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Spillikins #67. Nokia Learned to Play Violin, but is Losing its Worth
Honestly decided not to write about Nokia’s problems outside of the recent well known events, especially because the last few Spillikins were clearly too concentrated on the news from the market leader and related stories. What can be done however, if the company can’t stop and generates the news with the speed of a bullet train flying somewhere? Nokia claims to know where that somewhere is, but its stockholders and outside observers can only see the cars flashing past without any comprehension of the ongoing processes and that complicates everything even more. This whole week I was telling Nokia employees an old joke that unleashed waves of laughter even in my loose translation. Some were smiling sadly and saying that it does remind them of something:
A patient on the operating table:
I feel like I have to tell jokes and proverbs – this time the old “Don’t change horses mid-stream” comes to mind. Nokia, however, managed to not only change the horses, but to learn how to play violin after a cosmetic surgery. The restructuring inside the company looks like the first step to a large corporate shake up, i.e. the first act in an attempt to get rid of CEO Olli-Pekka Kallusvo. At least, unhappiness with current CEO time after time resurfacing in mass media, does not look like a coincidence, but rather like an attack preparation. Whether is happens or not is not important. We are more interested in what is happening with the company’s management structure and what consequences for Nokia will it bring.
On October 1, 2009 the company accepted a new governance structure, but before moving to it lets recall what it was beforehand. Initially, the company started out as a manufacturer of a single type of devices, mobile phones in particular, that could ring, go online and do everything expected from such a device. The company structure was dedicated to creation and distribution of phones.
The problems started with curving out of a separate type of multimedia devices and organization of a special dedicated division – Multimedia. If before that all devices where planned in a single Mobile Devices division, now the additional class of multimedia computers was created as a separate segment. In the N95 years this approach did not bring any problems as N-series devices were only one segment of Nokia products and they played in a small niche.
With expansion of the product line these devices began to overlap with Mobile Devices models and the first confusion was born. Who will get the priority to release this or that function? Do these have to be regular devices or multimedia? The Mobile Devices always had the strength of the portfolio, when Multimedia had a higher profit margin, better image. During those years the separation of Multimedia into a different division was totally logical, it allowed creating N-series and entrenching them on the market. There were however some negative consequences for the future, in particular with the increasing number of such models there had to sooner or later be a conflict with the division responsible for regular mobile phones. In reality, Nokia was setting up future competition between its own divisions who will create more successful products as the decisions about them were not made in a single control center, but rather were a compromise between different parts of the company. By compromise we mean price policies and launching of various models by each of the divisions. De facto, the growing number of multimedia devices meant loss of management control within the company. Instead of a single strategy a center of tension appeared inside the company and it was taken care of by the change in structure as of October 1, 2009. The main goal of that reorganization was to return to manageability of product line design and service development, previously connected to particular models or model lines, from now on had to be done for the whole product line. The structure became logical.
Devices division became responsible for all the devices and that looked like a step back to a logical, transparent system of management. This step destroyed the center of tension, when lots of time was wasted to have everyone agree on the portfolio and compromises had to be achieved. The structure became transparent. Services division was now responsible for Nokia internet services development, for example mail, Ovi, maps, etc. Finally, the third division that we are interested in – Solutions, was uniting the services and devices, offering some kind of a unique set as well as analysis of what may just become such a set, what the company needs to work on first of all. We are leaving the Markets division alone as it was only responsible for product launch, marketing, etc. In other words, this business unit is not as important for the context of this article. It began to function on October 1, 2009 and in seven months since it had no time to start working full speed and to show any real results. The reason? Explanation is that to create a unified model lineup, taking into consideration all devices, six to twelve months are needed. Development of a single model takes six to eighteen months, the new Devices division received models from two sources at once and could not immediately create a logical and clear product lineup. That would’ve meant cancellation of a number of duplicate models, revision of price segments in itself impossible due to existing carrier orders and/or amounts of money already invested into the development. As of October 1, 2009 people familiar with the situation inside Nokia, saw how the company roadmap was changing literally weekly. Some models were disappearing, others appearing, numbers and names were changing, so was the pricing. All that meant that people in the Devices were creating a unified portfolio based on the products they had on hand. Practically, by creating this division Nokia was losing three – four months dues to reorganization. This was a leg-up given to competition. We will now never know just when exactly the Devices division would be able to start working normally and provide the transparency of product lineup design. Possibly the results of the reorganization could have been seen by summer of 2010. During the reorganization a number of potential hits were cancelled – Nokia Erdos (8000-series, continuation of Arte), many models with HVGA screens, many sliders and flip phones.
