How to save Nokia (from itself)

[Who can save Nokia from a tumbling market valuation, declining margins and product failures? Guest author Thucydides Sigs deconstructs Nokia’s culture and explains why an acquisition would be the best next step for Nokia]

How to save Nokia (from itself)

When CEO Olli-Pekka Kallasvuo took control of Nokia in 2006, the stock was at $25 per share. In late July 2010, the stock was around $8, the same level as in the late nineties. Ouch. In just four years, two thirds of shareholder equity is gone.

 

If  we go a step further, and compare market cap and sales by number of units, we observe an even more disturbing picture: Nokia’s valuation was at $33B on sales of 125M handsets last quarter; the same figures for Motorola were $17B on 12M handsets and for RIM $31B on 10.6M handsets. The math is pretty simple: Nokia is valued almost as much as RIM, but ships 10 times fewer MORE handsets.

The trend is not looking good for Nokia. No wonder that we have seen news reports of the board finally looking for a new CEO. Is a CEO change what it takes to fix Nokia? Will it make a difference if a foreigner takes over the proud Finnish company? Is Nokia beyond fixing – a dinosaur who can’t survive the climate change – or is there something that can be done to transform the company?

I don’t think Nokia is unfixable. Nokia has a huge potential: amazing global consumer brand, a very strong IP war chest and deep understanding of where the market is heading.

Yes, Nokia does know where the market is going and it always has known. From launching the Nokia Communicator in 1996… and attempting to expand into services (Ovi is the latest strategic attempt), Nokia has known where it wanted and needed to go. But the problem has been and still is the execution. The Finnish giant just fails to move and adapt fast enough to the chaotic, rapidly evolving software and internet market.

What is holding the execution back? More than anything, it’s the company’s culture. And before I dive into it the details, I have to preemptively apologize; like any discussion of a large corporation or a regional culture, one has to use generalizations. Yes, there are always exceptions, but if we want to analyze the culture we need to resort to generalizations. Some readers might find this offensive. Don’t say you haven’t been warned.

Nokia takes great pride in being “Smart, Cold Blooded Vikings.” Thoughtful and tough, strategic and careful, they don’t take chances. They calculate, analyze and think before they react. And “if it takes time, that’s fine”. This is an admirable approach. But as Google’s Shona Brown pointed out in “Competing on the Edge: Strategy as Structured Chaos“, if you try to analyze and manage chaos (or any environment which is rapidly changing in multiple dimensions), that might take a while. Plus, if your analysis takes longer than the rate of change, you are actually moving backward. In the age of fast moving internet and web, the best strategies are coming from the bottom up, and are best developed through experimentation rather than long analytical cycles.

This is the antithesis to what the Nokia culture is all about. And to a large extent, the culture goes beyond Nokia; it is deeply rooted in the Finnish way of living. Nokia is a Finnish company and I would argue that you can’t take the Finnish out of Nokia. Yes, some Nokians – especially those who spent parts of their careers in the US – know how to, and often do, operate differently. And in the last re-org some good “Nokia 2.0” people have moved upward.

But overall, Nokia is a reflection of the Finnish culture: “Smart, cold blooded”, strategic, cautious, Vikings. This should not reflect as a negative comment on Finns: Just like a camel can’t survive in the arctic and a polar bear will die in the desert, a culture makes a company best suited to a specific kind of environment. Nokia has a great tradition of excellence in manufacturing and mastering logistics through process. This DNA is different – and I argue that it is the anti-thesis – of the Internet & Services culture.

The recent rumors about Nokia looking for an outsider, non Finnish CEO are interesting – and a move in the right direction. But will it be enough? I doubt it; either the strong existing culture will change the CEO, or the CEO will leave within a few years.

So, is it possible to change Nokia’s culture and save the company? In my opinion, to change such a deeply ingrained culture, a shock treatment is needed. Three things need to happen.

First, Nokia needs to be acquired by a foreign entity (Chinese? American?) or a private equity group. With a market cap of $33B, it is a bargain. Just turning it into another Motorola will double the value. And if whoever acquires Nokia succeeds in generating service revenues from those 500M handsets sold each year (and one interesting direction they should explore is mobile payments) the valuation will be in the hundreds of billions.

If Nokia were to be acquired it would cause a shock wave throughout the organization, the kind of shockwave that can induce a rapid cultural change. Yes, there will be a lot of resentment among the old-guard Nokians, many of whom will leave, but these are exactly the people who should work in industries that are not as fast paced. And many of the newer Nokians – what we call the Nokia 2.0 execs – who suffer under the existing culture might actually appreciate and support such a move.

