia press releases.

Does Nokia have IP ownership over the features it codevelops with Microsoft?  If not, how does Nokia avoid being commoditized by Windows Phone clones?


Will it work?

That's the other big question, and no one can answer it right now.  I've lived through some whopping corporate alliances over the years, and they often fail.  Reading through the Microsoft-Nokia press release gave me flashbacks of the IBM-Apple deal that produced Taligent.  The wording, the vagueness of the details, and the miasma of mild desperation clinging to both partners is very familiar.

(If you don't remember Taligent, it was a visionary joint venture by Apple and IBM in the 1990s to create a new PC operating system.  It consumed huge amounts of money and talent from both companies, and produced nothing of value.)

The difference is that neither Apple nor IBM had to make Taligent work.  It was not central to the future of either company.  By contrast, if Nokia really does ramp down development of Symbian and MeeGo, it will have no choice but to make Windows Phone work.  Microsoft is in a little less of an existential crisis, but with HP moving away, it really needs a big win somewhere, and as far as I can tell Nokia is its only shot at renewed relevance.

For Nokia, the upside of this deal will come from redirecting its resources.  Instead of spending a huge amount of time and money creating OS plumbing that customers can't see and don't value, Nokia should be able to put a lot more effort into creating apps and devices and middleware that delight customers.  This could be an incredibly liberating experience for Nokia, triggering a renaissance in its innovation.  But it won't happen unless Nokia makes the alliance work.  Execution is everything.

The next year will be painful and humbling for Nokia.  The company dreamed of ruling the entire tech world, and Stephen Elop is killing that dream.  Many Nokia fans online had bought into the dream, and we're going to hear screaming from them.  To make matters more difficult, all of the pain will happen up front, as projects are canceled and people get laid off.  The benefits won't be visible until the new products ship, and phone development takes a very long time.

In a comment on my post about Nokia earlier this week, Doug Turner pointed to the "Finnish consensus culture" as part of Nokia's problem (link).  I agree about the problem, but I think that culture could be turned to an advantage.  When there is a consensus, Nokia can move quickly and firmly.  So a key to success for the new strategy is creating an internal consensus at Nokia on the need to let go of the OS, and to adopt some different business processes in the smartphone team, in particular the institution of the dictatorial product manager. 

These will be hard ideas for Nokia to absorb, but there are precedents.  When I was at Apple, it had an incredibly dysfunctional culture that you can probably say was based in Californian cultural values of independent thinking and conflict avoidance.  The result was passive resistance so severe that the company was almost unmanageable.  Back in my pre-blogging days, I wrote about it in an essay called "Who Killed Apple Computer?" (link)  I took a lot of grief from some of my former colleagues over that article, and I am delighted that Apple bounced back from its near-death experience far more vigorously than I thought possible at the time.  But it happened only because Steve Jobs made a massive change in Apple's culture and operating practices. 

The change at Apple was far bigger than what Nokia needs to do, in my opinion.  If Nokia's employees are willing to change, I think it can bounce back too.

But I can't tell yet if the willingness is there.  Some of the comments I've seen online from former Nokia employees are jubilant.  Here's Julien Fourgeaud, a former Nokia design engineer, on the Elop "burning platform" essay: "It is a brilliant piece of communication, providing a clear description of the situation, and a clear corporate message" (link).  But then there's Tomi Ahonen, a former Nokia employee and mobile industry consultant.  Tomi has always been my touchstone for Nokia's culture.  Reading his weblog feels almost exactly like doing a meeting with Nokia, circa 2007. Tomi's reaction to the Elop memo was total denial.  He didn't just disagree with the memo's points, he believed it was a forgery.  In a very methodical, logical essay (link), Tomi said the memo sounded like the work of an ill-informed American analyst, and contained omissions and factual errors that no Nokia CEO would make.  "No way would Nokia's CEO be so deluded from the facts," he wrote.