Now, starting from July 1, 2010 Nokia starts another reorganization. With it the transparency of Devices becomes the thing of the past, because the company decided to divide its structure into two parts yet again. Mobile Phones division, existing from a long time ago, now is in charge of budget and medium priced models (also 8000-series, but this is a different story). Basically, the division is in charge of S30/S40 platforms based phones. Another division - Mobile Solutions – is responsible for smartphone development and all internet services of the company. Meaning that former divisions Solutions and Services are now joining as one. According to interview given by Nokia CEO to Financial Times, it was all done with one goal in mind: “We have a clear direction. We know where we are going. But we have had difficulties with execution at times”.
Unfortunately, I have an impression that Nokia CEO is either mistaken himself or wants us to be misinformed. One of the results of another restructuring is that every division will now have its own R&D center or centers.
Basically, Nokia does a very simple thing – it gives up on synergy effects from unified phone development in order to speed up the development of S60 and MeeGo based devices. This is very logical if you want to control expenses and forecast them better, management, but it leads to higher R&D costs and worsening of the situation for S30/S40 platforms. Even the fact that Mary T. McDowell, current Chief Development Officer, was chosen to head Mobile Phones, proves it. She has no experience in this field, it is not the best candidacy inside Nokia to head Mobile Phones division. She has a different kind of experience. However, considering that the division is to get its own R&D team, she becomes the ideal candidate. He task is to guide the division of R&D teams between various Nokia parts during the transition period, make it as smooth as possible. Not to take the best and the extra into Mobile Phones.
At the same time, Anssi Vanjoki is now heading the Mobile Solutions, in 2004-2007 he was heading the Multimedia division and success of Nokia smartphones is associated with his name. Looks like he is trying to enter the same river twice.
Reading in press comments about Nokia restructuring, I came across a common opinion that it will not give immediate results, they are to be expected in a year or more. No one can argue this, it is not a contradiction. But excuse me, what would all of a sudden make Nokia change its decision made more than a year ago and destroy the structure that was implemented on October 1, 2009? It was logical, it was transparent, it could have worked by this summer. Instead, the company again splits the product line into two big segments, but for the first time also increases this separation by abandoning concentration of efforts in the same R&D centers? We are getting back to the situation when company’s product portfolio will not be transparent again, inside the company there will be compromises on cost, positioning of the product overlapping in the medium price segment. What pushed to recreate the chaos?
My explanation is that the market threats for Nokia became differentiated, the company can’t react to them within existing structure. On one side, we see the growth in number of smartphone manufacturers: Apple, Motorola, Sony Ericsson, LG, Samsung. On the other side, the attempt to make Symbian an open OS, to attract other manufacturers de facto failed. Sony Ericsson is still on the market, but it bets on Android. Samsung refused to use Symbian, also giving a green light to Android and its own Bada. Therefore either way it will be Nokia developing Symbian and paying all the related bills. All efforts have to be concentrated on this platform. Many services the company launched, but never was able to make them work well or without a major number of problems, will need to be integrated. In other words, creation of Mobile Solutions division, it is an attempt to fortify position on smartphone market, where the competition became much tougher and from where Nokia is being slowly squeezed out. The Nokia market share stays stable, while the market shares of other major players are growing.
