September 27, 2010 / 9:45 AM / 7 years ago

Welcome to Nokia, Mr. Elop

LONDON/HELSINKI (Reuters) - The company many see as among the most innovative in the world is a strange mix of intensity and laid-back cool. Its products are revolutionary and have transformed an entire industry, says the author of a definitive history of the firm. The mobile phones it makes, says one executive, are a perfect fusion of form and function, both “beautiful and practical”.

Apple, right? Actually, it’s Nokia -- or at least Nokia at the turn of the century, when the Finnish firm had just become the biggest mobile phone company in the world with a market value of $250 billion and visions of the cellphone as a fashion accessory, a substitute for cash, even as a handheld computer.

We know what happened next. Within years, Fortune magazine was asking “Has Nokia Lost It?”; today, North American rivals like Apple and Research in Motion have stolen the lead in high-end smartphones while Asian competitors are loosening Nokia’s grip on the mass market. Investors who have checked Nokia’s stock price recently -- using an iPhone or a BlackBerry, probably -- may know the stock has fallen back to 1998 prices, putting the company’s value at about 15 percent of its peak. The cool factor? Gone.

Granted, Nokia is still easily the biggest cellphone maker in the world, with incredible market share in fast-growing markets such as India. But as its margins shrink and its Symbian operating system loses ground to upstarts like Google’s Android, the company risks losing even that title.

Which is why, on September 10, Nokia announced that it was replacing its CEO and had dialed up what it hopes will be some Silicon Valley mojo.

Enter Stephen Elop, a Canadian who headed Microsoft’s business division. Elop, the first non-Finn to head Nokia in its 145-year history, begins this week, just in time for the autumn equinox that heralds the long, dark Finnish winter. His appointment is part of a wholesale regime change: Chairman Jorma Ollila, the architect of Nokia’s cellphone success, and smartphone chief Anssi Vanjoki have said they will follow CEO Olli-Pekka Kallasvuo out of the door.

Nokia is on a path often trodden in the unforgiving world of consumer electronics, an industry which is built, after all, on obsolescence. In the beginning comes a great product slightly ahead of its time, and a charismatic leader. As things mature, imperceptibly at first, habits harden, bureaucracy grows. Once more nimble rivals seize the initiative, the buzz -- and fast-money investors -- vanish.

Philips, which convinced the world it needed electric razors and invented the home video cassette recorder, has now largely given up competing in consumer electronics and is concentrating on healthcare equipment and lighting instead. Sony, while still a force in everything from televisions to Walkman music players, has seen better days and is cutting 10 percent of its global manufacturing capacity.

Most famously there’s Apple itself, which after early success with personal computers went through a decline in the late 1980s and early 90s that threatened to sink the company. But following the triumphant return of Steve Jobs in 1996, the firm came back with a vengeance. Even though it was at one stage forced to accept a $150 million investment from then arch-rival Microsoft, it went on to achieve phenomenal success with products like the iPod and iPhone.

Like Apple, Nokia is determined to transform itself. In 2007 it set out to add software and web services to its existing offerings. So far, the results have been mixed. The arrival of Elop is partly an admission of that, as well as being an attempt to boost the vision of a new, software-focused Nokia.

“What they really need is a software guru,” says Tim Bajarin, president of Creative Strategies, a California-based analyst firm, who has been following Apple for 30 years. “This has been a huge hole in Nokia’s strategy. They knew that building the software ecosystem around Nokia hardware held the key to their future.”

STEPHEN, NOT STEVE

On the morning of his first appearance as Nokia’s CEO-designate two weeks ago, Elop didn’t give the impression of being a magic man. Dressed soberly in a neat suit and tie, he blended in with the Finnish executives surrounding him. Compare that with his predecessor Kallasvuo, who gave the keynote speech at this year’s International Consumer Electronics Show in Las Vegas wearing a black T-shirt and jacket as if channeling Apple’s Steve Jobs.

Addressing the press conference -- broadcast live on Finnish television -- Elop seemed more concerned with being liked than shaking things up. He talked about his love for ice hockey -- a passion the Canadians and Finns share -- and noted that both Finland and Canada have territory in the Arctic Circle. “Now, my role ... is to lead this team through this period of change, take the organization through this period of disruption,” he said, appearing to read from notes. Not for this bespectacled executive the stage-striding style that Silicon Valley expects.