I had a different take.  The memo sounds like something I'd expect to see from a very busy Silicon Valley CEO who knows in his gut what needs to happen, is trying to explain it to his team, and is a little bewildered that the employees can't see what he sees.  Elop's point wasn't the precise details he cited, it was how they all added up.  A computer platform is all about momentum.  If you're gaining partners and developers and customers, you are on track for success.  If you're losing supporters, you are in trouble -- no matter what other evidence you have.

In mathematical terms, you manage to the second derivative -- the rate and direction of change, not the raw numbers themselves.

Nokia's second derivative sucks.  You don't need a long analysis to understand that, you just need to look at gross margin.  As I said in my note on RIM last fall (link), the leading indicator of decline in a computing platform is erosion in gross margins, because that means you're consuming late adopters and you'll eventually run out of them.  Let's look at the gross margins of Nokia's Devices & Services business:

Forget about the big S60 installed base, forget about how cool Ovi is, forget what Symbian did in Japan.  History shows that if you wait for all of the indicators to turn red it'll be too late to save the company.  Nokia's mobile phone gross margins have been declining for three years, at an accelerating rate.  That alone is enough to justify everything Elop said, in my opinion.  It would be blindingly obvious to any exec who knows platforms.

A disconnect between Elop's concerns and Nokia's understanding of them would be a mortal danger to Nokia.  If that disconnect exists (and I can't judge that from the outside), it needs to be addressed immediately.  The only way to fix a communication problem like this is through exhaustive two-way outreach; both parties need to take ownership of the problem. 

For Nokia's employees, that means you need to recognize that your new leadership comes from a business culture that sometimes values vision and gut instinct over detailed analysis.  The assumption in the computer industry is that things change so quickly that if you wait for a full analysis you'll fail for sure, so you might as well trust your instincts and experience.  This sort of decision-making is going to seem reckless and irresponsible to data-driven Nokia, but if you want to be a player in computing you have to get used to it.  Listen supportively, ask clarifying questions (as opposed to challenging ones), and comply energetically with what you're told to do even if you don't completely buy into it.

And by the way, if you find that you can't get energetic about the new direction, you need to turn in your badge.  If you can't put in your best effort, you'll drag down the energy of the people around you.

For Nokia's new leaders, that means you need to explain in great detail the problems you see and exactly what you expect employees to do.  Keep in mind that you're asking them to do things that aren't instinctive to them, and that may go against long habits.  Even if they are eager to carry out your plans, they may need a lot of handholding before they have an intuitive understanding of what to do.  When they ask rudimentary questions even after you've explained the new strategy three times, you may feel like they're challenging you.  Maybe they are, but more likely you just haven't been specific enough.  Be patient, try again, and give lots of details on what to do.  Don't assume that anything is intuitively obvious.


The alternative to this sort of active outreach is gridlock, which really would doom Nokia.  I've seen that happen at other companies, where the CEO and the mass of employees settle into opposing camps, with the CEO grumbling that employees are resistant to change and the employees grumbling that the CEO is "a delusional psycopath (sic) who willingly suspends reality," as Tomi wrote.  Once that mindset sinks into a company, it's almost impossible to eradicate.

(My former colleague Nilofer Merchant wrote a whole book on this subject, The New How.)

So the hard work for Stephen Elop and his team is just beginning.  Identifying a strategy is relatively simple.  The real test of Nokia will be its ability to rally around that strategy and implement it.  I'd be surprised if it's not a bumpy process, including the firing of senior managers who don't buy into Elop's view, and a lot of heartache as treasured initiatives are tossed out because the company simply can't afford to do everything it wants to do.

When Steve Jobs returned to Apple, he asked for 100 days to plan significant changes in the company.  Nokia's a lot bigger than Apple was at the time, and the challenges are different, so I suggest a longer timeline.  I think Nokia probably needs four months just to get the organization aligned, and it takes 18 months to get new products to market.  So by the August break, Nokia needs to be settled into its new structure with a good plan for executing on the strategy.  And then if everything works well, I hope we'll see some very interesting new products from Nokia in Christmas 2012.