During his meeting with stockholders Nokia CEO agreed that while the company fights with Apple in the high price market, it is facing the increasing competition from the Chinese manufacturers in the ultra low price market. I can confirm that devices based on Taiwanese MediaTek made chipsets are becoming very popular and took up a considerable market share in Asia. Release of these solutions on the European markets is only a question of time. And this is where the separation of Mobile Phones division, responsible for budget solutions, looks logical. Nokia is trying to prevent struggle in this market segment, design an adequate structure to quickly react to such threats. Unfortunately, this means that Nokia is playing the game forced on it by the market, it is not pushing its own agenda. The company reacts to outside stimulus, starts to hustle and looses many opportunities. The new structure is aimed at the smartphone and budget markets fight, but the price to pay here will be six to twelve months time needed to transition, time the company is losing again. Another price to pay is the factual abandonment of S30/S40 platforms development to S60 level. These platforms will be developing slowly, will not be getting the services at the same level as S60 will. We see it today, just look at the Maps. In the future S40 development will be only slower, it is a sacrifice Nokia is willing to make and is making. All efforts will be targeted at the return of position on the smartphone market. Mistake in my opinion, because the company is pretty much still afloat thanks to regular phones, phones that put it on the map in the first place. Slowing down the pace of the development of such devices will mean growth for other manufacturers. A little detail says a lot about it: after the last Nokia restructuring announcement, Samsung began worldwide revision of its sales plans in 100 – 250 Euro ($125-$315) feature phone segment. Samsung calculated that the newly opened window of opportunity may mean 10% to 30% growth in comparison to previous estimates. Obviously, this is not official information, just a quote from one discussion about the developments I had, but it does say a lot.
Probably, we could have remembered that the first reorganization in October already brought a change in the system of phone names: C-series, X-series, etc. Now we will again see a few new ways of naming phones, creating bigger mess. Not to waste time in Spillikins, allow me to finish the story about restructuring, I’ve presented the main ideas. At the end, we see Nokia trying to do something they could not with the current team. The company is changing its structure as a reaction to the actions of competitors, but does not hire people who can think a step ahead of the market, create the solutions winning the race. This is a shame because Nokia does have the resources necessary to change the situation quickly, turn it in its favor. The pressure on Nokia CEO from the stockholders will be only increasing and may lead to his resigning in 2011. Now, that will be a mistake because it will in turn lead to more changes. You don’t change horses in mid-stream, but Nokia tries to do it time after time and at different levels of its structure, mind you. In a meantime, the reduction in Nokia stock price clearly shows that the market does not believe in positive changes in the company and votes with a dollar. The stock is going down since October of 2007, you can see it yourself.
Just to remind, Apple started the patent war first against Nokia, then HTC, aiming in the last case at Google and its Android OS. So on May 12, 2010 HTC filed a complaint with the US International Trade Commission (ITC) on Apple violating 5 of its patents. At the same time, the company requested to suspend the sales of apple iPhone, iPad and iPod in the US as its rights are violated. Among the patents listed by HTC is power saving mode, number dialing interface. Nothing in particular, but its enough to say that the answer was symmetrical. No one can predict what will come out of this and when.
Last week Nokia also made a move against Apple, pointing out that its patents are being violated. There was a standard request to suspend sales. Apple decided to fight this patent war on a few fronts and that could lead to a lot of problems for it. Both Nokia and HTC are demanding the suspension of sales, do not want any compensation and seem to be genuinely serious about it. Which means war ‘till the end. Whether there will be more actions against each other is unclear, but for now the only winners are the attorneys, not the consumers. Every side of this conflict initiated by Apple loses.
I remember the fights about the first real Google phone – Nexus One. My opponents with foam at their mouths were telling me just how this world will change, what amazing sales there will be in Google online store. The time is the best judge. There is no Google phone, there is a product from HTC and now Google itself admitted the failure of its online sales model. Nexus One will be no longer sold online, other models planned before are now questionable. This is another prove that the search giant is strong in search, but it is not always fault free. There are no exact sales numbers for Nexus One, but rough estimates show 100-120K sold. Very modest numbers, to say the least.
However at 06:00 GMT on Tuesday you will be able to read about the device announced at the same time. Already it is safe to say that its sales will not be modest, but will be rather significant. In every sense it is one of the first models of its class that will make some people change their touchscreen phones plans. Come on over on Tuesday, you will not be disappointed. See you then.
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Published 17 May 2010
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