A Canadian in Espoo: Elop Gives Nokia a Chance

Stephen Elop, the Canadian-born ex-Microsoft (s msft) executive that was tapped as Nokia’s Chief Executive Officer in September, has seen enough. Elop reportedly sent a candid, company-wide memo that sets the stage for the significant changes at Nokia (s nok), which is watching its dominance in the handset market rapidly erode in terms of market share, profit and mindset. There’s no guarantee that Elop can turn the giant Finnish company around, but for the first time I can think of since the 2007 arrival of Apple’s iPhone (s aapl), his words bring hope for fans of Nokia.

Indeed, the memo mirrors several thoughts I’ve shared here about Nokia’s challenges over the past year or two, but the full memo, posted at Engadget, is well worth the read. Essentially, Elop likens Nokia’s situation to a person standing on a burning oil platform who can do one of two things: continue to watch everything burn around him or jump to the icy waters below. Neither situation is attractive, but at least one option provides a future. Some key excerpts from the memo tie back to thoughts shared here:

In 2008, Apple’s market share in the $300+ price range was 25 percent; by 2010 it escalated to 61 percent. They are enjoying a tremendous growth trajectory with a 78 percent earnings growth year over year in Q4 2010. Apple demonstrated that if designed well, consumers would buy a high-priced phone with a great experience and developers would build applications. They changed the game, and today, Apple owns the high-end range.

Whenever I’m critical of Nokia in regards to Apple’s iPhone , the common and near-immediate response centers on how Nokia handsets outsell iPhones by leaps and bounds. Elop knows that this becomes less true with each passing day, and Apple has quickly become one of the top five mobile phone sellers in the world. It has done this with a limited line of smartphones while Nokia has continued to create hundreds of models with various features and functions. Of course, Apple dominates the high-end, so Nokia fans then turn attention to mid-tier market. But Elop knows that’s simply a trick of misdirection:

And then, there is Android. In about two years, Android created a platform that attracts application developers, service providers and hardware manufacturers. Android came in at the high-end, they are now winning the mid-range, and quickly they are going downstream to phones under €100. Google has become a gravitational force, drawing much of the industry’s innovation to its core.

Google’s (s goog) platform is already outselling products that run Apple’s iOS or Research in Motion’s BlackBerry (s rimm) here in the U.S., where smartphone adoption is rising quickly. But Elop knows that’s only part of the story, because Android sales have recently overtaken Nokia’s Symbian platform around the world as well. And today, the Gartner (s IT) research group confirms an 888.8 percent rise in the sale of devices running Android during 2010, even as the worldwide market share of Symbian devices dropped to 37.6 percent from 46.9 percent the year prior. Nokia’s Symbian device sales grew (as fans will surely tell you), but they’re growing at a slower rate when compared the mobile device market. That’s a problem.

Does the high level of U.S. smartphone adoption skew that fact? Probably. But Elop notes, there are examples of Android’s growing dominance in regions that have typically been Nokia strongholds. In highly populous countries such as India, where mobile broadband and smartphones are now emerging, $150 Android phones are taking large chunks of Nokia’s market share. What was once nearly two-thirds of the market has quickly dissolved to one-third.

“But wait,” cry the faithful, “Nokia still owns the low-end market, right?” Elop dismisses that question with a dose of reality: Thanks to system-on-a-chip advances, an inexpensive but functional handset can be built by nearly anyone these days, even at U.S. contract prices of $30 for a cheap Android handset:

Let’s not forget about the low-end price range. In 2008, MediaTek supplied complete reference designs for phone chipsets, which enabled manufacturers in the Shenzhen region of China to produce phones at an unbelievable pace. By some accounts, this ecosystem now produces more than one third of the phones sold globally — taking share from us in emerging markets.

Elop’s memo reiterates much of our Nokia reporting of late: The company is losing ground on all fronts for a variety of reasons, ranging from a lack of internal collaboration to a lack of speed. The latter point bears particular scrutiny because Elop understands a key aspect that Nokia as a company and brand simply don’t. I can think of no better example than a post from last week where I suggested Nokia “continues to move as if the year is 2001, not 2011.

My comment revolved around a Symbian update that took months to produce yet brought little tangible benefit to end users, leaving key functions such as the browser and input method to be less than optimal. Yet the fans decried my thought, saying that the update was right on time and the fixes within it were the expected ones. One Nokia employee even suggested I didn’t know the difference between a major update and minor one. Such commentary illustrates the problem that Elop has seen: Nokia may be on time within its own schedule, but that schedule is far too slow to compete in this fast-changing market. His comment on the speed-to-market challenges exemplify this thought:

Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.

How then is Nokia to proceed now that the CEO has taken step one, which is to readily admit to the problem? We’ll likely get a good idea of Nokia’s future path this Friday as Elop is expected to outline his strategy, but a glimpse can already be seen from this tidbit in the memo: “[W]e’re going to have to decide how we either build, catalyse or join an ecosystem.”

Although I suggested last July that Nokia consider Android, the better play now may be to extend the company’s relationship with Microsoft (s msft) and use Windows Phone 7 for the platform and ecosystem. Either approach will diminish Nokia’s independent brand, but what good is such a brand if consumers are more interested in products from other companies? Nokia makes excellent hardware, and Windows Phone 7 is a fresh take on smartphone software, so there’s merit in the partnership.

A year ago, it may have made sense for Nokia to buy Palm, and in turn, the company’s webOS platform. Nokia spent a reported $3.9 billion on research and development in 2010; for $1.3 billion, it could have had webOS and still had $2.6 billion left over. But that window has closed and Microsoft arguably has a stronger ecosystem than HP (s hpq) does for Palm’s platform.

Symbian and MeeGo are still on the table, of course, but even Elop doesn’t seem to instill confidence in either with his memo. For all the effort on MeeGo, he notes that the company is likely to only have one MeeGo device available for sale in 2011. MeeGo may stay, but progress will needs to come faster in order for Elop to consider saving it.

I suspect this Friday will bring several changes: a greater partnership with Microsoft, a large reduction in the number of future Nokia handset models and a timeline for MeeGo to prove its worth. Regardless of the path Elop sets for Nokia going forward, it will clearly be a major deviation from the prior path. And it needs to be. Up to now, each time Nokia faced a setback and modified its strategy, competitors were already two more steps ahead.

With an outsider’s observation combined with the grave realization of how dire Nokia’s current path is, Elop is at least giving the company a fighting chance to compete and grow. Not even the Nokia faithful can argue with that.

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