Does an autocratic CEO perform better than other CEOs?

A LOOK AT THE MOST SUCCESSFUL CORPORATIONS OF THE WORLD – AND HOW THEY ALL HAVE AUTOCRATIC HITLERS AT THE VERY TOP, WHO ALL BELIEVE THAT HUMANS CAN NEVER BE PRODUCTIVE UNTIL THEY ARE WHIP-LASHED, AS HUMANS ALWAYS CHEAT AND SHIRK WORK AT THE FIRST INSTANCE... SURPRISINGLY, I ACCEPT THAT!

Hold on! Before you burn me at the stake for invoking the unforgivable fanatic, allow me to confess that I have no love lost for this clipper megalomaniac. And I’d hope that none ever follows the narcissistic madness of the man known for many years as Führer und Reichskanzler. Well, political correctness aside, truth in the real world is quite to the contrary. Despite whatever the world might wish for, the fact is that there is at least one quintessential and ubiquitous quality of this Austrian born German deuce that is followed to the tee by leaders of some of the largest and most successful corporations of the world – a quality that had, before WWII, led to Germany becoming the superpower it was; a quality that now is assisting leaders to ensure that their corporations are amongst the most productive and most efficient business units this world has ever seen! Read on and you might catch on to the wave.

William Clay Ford stepped down as Ford’s CEO in 2006, the carmaker was all drenched in a big bowl of hot soup, with the worst market scenario. Detroit had totally given up on Ford. The world had too. William Ford tried hard, but there were no respectable names in the auto space willing to take charge as Ford’s CEO and digest the numbers that threatened Ford’s very existence. Imagine this: During the first half of 2006, while Nissan earned $1800 per vehicle, Toyota and Honda pocketed about $1,400 apiece. Fly westward, and the numbers turn turbid. While GM lost $333 per unit, DaimlerChrysler lost $1,100 during the same period. And Ford? It bled the most – a disquieting $1,400 per vehicle.

Given the state then, what followed in the succeeding years was baffling – despite Ford being the first one expected to crumble first, since December 2008, GM and Chrysler were the ones forced to live through the ignominy of a Fed bailout plan of $110 billion. As for Ford, it managed to become the first one to bounce back into the black sans a revival package, having made $2.72 billion in net profits during FY2009 – the very year GM & Chrysler filed for Chapter 11!

And how in heavens did this astounding turnaround happen? The answer, the single change agent, as experts and researchers globally have accepted now, was the recruiting of one man – the most authoritarian CEO that Ford had ever seen after Henry Ford – Alan Mulally. This man, a veteran engineer at Boeing (who was in charge of the Boeing 777 development project), took up the task to play Captain America for Ford Motors in September 2006. Forget about never having been exposed to labour issues in his life (Ford had had enough of it with the UAW in place), or even having never seen a car being assembled before, this new boss of Ford, had never had the chance to make a single pitch as a salesman during his entire career. But what made him victorious was not just his desire to win, but in his viewpoint that what he – and not his team – believed was right. His style was autocratic and simply “results oriented”. When Mulally walked in as CEO, Ford was known as a maker of pick-up trucks and the Mustang. Despite popular displeasure, he forced his strategic planning teams to get a line of more efficient & smaller engines in place. It worked for the company. In his first two months at the company, he went ahead pledging $23.6 billion against Ford’s assets including its logo. Ford’s management disagreed. But Mulally was convinced, and that was enough. The idea of doing away with Jaguar, Land Rover, Aston Martin and Volvo, was his brainchild.