Second, for Meego (Nokia’s live-or-die bet on a software platform) to become a viable alternative to Android, the Meego executive leadership must physically relocate to Silicon Valley. We hate to admit it, but when it comes to rapid development of software and services, this is where the right culture exists and right talent can be sourced. This physical change will lead to an attitude change that will impact every decision Nokia makes, and all else will follow.  By relocating to the Valley, MeeGo will become more independent from its Finnish roots and will be able to work more effectively with Intel. It would also give the Silicon Valley team something to rally around, and a clear ambitious goal they can focus on – which is how you build effective teams and why all of Nokia’s previous attempts to build high caliber teams in the Valley have failed. Yes, you can have satellite offices in other countries (just like Android does) but there is only one place where the software & services brains should be placed, and it is in Silicon Valley.

Third, Nokia’s handset development efforts need to be transformed from a mammoth machine into small, fast moving (9-12 month development cycle) commando units of integrated software, hardware, mechanical and design specialists. The economics of the CE space have changed, and it is now possible to test and create prototypes much faster and cheaper than it used to be. Forget the 24-month planning cycle… let multiple teams come up with contrasting ideas, prototype those and then cherry pick the best ones for market testing and production. It will build a constructive competitive culture that will push everybody forward. Samsung does that today. The Taiwan ODMs do that today. Nokia can and should match up.

Nokia is a great company with great assets and some great people working for it. It can be saved from becoming the cold-blooded 21st century dinosaur. For whoever saves Nokia – if they manage to change the culture – a big reward lies ahead.

So who will buy Nokia? Comment with your best guess below…

-TS

[Thucydides Sigs – a pseudonym – has many years of experience juggling computing constraints, mobile software and consumers needs. With that said, imagine listening to a violin sonata not know who the artist is or who composed it. You end up having to listen more carefully in order to make a judgment. He can be reached at thucydides /dot/ sigs [at] gmail [dot] com]

Why handset OEMs shouldn't mess with UX and other lessons from the automotive industry

[Why are so many phone manufacturers trying to develop their own branded experience? Guest author Thucydides Sigs argues that there should be a limit to UX innovation and looks at what the phone industry can learn from how car manufacturers differentiate]

In Mobile World Congress, during a special panel on “New Devices” Motorola’s VP of software, Christy Wyatt, made an interesting statement: “I don’t want the same phone as my teenage daughter“. This was followed by Ari Jaaksi, Nokia VP of Maemo – nodding his head in confirmation.

Hmm. Last I checked, most soccer moms in the US either use an iPhone or want to get one. Most of their teenage daughters either have one or beg for one. And a surprising number of dads do as well. So why is it that Apple is doing quite well without customizing their iPhone, while Motorola and Nokia make a “Signature experience” such a core components of their strategy?

Before we start, half of the challenge is due to terminology, so lets setup some definitions. For years, OEMs have been trying to create a unique “Branded Experience” that spans multiple dimensions: how the device feels, which functions and services are bundled, how polished the graphics look. Part of this “Branded Experience” is also how consumers launch or switch between tasks, i.e. the “User Interaction model” which is largely dictated by the underlying “Software Platform”.

Most of the major consumer electronics brands have made significant efforts to establish their own “branded user experience”. Lenovo just showed their new U1 Tablet with their own OS and UX during CES, and Dell have been playing with “Dell Experience” on their Linux devices as well.

Nokia, which could have been shipping millions of Android phones today, felt compelled to do their own thing and have been spending hundreds of millions on building their own software and services platform – included the user interaction model, consumer services and branded user experience; making an almost life or death bet that they can become a ‘real’ software company.

The Phone Industry vs the Car Industry
So why are so many device vendors chasing this illusive goal? What are they trying to gain? What kind of user experience customization that makes sense for an OEM? And what doesn’t?

To crack this challenge, lets use the car industry as an analogy. Car vendors compete on industrial design, engine and performance, cost, colors, finish, entertainment, comfort and many other factors. But they don’t try to move the gas pedal to the other side just to have their own “Driving experience. Ford or BMW don’t say “We need to create our own driving experiences so we will use a joystick in the center panel and throttle on the door.”

Why is it that the Car industry competes on “overall user experience” but mostly refrain from touching the “User Interaction” model ?

Design constraints
Any interaction design is driven by three constraints: (i) The human body physical constraints, (ii) the task at hand constraints and (iii) the established paradigm constraints

First: the human body constraints. How many legs we have effects how many pedals we can use simultaneously. How we sit effects what we can do with our hands vs. legs. Same applies to the phone; the size of our palm, the number of fingers. These physical constraints limit the possible variations of both physical design and interaction design. Sure, you can come up with five pedals but you can’t reach them all at the same time. Or in the phone case, you can create a design with twenty main choices – but you don’t have enough fingers. And then there are the mental constraints of the human mind; how many choices we can effectively deal with at the same time, how we scan from right-to left and top to bottom, etc.