The 46-year-old’s profile was so low that he didn’t even have an entry in Wikipedia until Nokia hired him.

At a surprise appearance at the company’s annual showcase conference last week, he was more dynamic, calibrating his approach to appeal to a young crowd of software developers who had spent 36 hours dreaming up and building Nokia apps in a London hackathon. He leapt onto the stage to present a million-dollar award to one developer, and invoked the wild energy of the famous, and often repeated, performances of his old boss Steve Ballmer.

“Developers, developers, developers. You guys matter. It means so much to Nokia, and I can’t help but be proud that my first act at Nokia is to give you a million dollars. Woo, isn’t that great?” he said, echoing Ballmer’s rant at a 2006 Microsoft software developers’ conference.

Elop’s mild, besuited delivery was a faint echo of Ballmer’s manic, sweat-soaked chanting, but the applause he drew from the few hundred developers in the cavernous auditorium of London’s ExCel conference center was warm enough.

Members of the audience said they hadn’t seen or heard enough of Elop to form much of an impression of him. “He wasn’t at Microsoft that long, so he might be OK,” said one Silicon Valley insider, a comment that reflects a common industry disdain for the software giant’s style.

NO-KEY-UH?

Elop may not be a showman, but the father of five does have impressive Silicon Valley credentials. After graduating in computer engineering and management from Canada’s McMaster University, and a spell as chief information officer of restaurant chain Boston Chicken, he spent seven years at Macromedia. The San Francisco-based software house produced Web design tools beloved of Apple developers, and Elop held many senior positions including head of worldwide field operations. It was Macromedia who made the Flash video software that powered the rise of YouTube, and Dreamweaver, which is widely used for building websites. The company successfully pushed to get Flash into mobile devices, winning over every handset maker and service provider including Nokia. Adobe bought the Macromedia business for $3.4 billion in 2005.

When it was plain he was not going to become the next Adobe CEO, Elop wasted little time in moving to Juniper Networks as COO, and then on to Microsoft to run its business division -- a $19 billion operation that includes Microsoft’s Office software and is the largest of the company’s five divisions.

Elop did not develop a public profile there, but Ballmer says he was a solid leader of the unit during the recession. Importantly, he helped steer the company toward online versions of programs such as Word, Outlook and Excel which users could access from anywhere, including mobile devices. That was a tough transition for Microsoft, whose fortune is founded on software installed on desktop computers. The company announced a tie-up with Nokia a year ago as part of this drive. Microsoft’s chief negotiator in the deal: Elop.

Elop’s low-key style may be one reason Nokia has hired him. It’s certainly more in keeping with the Finnish culture of seriousness than with the freewheeling U.S. West Coast. And in at least one small but telling detail, he has already made a difference. He pronounces the company name the American way, “No-key-uh” rather than the Finnish “Knock-ee-uh”.

MISSED CALL

America is the toughest nut for Nokia to crack. When Olli-Pekka Kallasvuo, Elop’s predecessor, took the helm in 2006, he made one big promise -- he would focus fully on fixing Nokia’s problems in the United States, spending a week each month on it. But Nokia has continued to lose market share in the U.S.; the company now has well under 10 percent of the market, lagging behind rivals such as Apple, Samsung and LG.

Failure in the United States is a legacy of Nokia’s global ambitions. Looking to build mobile markets in Asia, Europe and Africa in the mid-1990s, it focused on the GSM standard that is now the world’s prevalent mobile phone technology. But about half the U.S. market stuck to phones based on the CDMA standard, which limited Nokia’s potential.

The shape of Nokia’s phones also played a part. While consumers in much of the world were going crazy for Nokia’s candy-bar phones, and quickly learning the T9 predictive text technology that made it fun to send trillions of SMS text messages a year, Americans never really caught the texting bug. Consumers there preferred clamshell handsets -- the ones that flip open like a wallet -- such as the Motorola Razr. For a while, that may not have seemed to matter much: the rest of the world offered a potentially much bigger market for handset sales.