During his first day at work, Mulally went ahead to check Ford’s product lineup. When the engineers laid it out, Alan enquired why the iconic Taurus brand was missing. “Well, we killed it. We made a couple that looked like a football. They didn’t sell very well, so we stopped it,” said one Ford official. To this, Mulally retorted, “What do you mean, you killed it? You stopped the Taurus?!? You’ve got until tomorrow to find a vehicle to put the Taurus name on because that’s why I’m here.” Mulally had no statistics to justify why he wanted the Taurus back in the 21st century. He didn’t need one, because that was him – the authoritarian saviour of Ford, the latest rage in Detroit.

Mulally wanted results. Period. Today, Ford’s employees in US carry plastic cards with four goals printed on one side (which Mulally puts as the “Expected behaviors”) and “One Ford” written on the flip side. “This is me. I wrote it. It’s what I believe in. You can’t make this sh!# up.” He loves taking daily reports and every Thursday, starting 8 am, you can see all there is in the name of bashing up of non-performers in the conference room that Ford’s employees call “the Thunderbird Room”. There are eight clocks on the wall, each representing one time zone and the chair he sits on, he likes calling it the “Pilot’s seat”. Did someone mention narcissistic again?

Under Mulally’s reign of a little over four years, Ford’s Mcap has increased by 370.31% – enough reasons for shareholders to love this 65 year-old imperious monocratic boss.

Mulally is only one of umpteen despotic CEOs who have prospered and made billions for their companies. Steve Jobs, the face of Apple, is unmissable. Once out of Apple after a power struggle with the-then top management (the top brass considered him a “control freak”), he struck back, and is today the strongest living example of how an insistence on total control over your company and employees (call it totalitarian leadership if you like) and a focus on innovation can keep the clock ticking, with the sound getting sweeter by the second. There was a time when during late 1997, only a year after Jobs had taken over as Apple’s Interim-CEO (he had returned to Apple in late 1996), someone had asked Michael Dell during a conference what he would have done had he been in Jobs’ shoes. Dell’s reply to this was, “I’d shut Apple down and give the money back to the shareholders.” Then, Apple was just worth $3.1 billion, while Dell was worth $28.1 billion. 13 years later, Dell has become smaller with an Mcap of $26 billion (as of February 8, 2011), while Apple’s Mcap has grown by 10,456.13% to touch $327.24 billion and it is today the most valuable IT company in the world, and the second most valuable on the bourses (after ExxonMobil).

What Jobs did was to use a tyrannical leadership style – fire and force at will – to ensure that his employees delivered products that consumers lusted after, in an ever-evolving digital world. It has worked so far. Writes the American author Andrew Keen’s in his best-seller titled, The Cult of the Amateur, “There’s not an ounce of democracy at Apple. That’s what makes it a paragon of such traditional corporate values as top-down leadership, sharply hierarchical organisation and centralised control. It’s Steve’s company – pursuing his vision, at his pace, with his team, making his products. Without Steve Jobs’ authoritarian leadership, Apple would be just another Silicon Valley outfit...”

There are many names from history books that testify why oppressively domineering leaders stand for excellence, not mediocrity. Even today, ExxonMobil’s dictatorial CEO Rex Tillerson runs the oil major in the same way it has been run for years by the likes of John D. Rockfeller and Lee Raymond – preeminent and absolutist control over decision-making, whether it comes in the form of a justification as to why Exxon should not bet on non-fossil fuel or why the company should continue betting on Qatar for more than 13% of its reserves. The credit for the highest profits made by any company in the history of mankind goes to Rex of Exxon. Under him, despite fluctuating oil prices, during just the past 4 years, Exxon has reported total net profits of $142.61 billion. Today, Exxon is the most valuable company in the world – with an Mcap of $423.23 billion.

