Business Watch: Nokia Microsoft gamble could be worth billions

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So now we know what Nokia’s new chief executive Stephen Elop had up his sleeve as his big-bang turnaround strategy for the world’s leading handset maker

Elop’s decision this month to effectively dump Nokia’s long-standing Symbian operating system and get into bed with Microsoft, is one of the most controversial moves in the sector for years – and there are several reasons why that’s the case.

The first, and perhaps the least surprising given the funk Nokia has found itself in, is that it will make “significant reductions in headcount” at the Finnish giant’s global operations.

The unions have predicted as many as 6,000 job cuts in Nokia’s home country, with most concentrated among research and development workers.

Elop hasn’t put a number on it yet, but admitted there is a “great deal of pain” inside the company.

The second is that Nokia’s long-suffering investors are unconvinced the strategy makes financial sense for their company.

That was clear from the fact that Nokia plunged close to 13-year lows on the day Elop uncovered the strategy, and are still plumbing those depths.

At the Mobile World Congress, Elop defended his decision to adopt Microsoft’s Windows Phone as the group’s main smartphone operating system.

Elop and Microsoft chief executive Steve Ballmer insisted that the proposed strategic partnership was good for both companies.

Many analysts claim Microsoft will come off best from the team-up but Elop begged to differ.

The tie-up would, he said, transfer “substantial monetary value” to Nokia, which he estimated to be worth “billions” rather than “millions” over the lifetime of the deal.

What is abundantly clear is that Elop had to do something. Nokia’s share of the all-important smartphone market tumbled to 31 per cent in the fourth quarter of 2010, from 38 per cent in the previous quarter. Symbian has also lost its place to Google’s Android as the leading smartphone operating system and is never going to get pole position back. Research group IDC reckons Android will have hoovered up 60 per cent of the smartphone market within three years.

In a hurry
Meanwhile, Apple is at war with Google’s open system, with its own closed operating system tied to the best-selling iPhone. It’s set to be an ugly battle.

Nokia needs a mass-market alternative to the operating systems of Apple and Google. But some analysts think that the company’s market share could suffer if it takes too long to actually get Microsoft-powered smartphones into the marketplace. The company has indicated that it wants to get at least one smartphone using Windows Phone out in 2011.

Meanwhile, Elop stressed that the deal is not just a case of Nokia shelling out expensive royalty fees to Microsoft every time it shifts a new smartphone. Nokia’s research and development costs will drop dramatically, which is where those job cuts come in. Elop also pointed out that Nokia will, for instance, allow Microsoft to integrate Nokia’s mobile maps service into the US giant’s web search engine.

And by giving its support to Microsoft, Nokia is turning Windows Phone into a viable alternative to Google and Apple in mobile.

“For all of the unique elements Nokia is contributing, including the swing factor, including the decision to make Windows Phone a challenger, Microsoft is contributing to Nokia substantial monetary value,” Elop was reported as saying.

Another controversial element of the deal is that some think Nokia has simply backed the wrong horse. Microsoft has failed to repeat its dominance of the PC operating systems environment in mobiles despite 10 years of trying. In those 10 years Google and Apple have changed the game and Microsoft is now coming from behind. The doubters include Google’s own chief executive Eric Schmidt, who told those gathered in Barcelona that Nokia should have gone with Android instead.

Schmidt cheekily added that Google was open to moving Nokia onto Android in the future. “We would have loved if they had chosen Android. They chose the other guys, that other competitor, Microsoft. I think we are pretty straightforward,” he said.

“We would like them to adopt Android at some point in the future and that offer remains open. We think Android was
a good choice for Nokia. We are sorry that they made a different choice.”

Schmidt admitted Google and Nokia had on a potential tie-up before Elop eloped with Microsoft.

Network concerns
The Nokia/Microsoft partnership has even raised concerns with network operators themselves.

Jean-Paul Cottet, Orange’s chief of marketing and innovation told Reuters that operators could be discouraged from offering Nokia-Microsoft phones if the pair go for a closed system like the Apple iPhone.

Apple insists on approving programs that run on its iPads and iPhones and it largely controls the billing relationship with the customer so as to maximise profits.

The system has worked well so far because of the brilliance of the device (iPhone 4’s many faults notwithstanding), but the approach is unpopular with some of the network operators.

That includes Vodafone, whose chief executive Vittorio Colao, was busy slagging off the “walled garden” Apple appears to be creating around content on
the iPad.

Orange’s Cottet echoed those sentiments as regards the Nokia/Microsoft deal.

“We want a mobile ecosystem that is open and allows our clients to use all the services they want, not closed systems that benefit one company or another,” he said.

Cottet is also understandably concerned about how the deal will affect Orange’s forward planning in the short-term.

“Nokia’s new platform with Windows is planned for 2012, so what happens until then? We know what we sell of Nokia’s line-up for the first half of this year, but are wondering what they will propose to us to sell in the second half of the year.”

Elop was dealt a rough hand because his predecessor failed to address the threats of Google and Apple early enough. So the market will have to give the new CEO time to prove he can make the deal work. But picking Microsoft over Google was a huge call.

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