But Nokia’s weakness in the United States has proved part of its undoing because it prevented the company from easily joining the smartphone party once it finally got going. While Nokia was busy conquering the world, the idea that a phone should be a small computer in your hand was becoming mainstream -- and companies from Palm with its Treo to RIM with the BlackBerry were providing them. That was even before the advent of the iPhone, an object so cool it was nicknamed the ‘Jesus Phone’.

“They’ve tried since, but it’s part of their DNA. I don’t think they understand how to be hip and cool,” said one executive who’s worked in the U.S. wireless industry for more than a decade but did not want to be named criticizing Nokia.

AN IMAGE THING?

As the new boss makes his rounds of Nokia’s Helsinki headquarters, one of the people he might like to check in with is Mark Squires. Head of social media at Nokia, the burly 50-year-old Englishman runs the firm’s official blog. He started his job in 2008 after outlining in a paper how Nokia needed to connect better with its customers, to live up to its own slogan: “Connecting People”.

“We were passing our products down through a distribution chain, a very good distribution chain, and through some excellent operator partners, but in doing that you don’t actually get physical contact with your end users,” he says, sipping coffee in a London hotel lobby.

“If you’re not listening to what they’re saying -- if there’s no mechanism for you to listen other than through third parties -- it’s a bit like constantly asking your brother how your mother is but never ringing her.”

Still, Squires was surprised at the hostility of some of the responses to a post earlier this year disputing Apple’s claim to be the world’s largest mobile-devices company. Entitled “A Fruit Confused?” the piece sparked a flurry of arguments, which Squires puts down in part to an online army of Apple fanboys.

He attributes Nokia’s image problem to the disproportionate presence of U.S. users in social media -- he says 70 percent of Nokia’s own blog traffic is U.S.-based -- and the strong following that Apple has in that market.

“The opinions there -- which are led by probably the largest company fan base there is -- or certainly the most vociferous if not the largest -- is why you have this image perception out there.”

CONNECTING WITH NOKIA

Nokia, say some company insiders, should emphasize its differences with Apple. Elop has joined a company whose workers -- they call themselves Nokians -- are intensely passionate, but also one whose management culture is more democratic than dictatorial. It is expected that the CEO regularly lunches in the staff canteen, for instance.

George Linardos, a former movie producer who has also worked at Macromedia, has come to appreciate that culture. Linardos left the beaches of his native California to join Nokia five years ago, and is now product manager for Ovi Store, Nokia’s online outlet for services like ringtones, games and music which sets out to rival Apple’s App Store.

Asked to describe what it means to work for Nokia, Linardos answers with an anecdote from Hollywood. During the filming of “Wall Street”, he says, director Oliver Stone humiliated Michael Douglas in public in a deliberate and successful effort to provoke the actor into a rant he then captured on film. In contrast, Czech director Milos Forman, with whom Linardos worked on “The People vs Larry Flynt”, allowed his actors to repeat an improvisation again and again for a week until they found their own voice.

“If one is top-down, there’s a bottom-up way of doing things -- and that’s what I recognize in the Nokia culture,” says Linardos. “When you get that working -- and it takes a while to get working -- you get something that’s more sustainable because you’re getting this collective energy and this collective vision versus one person telling you who it’s going to be.”

It isn’t always easy though. Linardos describes the self-doubt and wrong turns that have been an inevitable part of Nokia’s years in transition.

“I‘m not going to lie -- the last few years have been very hard,” he says.

NEED A HERO

Without a premium product, or something to galvanize excitement around its devices, Nokia’s operating margin for phones has collapsed to 12.5 percent from 21.7 percent just two years ago. Apple’s operating margin over the last 9 months was 29 percent; RIM’s over the last six months was 24 percent.

If he is to deliver a hero product that can take on the iPhone, Elop needs to get developers excited enough to produce the applications that consumers now expect to bring a device to life. While Apple boasts in its advertising slogan that “There’s an app for that,” in Nokia’s case, there probably isn‘t. Its Ovi store has about 13,000 items for sale against almost a quarter of a million at the App Store.

Catching up won’t be easy for Nokia. Thanks to its pioneering role in the mobile industry, Nokia has a multitude of software platforms, which complicates life for developers. Even now, it’s not clear where Nokia’s going with its software strategy.