Even research supports the cause of authoritarian leadership style, especially during times of crisis. A 2006 Harvard Business School case, titled, Harley’s Leadership U-Turn, proves how under Rich Teerlink (ex-CEO of Harley-Davidson), the organisation took a U-turn from near extinction. It says, “When an organisation is under extreme pressure – so much so, that one wrong move can mean its collapse – authoritarian leadershipmay very well be necessary.” In another paper titled, Is Servant Leadership Part of Your Worldview?, by Dr. J. Howard Baker of University of Louisiana, he states, “An authoritarian, command and control model of leadership may be very effective for stopping something, destroying something, or conquering something...” He goes on to praise Jack Welch, the authoritarian former Chairman & CEO of GE, one of the most successful CEOs of all times, under whose 13 year-long tenure, GE’s market value appreciated by 2,828.5% to touch $410 billion. [This is something which Jeff Immelt, his democratic-participative leadership styled-successor has failed at; GE is valued at $221.9 billion today – down by 45.9% in a matter of six years.] Enough proof that authoritarian leadership does much good for investors.

From Larry Ellison, who has been written about as being an autocratic indomitable CEO (in one such book titled, ‘The Oracle of Oracles’, by Florence Stone, he has been described as “Ruthless, volatile, arrogant, impatient and autocratic”) to IBM’s former CEO Lou Gertsner whose shout-and-command policy helped save IBM (when he became the CEO in April 1993, IBM was struggling to survive, having lost tens of billions since 1990; under him, IBM’s Mcap increased by 476.67% in a decade to $173 billion, while its stock price increased sevenfold, to $101), there are names that have become immortal as leaders who have used lashing at will.

The CEOs I have mentioned embody the typical American ego, and they only have two bad habits – a hard-to-believe vision and an unbelievable fantasy for total control. And the reason all this despotism works is because experience has shown these iconic legends that humans, in general and most of them, will cheat and shirk work at the first possible instance. Of course, there will be exceptions – like you, obviously – who would not shirk work and who would not need to be threatened, to be productive. But these will remain, as the saying goes, exceptions. Once you truly start believing that the only way an organization can be ruthlessly productive and profitable is to be as ruthless to its people, that’s the moment you’ve qualified in my diary as one of the world’s best CEOs.

Nokia: An Excess of Cleverness

I'm looking forward eagerly to Nokia's strategy announcement this week.  Although Nokia is not highly esteemed in the US, most of the rest of the world recognizes it as an enormously important company: a brilliant manufacturer, a symbol of status and affluence in the developing world, and a source of great pride to its many fans in Europe and elsewhere.  If Nokia could combine its strengths with better execution in software and smartphones, it could be a formidable force in the computing industry as a whole, not just in mobile.

In anticipation of the new strategy, I wanted to share a few thoughts on why Nokia has struggled with the intersection of phones and computing, and what it might do to fix the problems. 

A couple of disclosures first:
--Several years ago I did a consulting project for Nokia.  I've also met with them, I have had a lot of briefings from them, and I know several people who work there.  No inside information from any of those sources has gone into this note.
--Before someone posts a comment saying so, yes my views are colored by the place I live, Silicon Valley.  Your paradigm may vary.

As is often the case for big successful companies, I think Nokia's strengths are also its weaknesses:


Strength 1: Nokia focuses very well...which can lead to denial of reality 

Nokia has a very intense, delivery-focused culture that has enabled it to pursue strategies with awesome focus and determination.  Over the years, the company has transformed itself from a paper mill to a rubber boots company to a video monitor company, etc, etc.  I can think of very few modern firms that are capable of that sort of huge transformation.

But I think that same determination has also sometimes enabled Nokia to live in denial of reality.  As an outsider who has dealt with Nokia a lot over the years, the company often comes across to me as the opposite of a learning organization.  Rather than getting inquiry and questions, when you discuss an issue with Nokia you tend to find that there is already an official Nokia answer to it: self-assured, hermetically sealed, and often sounding slightly condescending.

When Nokia was on a roll and executing beautifully, that self-assurance was entirely justified.  As somebody once said, "it's not arrogance if you can do it."  But as the company faltered, I think its belief in its own specialness and power led it to resist making changes that would have happened at most other companies several years ago.  This deepened Nokia's problems.