Second: the task at hand constraints. You need to drive the car: control speed and direction simultaneously so you need to access both the steering wheel and pedals at the same time. Same with phones; when phones were used mostly for voice calls, you needed to easily access the 0-9 digits with your right thumb and all phones ended up with the 3×5 key matrix. Nobody thought to customize the experience by providing 0-9 keys in a single row.  Well – Nokia did decide to try a circular keyboard with the 3650 – and it didn’t go that well.

Third: the established paradigm constraints: once a working interaction model is accepted, it reinforces itself as more and more consumers use it. It does not – and often is not – the best possible interaction model. It just needs to be good enough so consumers will keep on using it. And once they do – and more and more users do – it becomes very hard for others to transition to a different paradigm. So even if you have a better user interaction model, it is often impossible to change the dominant existing interaction model (the Qwerty keyboard is a great example here: suboptimal arrangement, but impossible to change the established paradigm). Small tweaks here and there (a la Manual vs. Automatic cars, Mac vs Windows, or Android vs iPhone) are possible – but there is only so much that makes sense to customize.

Android didn’t really copy the iPhone – they are similar because of the human and paradigm constraints involved in small touch devices. Once you design an interface for a four inch touch device, there are not too many different choices. The designs just converge on similar concepts. Attempts to customize the UX beyond that are futile – they result either inferior user experience (because the human or service constraints are ignored) or just don’t get adopted for lack of critical mass.

What actually matters
What actually matters for a “branded experience” and where differentiation makes sense – is the services & features. Audi can compete by adopting their automobile industrial design language to the latest fashion, bundling “Services” like  infotainment system or features like ABS. In a similar way, phone or computer vendors can differentiate on slicker industrial design, bundled music or navigation services (Nokia attempts to do with Ovi) or features like inductive charging (Palm).

Instead of OEMs focusing on strengthening their brand by building their own interaction model, they should focus on the consumers (what a novel concept) and what consumers want: which means empowering the consumers to personalize the device to their own needs. This is the powerful role the application store fills and why Apple can ship the same iPhone to the teenage girl, the soccer mom and the business daddy.  Not only is focusing on the services and app store good for consumers, it is also good for the OEMs: making consumers happy is the best thing you can do to strengthen your brand. And – there is a lot to gain by selling real-estate on their app stores: turning them into “Malls” and renting out sections. Turning the OEM into a ‘landlord’ who can ‘auction’ this ‘real-estate’ statically or dynamically to all application developers. VisionMobile have been covering this trend in their annual Mobile Megatrends report.

So why are so many OEMs going down the slippery slope of “Branded User Experience” and end up with their own flawed user interaction model and a large software team needed to keep the effort alive?

The faulty OEM logic
First, because they are looking at Apple and getting envious. We industry insiders hate to admit it, but there is a strong Apple envy syndrome in the industry. The OEM false logic is something like this “Apple has high margins, branded user experience and owns the user interaction paradigm. So if we develop our own user interaction and create a branded user experience, we will have high margins”

WRONG: Just pure faulty logic. The fact that lions have a mane does not mean that if you bought a mane wig you will become a lion.  There is much more to Apple’s high margins than owning the user interaction model.

Second, when new usage paradigms emerge, and there is no dominant user interaction model, there are opportunities to innovate and be the first to build the new paradigm.  When the world was dominated by closed source software (the Microsoft era) this offered significant revenue upside.

But we live in a different era – “Open Source” has changed the dynamics of the game. All it takes is that at least one of the software solutions be open sourced, and the upside from controlling the basic interaction model and underlying software platform is minimal or none. The company who leads this effort gets industry recognition, establishes itself as a thought leader and strengthens its brand – but it is no longer a sustainable source of revenues or competitive advantage.  To the contrary; quite possibly, they can turn into the “mule” which guides the rest of the industry and can be embraced and extended.

Motorola’s Sanjay Jha realized this when he made Motorola embrace (and extend) Android. Nokia on the other hand could have been selling millions of fantastic Android phones with Ovi services if it wasn’t for their Finnish pride.

When Microsoft had to fight Netscape in the mid nineties, it has done so by an “Embrace and Extend” strategy. It would be beneficial to many OEMs to remember this and put an end to their mediocre attempts to invent new interaction models. Instead focus on what matters to consumers; great app store, superior services and overall compelling device experience.

– Thucycides Sigs

[Thucydides Sigs – a pseudonym – has many years of experience juggling computing constraints, mobile software and consumers needs. With that said, imagine listening to a violin sonata not know who the artist is or who composed it. You end up having to listen more carefully in order to make a judgment. He can be reached at thucydides /dot/ sigs [at] gmail [dot] com]

MeeGo: Two (M)onkeys don't make a (G)orilla. But they sure make a lot of noise

[What is behind the announcement of Meego operating system by Nokia and Intel? Guest blogger Thucydides Sigs deconstructs what Meego means and its importance to the mobile industry]

How much substance is behind the noise of Nokia’s and Intel’s announcement of Meego? A few points to consider.