Its four most recent models -- well received without moving reviewers to superlatives -- are the first to be built on the delayed update of the operating system, Symbian 3. Symbian 4 is due out next year, but so too is another system, Meego, which was jointly developed with Intel and is itself a merger of two earlier platforms.

It’s a tangle which produced something of an own-goal during last week’s conference, Nokia World. Nokia invited the CEO of Rovio, Finland’s hottest start-up, to speak about the improvements Nokia has recently made in the way it approves apps and pays developers, and new development tools it has released.

He duly did, but the truth is Rovio’s cult following has been earned not through Nokia, but with the iPhone. Its insanely popular puzzle game, Angry Birds, has been Apple’s no.1 paid app in 60 countries. Because of Nokia’s fragmented software strategy and the delay of Symbian 3, the only Nokia model for which it is so far available is the niche N900.

HOME IMPROVEMENTS

Linardos says he sometimes envies rivals like Apple and Google. “They got afforded the luxury of being able to say, with operating systems and services, of sort of sitting down at a whiteboard and saying: ‘Who do we like that’s out there? Who do we not like? How would we do it?'” he says.

“In Nokia’s case, we’re in an existing business shipping hundreds of millions of phones a year, with obligations to keep certain revenue levels. So what we did was more like having to remodel an old Victorian house while we were living in it.”

Nokia has an enormous number of older, more basic phones in circulation, and it likes to make new features back-compatible for the mass market, taking up valuable research and development time and money.

That presents a dilemma: on the one hand, Nokia needs to focus its efforts more closely on the top end of the market, the high-spending North Americans and the Europeans who have traded their Nokias for iPhones and BlackBerrys; on the other, it is enormously proud of its size and the trust it commands among the 1.2 billion people who use Nokia phones and the more than one million people a day who buy a Nokia -- more than its three nearest rivals combined.

Any move to slash the portfolio or take resources away from the bottom end of the market would cut at the heart of what many Nokians believe in and work for. That means that even as he goes after Apple and Google, Elop will have to celebrate and build on the company’s successes elsewhere.

“Nokia needs to Americanize while simultaneously protecting its assets in the rest of the world. An injection of Silicon Valley attitude will play well in the United States, but the company must take care not to unsettle staff in Europe and elsewhere,” says Neil Mawston, analyst at research firm Strategy Analytics.

LOCATING PEOPLE

The new boss will find another big challenge inside the Berlin headquarters of its navigation business. The fruit of the company’s most ambitious acquisition to date -- the 2007 purchase for $8.1 billion of U.S. digital mapping firm Navteq -- it’s aimed at tapping the local knowledge of Nokia’s mass of users to create location-based services.

Michael Halbherr, who now runs the business, is convinced that Nokia’s future is inextricably tied to maps, navigation and services linked to where the user happens to be. In an office overlooking the construction site for the new building, he enthusiastically sketches a grid showing the places he believes these are set to occupy in all devices.

It’s the same grid the German manager drew for the board three years ago, when he was trying to persuade Kallasvuo to buy Navteq. He recalls Kallasvuo’s response at the time: “Holy smoke!”

The bold plan has attracted some of Nokia’s best and brightest, insiders who felt it was time for a change. Tuula Rytila-Uotila leapt at the opportunity to join the venture after taking Nokia’s last hit smartphone, the N95, to market. “I felt we need a material change, not little bit of change,” she says. “I thought, I have to leave the company or bite the bullet.”

The venture appeals to Nokians’ desire not just to make money, but to change the way the world works. It’s a passion that has yet to win over investors. Analysts have been asking Nokia to write down some of the goodwill from the deal almost since it was done. “You have to pay for the birthright to play in the navigation industry,” insists Halbherr. “The map is your entry ticket. It’s the endgame for the navigation industry.”

CONNECTING WITH PEOPLE

As Elop settles into the Helsinki winter, market talk is turning toward the industry alliances he may look to build. One fairly safe bet given his background is that he will deepen ties with Microsoft. Microsoft itself has had little success in the smartphone market and Elop’s old boss Ballmer made a point of saying how he looked forward to continuing to work with him in a Microsoft staff memo marking the Canadian’s departure.