A quick look at the company's financials tells the story.  In 2006, Nokia was on a roll.  Its revenue was growing nicely, and it had operating profits of about 12% before taxes.  But starting in 2007, Nokia hit a wall.  Its revenue flattened and then fell.  Despite the revenue problem, Nokia held its R&D, marketing, and administrative spending almost steady in Euro terms, increasing them as a percent of revenue.  It's as if Nokia believed four years of revenue stagnation were just a temporary glitch to be endured rather than a fundamental problem that had to be fixed.

(Note: Fiscal years, all figures in $millions.  The numbers above and below were restated from euros to dollars.  I also excluded miscellaneous revenue and expenses, and one-time charges, because they distort the trends.)

To give you an idea of the impact of Nokia's slowdown, here are a couple of comparisons to Apple.


First, revenue...


Yes, Apple is now a bigger company than Nokia in terms of revenue.  That alone is pretty astonishing to me, and I'm sure it irritates the folks at Nokia, since they routinely bristle at this sort of comparison (link).


Here are expenses (R&D, marketing, and administration) as a percent of revenue.  Lower is better.


Apple has done a nice job of holding its expense growth below its revenue growth.


And here's the payoff:  Operating income


Financially, Apple has just plain run away from Nokia.


When Stephen Elop was announced as CEO of Nokia, people made a lot of hay about his background as a Canadian.  I think that was the wrong bit to focus on.  To me, the most important element of Elop's background was the ten years he spent in Silicon Valley.  I wondered what a Silicon Valley guy would think when coming into a company and seeing financials like these.  I believe the reaction would be horror: "Why didn't you people panic back in 2008?"  The accepted wisdom here is that you just don't let expenses stay high through four years of declining revenue.  That lets the problems fester.  Nokia is now a bit like a patient who has delayed routine medical treatment for so long that he ends up in the emergency room needing surgery.

Elop's now-famous memo on Nokia's problems speaks volumes about the company's culture (link).  Assuming the memo is real (I am taking the word of the press on this), Elop likens Nokia's situation to jumping from a burning oil derrick into the North Sea -- where, as anyone in the Nordic countries would know, you can die of hypothermia in minutes. 

What does it say about the employees' resistance to change that the CEO feels he has to be this alarming? 


Strength 2: Nokia manufactures wonderfully...which produces sterile, inartistic smartphones

Nokia is one of the most efficient manufacturing companies on the planet.  Very few western companies have ever withstood an all-out assault by China Inc, but Nokia, a company from high-cost Finland, has also been for years the world's lowest-cost major producer of phones.  Elop's memo says that cost leadership is now under threat, but still it's an unbelievable accomplishment that ought to be studied in every business school worldwide. 

But the same manufacturing-driven culture that turns out great, cheap feature phones by the dozen breaks down when asked to craft an intricate smartphone in which overall system integration is the most important feature.  Nokia designs phones using a manufacturing-like process in which different groups create features in parallel.  So (to make up an example) one group might do the user interface, another the mail app, and another the browser.  That's very efficient for creating lots of phones quickly, but it means it's very difficult to integrate all of the pieces together closely so they produce a great user experience.  The best smartphones, like the iPhone, are designed holistically, with all of the pieces coordinated together.  A product manager controls the process and can enforce compliance with the product vision.  This process is much slower and less efficient than Nokia's, but when you're creating a product with a lot of software, it ensures that everything works together well.

Apple can get away with this less efficient process because it produces one phone at a time.  Nokia has 89 different phone models available currently in Europe (link).


Strength 3: Nokia makes fantastic plans...over and over and over again

Nokia has for decades been able to hire the brightest people from a very bright country, Finland.  After meeting a lot of Nokia employees, I can tell you that it probably has one of the smartest workforces anywhere.  But all that intelligence has produced an analytical culture that breeds complicated plans elaborately fleshed out by committees.  Its history in the last decade is a series of wickedly clever, logical strategies that were so complex and took so long to develop and implement that they were often obsolete before they came to fruition.  It sometimes seems as if Nokia has been crippled by an excess of cleverness.