Nokia, who feels threatened by Google’s Android and Chrome OS efforts, is putting significant  efforts in order to expand into other device categories and bring its Ovi services to more consumers in more places. So a move that brings Maemo – together with Ovi (and the underlying Web-runtime apps and Qt cross-platform) to Intel chipsets is a straightforward strategic win. It will allow OVI services – such as Maps – to get into non mobile devices, especially Automotive (which has been a strategic focus for Intel) and other connected (but wired – after all power consumption is Intel’s Achilles heel) devices such as home phones.

So is Nokia going to bet it’s future Linux devices on a group of Intel engineers? Nokia is smarter than that: Intel software engineering has never been something to write home about. And Nokia has always been careful in maintaining and winning control over strategic areas. So Nokia will either maintain a parallel internal effort or maintain tight control over the ARM port and the overall MeeGo architecture.

Is MeeGo going to really bring Ovi services & Maemo into the hands of tens of millions more consumers? Well, MeeGo open’s a door, but success will depend on the quality of Maemo and Ovi experience. Maemo v6, due late this year, will be catch-up to where Android and WebOS were half a year ago, and were Apple was a year ago. So it is still one or two years behind the rest of the industry. That said, Maemo does not need to be the best – it needs to be good *enough* for ‘mass market’ consumers, so that combined with Nokia industrial design expertise and marketing power, an “object of desire” can still be delivered.

It’s this consumer “Desire” that brings us to the Ovi Services angle – and the question of how good will Nokia Services offering will be. Studying the NexusOne, it is impressive to see how Google seamlessly connected it’s many service offering – creating a compelling integrated experience. From a photo gallery that is both local and web (Picassa), through Google Voice (low cost calls, transcribed voice messages) and an almost perfect navigation and mapping experience (including turn-by-turn voice instructions and maps). Contacts, Email, Calendaring are the basics that are a must have. And Google is quickly expanding into other services (note the recent Aardvark acquisition and Buzz launch). Yes, MeeGo gives Nokia a vehicle to bring Ovi to some other device segments, but can Ovi compete effectively with Google’s breadth of services?

What about Intel? It has been spending hundreds of millions of dollars on a software strategy which does not seem to show a clear path to recouping the investment. Moblin, has not been able to ship in any significant volumes, is inferior to either ChromeOS or Android from a software platform perspective, and lacks any kind of services offering (which is why they needed Ovi). If Intel thinks that software is another part of it’s vertically integrated stack that will differentiate the chipsets, then it does not make sense to open it up and make it an open industry initiative. If Intel truly believe that Moblin should be open and used by competing ARM chipset vendors, then what does it gain from spending those hundreds of millions of dollars on the effort?

Open Source: ChromeOS, Android and Maemo are creating a very different software ecosystem then the one Intel got used to with Microsoft in the 90s. None of the software players is going to generate significant revenues on the device side. Intel exec’s might  want to re-read Andy Grove book, step outside the box and ask themselves if their software effort still makes sense in the 2010 industry context.

And while Intel is spending time on building this software strategy, the chipset market is experiencing a disruptive change, shifting from computing power (where good enough performance is delivered by both Intel and ARM), to battery power and mobility where ARM is clearly superior.  It might be better for Intel to focus it’s efforts back on it’s chipset technology and fix its power consumption problems, because when it comes to wireless devices (either within the home or outside, anything that is not tethered to a power cord), their offering is inferior to ARM, and no amount of software will be able to cover this gaping hole.

What about the rest of the chipset industry? Would the other ARM chipset vendors, such as TI, Qualcomm, Broadcom and nVidia follow path and join MeeGo? It’s hard to imagine that any of those companies will want to entrust their software strategy in the hands of Intel: not only is Intel a direct competitor, it software skills leave a lot to be desired, and it’s long term commitment to the space (as outlined above) is not clear. Is Nokia’s involvement enough of a carrot to entice those vendors into MeeGo? Having Maemo running on top of MeeGo will make insertion into Nokia easier, but Maemo is open source and there is nothing holding the chipset vendors from porting Maemo to their chips on their own or with the help of other independent 3rd parties. So we suspect Nokia will give it a modest try, but when it comes to purchasing chips, power, performance and cost will still be the over-riding criteria for Nokia.

So, lots of noise that those two monkeys are making, but little impact. MeeGo seems to be cute (qt) and (h)armless, but not a big industry changer.

– Thucydides

[Thucydides Sigs – a pseudonym – has many years of experience juggling computing constraints, mobile software and consumers needs. With that said, imagine listening to a violin sonata not know who the artist is or who composed it. You end up having to listen more carefully in order to make a judgment. He can be reached at thucydides /dot/ sigs [at] gmail [dot] com]