Would Nokia ever move onto Microsoft’s Windows operating platform? Probably not. So far, it’s been a partnership with few results; even with better coordination the two companies are likely to remain rivals when it comes to mobile platforms.

What about Google’s Android, which is free and has an active and fast-growing developer community around it? Such a move would entail a considerable loss of face for Nokia and antagonize Microsoft. It would also require Nokia to abandon its own software push. “The day Nokia goes for Windows Phone 7 or Android, investors will sell their Nokia shares,” says John Strand, CEO of Danish telecoms consultancy Strand Consult, who has followed the industry since the 1990s. “That would be the day Nokia turns itself into a hardware manufacturer like Dell.”

More ambitiously, Nokia could try to merge with one of its smartphone rivals. RIM has become far more affordable in the past few months. As it has expanded into lower-margin international markets -- where it could benefit from Nokia’s distribution network -- RIM’s market value has fallen to $24 billion, down nearly 40 percent since March.

Then there’s HTC, which makes smartphones and has embraced both Android and Windows. The Taiwanese firm is now valued at $19 billion (corrects). Motorola’s phone unit, too, is looking for a home and would give Nokia access to North American markets.

Nothing’s impossible. But it’s worth noting that Nokia has not bought a hardware company for years and would have little to win from a hardware-only deal. And Elop does not have a free rein on strategy anyway. Ollila initially said he would step down “soonest” after helping the new CEO settle in but then clarified that he will not leave until 2012.

Elop “has the mandate like any chief executive to look afresh, but he was not employed to shake up strategy,” Ollila told the Financial Times in an interview.

OUT OF THE FOREST

In the airy wood-paneled spaces of Nokia’s headquarters, with its huge windows capturing light from the sea, Elop will have plenty to reflect on. Nokia’s revenues fell 19 percent last year, while operating profit halved. The value of its brand -- one of its key assets -- dropped 58 percent in just one year, according to a global study by Millward Brown.

“Nokia has had significant transitional moments before,” says Dan Steinbock, whose 2001 book, “The Nokia Revolution: The Story of an Extraordinary Company That Transformed an Industry” helped mark Nokia’s apotheosis. “This, however, is a defining moment.”

History shows it would be unwise to underestimate the company’s determination to be reborn. Nokia partly defines itself by the Finnish concept of “sisu” -- which roughly translates as “fighting spirit” -- and the truth is, Nokia has reinvented itself in the past in a more fundamental way than Apple has ever had to.

Nokia began as a paper manufacturer in 1865 at a riverside wood pulp mill in southern Finland and grew to make everything from tires to television sets. Not so long ago in Finland, the Nokia brand was a common sight on lavatory tissue, and people went out into the forest in Nokia rubber boots. The big change came when Ollila, who headed the cellphone unit from 1990, became chief executive and transformed the Finnish conglomerate into a global handset leader.

Elop’s arrival finds Nokians energized for the challenges ahead. “When you are against the world, it also excites people,” says Juha Akras, head of human resources at the company. “We are ready to fight and that’s the key thing here now. Now Nokia is in a challenger position again.”

Linardos, the former movie producer, also relishes the challenge. Casting his mind back to 2007, he speaks with an almost Finnish intensity.

“I remember having a very distinct discussion ... with my boss at the time and saying everything was hunky dory, sales were going great, our stock price was great, we were on top of the world, and saying, what’s going to happen is, we are now leaving the light and walking into a forest. And just like when you do that, you’re going to watch the light start to fade behind you and you’re going to only see darkness ahead.”

The company is six months past the point where things looked most hopeless, Linardos says. An injection of new blood that has been going on beneath the surface has helped to lift spirits. Just as long as everybody understands Nokia’s in it for the long haul.

“It’s not, as gets played in the media sometimes, a story that has a finish line in six months where one platform wins,” he says. “What they call ‘sisu’ I call a kind of tortoise-and-the-hare quality, which is just a constant march and a sort of certain persistence and just never stopping and just going, going, going.”

Additional reporting by Sinead Carew in New York and Bill Rigby in Seattle; editing by Simon Robinson and Sara Ledwith

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