I'm reminded of a short story by science fiction legend Arthur C. Clarke, Superiority.  In it he described a society that lost a war by continually focusing on the new weapons that were about to come out of the labs, rather than mass-producing the ones that it already knew how to build.

To make matters more difficult, Nokia defined almost every major company in computing and telecommunications as its enemy.  At one time or another it has decided that it needed to dominate or defeat Microsoft, Apple, RIM, Google, the entire handset industry, the network equipment suppliers, and of course the mobile operators.  Even the US government tries to fight only two wars at once; Nokia has been fighting at least five.

There are so many examples of Nokia's busted plans that I don't know where to start.  The Symbian adventure, in all of its permutations, is an obvious one.  Nokia has gone through a number of different organizational structures, each of which was supposed to optimize it to compete in the new world of computing and internet.  But the one that sticks out at the moment is Nokia's venture in tablet computing.

Don't get me wrong, I do know the differences between an iPad and an n900.  They are dramatically different devices that reflect profoundly different design philosophies.  But both were designed for a similar high-level goal -- to make computing and web access mobile.  Nokia shipped its product first, more than three years ago.  Apple shipped last year.  Apple is selling seven million units a quarter, while n900 sales are what, a few hundred thousand?  Nice, but not a new industry.  I know Nokia has learned a lot, and has built a lot of infrastructure, but at some point you have to generate revenue rather than just having a great learning experience.


What do you do, Mr. Elop?

I think the biggest challenge facing Stephen Elop is that he needs to preserve the strengths of Nokia even as he undoes their effects.  Expenses have to come down, but at the same time he needs to invest in innovation.  The company must keep its manufacturing strength, even as it adopts a design philosophy that undercuts manufacturing efficiency.  People at Nokia have to be free to innovate independently, but when left to itself the Nokia culture tends to seek consensus and compromise.

I suspect that given all these changes, even motivating the Nokia workforce may become a challenge.  The Nokia people I've talked to love the company and desperately want it to get better.  But nobody could live through the last few years without getting a bit burned out.  Now the CEO says your home is on fire and you need to jump into freezing water.  Would that memo motivate you to work harder, or would it motivate you to work on your resume?  I was discussing the memo with several of my old friends from Apple today, and one of them joked that the message to employees was, "Everybody come to the communication meeting Friday!  Oh, and you might want to pack up your personal belongings and bring them, just in case."  On Friday, Nokia's people will need to see a carrot -- an attractive, plausible vision for the future of the company -- rather than just a stick.

I'll be watching carefully for that vision.  We're hearing rumors that Nokia is planning to shift away from its current operating systems and build on top of Windows Phone 7.  I doubt that's the full story.  For one thing, Nokia can't completely cut off its current software and switch to something else; there would have to be a long transition.  Besides, in the Nokia earnings call last month, Elop dropped some hints about his plans.  He talked about maintaining two platforms, one aimed at the mass market and another at the high end.  He said Nokia's biggest challenge is at the high end, so that's where I would expect a change is most likely.  Elop also went out of his way to praise the QT software layer, so I would be very surprised if it's killed.  If Windows Phone is in Nokia's future, I think we'd see it at the high end, paired with QT.  So we'd get a hybrid OS with Microsoft's plumbing and Nokia APIs. 
   
That would be a bold move, but it's also extremely complicated.  I remember when Palm tried to build its future on Windows Mobile, and gave up in disgust a couple of years later when Microsoft licensed Palm's innovations to other phone companies.  How would Nokia restrain Microsoft from doing the same thing again?  Elop worked at Microsoft, so I'm sure he has some ideas. 
   
Overall, it sounds like a high risk strategy, almost wickedly clever.  Exciting stuff.  And yet I keep remembering how Nokia's other wickedly clever strategies have worked out.

Note:  I've added more commentary on the Nokia announcement here.