Chris Ratcliffe
With a pop-star-style microphone clipped behind his ear, Stephen Elop takes the stage and gazes out at something he hasn't seen in a while: an adoring crowd. Hamilton's McMaster University is inducting him into the Alumni Gallery, its hall of fame for accomplished graduates. The honour couldn't be more appropriate: Elop, a native of nearby Ancaster and an engineering grad, has ascended through the innovate-or-die technology sector to become CEO of the biggest cellphone manufacturer in the world. But Elop isn't celebrating his laurels here today. Speaking to the crowd, he weaves one hell of a gripping narrative about the future: how he will save Nokia Corp. from total destruction.
Unfortunately, only half the crowd can hear it. At Elop's right, a pair of speakers mounted on poles are refusing to co-operate. Suddenly a young audiovisual technician in shorts careens down the aisle to attack the problem. As another techie climbs up to help the first wrestle with the misbehaving equipment, the bemused elder statesmen of Hamilton academe attempt to focus on the Chosen One's words, now warping in and out of focus as the speakers sputter.
Elop is detailing what ails Nokia, the Espoo, Finland-based handset and wireless networking giant that chalked up $56 billion of sales in 2010 (all currency in U.S. dollars) but is being undermined by competitors both North American and Asian, attacking Nokia from both above and below. When your very operating system is in peril, you are a technology company in a pickle.
Elop himself comes from a software background, having been hired by Nokia last September from the top of the Microsoft food chain. And his boldest move thus far has been to strike an industry-tilting partnership with his former employer. Henceforth, Microsoft's mobile software will run on millions of Nokia's devices—a startling about-face for the Finnish behemoth, which employs thousands of software engineers. At one point during the McMaster session, a student cheekily asks whether Microsoft, having flopped in the mobile space itself, had managed to secrete Elop into Nokia's executive suite in order to save itself. Elop doesn't wait a second: "The Trojan Horse conspiracy theory! Have you been to the Grassy Knoll, sir?"
As he lectures the crowd through the dysfunctional PA, Elop's witticisms are almost made redundant by the live-action metaphor: two technicians struggling with wonky technology. Still, what he's saying is true. With Microsoft as its partner, Nokia is finally ready to dance. The strategy is set, and Nokia's got a lot of heft to put into the effort, not least because the company is desperate. But the easy part, the planning phase, is over. Now Elop's got to deliver. And he doesn't have much time.
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Elop was hired because Nokia was in trouble. He knew it, and everyone else in the business knew it, but Elop wanted to make sure Nokia's board knew it, too. "What I was interested in understanding is whether there was a degree of self-awareness of the challenges that were faced—that was really important," he tells me prior to the McMaster speech. "The board of directors clearly had a sense that the world had changed around them, and that the company had to respond aggressively."
In a memo now arguably more famous than its author, the new hire detailed in February what was wrong with the 146-year-old conglomerate. His "burning platform" metaphor compared Nokia to a man standing on a burning oil rig, surrounded by flames and sloshing petrol on himself. He laid out in painfully plain English the problems facing the company. Apple's iPhone came out in 2007, offering a user experience Nokia simply hadn't matched. There were also new Chinese device makers such as ZTE cutting into the hold Nokia's candy bar-shaped talk-and-text units have on hundreds of millions in the developing world.
And then there's Android—the mobile operating system developed by Google and tossed out free to any device maker who wanted it. Companies no one had heard of (like Taiwan's HTC) seized on Android, and so did industry heavyweights like Samsung. Together, they propelled the operating system past Nokia's Symbian platform in number of devices being shipped around the world. For Nokia, a company that produces roughly one-third of all mobile devices sold in many markets around the world (and more than 50% of those sold in the Middle East and Africa), volume is extremely important. What's more, Android isn't a rival handset or manufacturer; it's a rival ecosystem—as disruptive as Apple's iTunes, say, but even more threatening, since it's a platform where multiple competitors can congregate, team up and whack Nokia's market share to pieces by leveraging Google's software brilliance. "We all talk about the exponential adoption curve," Elop says. "This is no exponential curve. It's far more aggressive than that."
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By the end of the 1980s, Nokia's growth was parallelling the global explosion of mobile telephony and wireless networks. Nokia was strong in both, having had a cable manufacturer in the corporate structure since 1918, when the company was bought by a rubber galosh-maker flush with profits from equipping soldiers in the First World War. By the 1960s, the largest division within Nokia made power cables and copper wire, furnishing a springboard for building wireless networks and manufacturing handsets. At first, Nokia merely dabbled, acting as the importer of foreign technology. But soon the company began producing equipment for the nascent nuclear-power industry, and by the early 1970s it was making computers of its own and pushing into digital telephone exchanges.
Nokia started a joint venture with the state-owned Finnish telecom monopoly Televa Oy, which, once privatized, became majority-owned by Nokia. By 1987, it had bought the entire business. Nokia also enjoyed stable and profitable trade with the Soviet Union, helping the company grow beyond Finland's borders. It was also in 1987 that Nokia staged an impressive bit of propaganda for mobile communications, persuading Mikhail Gorbachev to make a public cellphone call on one of Nokia's Mobira Cityman 900 phones, which weighed about 800 grams and cost in excess of $6,000. In the early days of mobility, characterized by car-bound phones with antennas drilled through trunks, it seemed an unlikely success story—like most new technology, it was restricted to the elite and still pretty unwieldy. But Nokia was a rising presence worldwide, riding high on the surging—if always mercurial—fortunes of advanced technology.
At the same time, Stephen Elop, studying both engineering and management, was just dipping his toe into the tech whirlpool. As the McMaster campus became digital, Elop found himself snaking some 22 kilometres of Ethernet wires around his department to hook up all of his classmates' computers. "I remember sitting in my office and seeing his feet dangling out of the ceiling tiles," says David Capson, then a professor of electrical engineering. Elop also found time to write a manual on a first-year course he'd just completed. Art Heidebrecht, who was dean of engineering, was so impressed that he hired Elop as an assistant. "I could send him to meetings and he had better judgment than a lot of the faculty there" when it came to new tech, Heidebrecht says. "He had a maturity about him, he wasn't just a geek. He had a big-picture vision."
Out of school, Elop climbed from the rather unglamorous position of CIO at fast-food chain Boston Chicken to land on the executive team at Macromedia, the creator of Flash software. Elop steered that company out of the dot-com bust and into a merger with Adobe. Elop was extremely talented, not to mention respected and widely liked. But he was also ambitious, and he still wasn't CEO. And it was the same story at Juniper Networks: a great place to land as COO, and a larger company with annual revenues of $4 billion, but he still wasn't in charge. When Steve Ballmer called about the top job at Microsoft's business unit, the $19-billion division in charge of Microsoft Office, Elop moved on—one more step on the ladder, but still not at the top rung.
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As the Soviet Union crumbled and deregulation spread across Western Europe, Nokia shifted from the ossified East toward the lucrative, tumultuous markets of Western Europe and Asia. The changeover from analog to digital signals and the resulting wireless gold rush saw Nokia building networks in Belgium, Germany, Denmark, Singapore and China, among many other markets—and selling the handsets that ran on them. Other companies missed the moment; and so, the sands of tech-time buried a few more corpses, and everybody moved on.
Nokia had gone from rubber boots to a global telecommunications powerhouse, a feat of self-reinvention. Yet the talk nowadays is whether Nokia has the necessary gusto for radical change—whether the dinosaur can dodge the meteors raining down around it. The fiercely proud company has been accused of industrial egotism and willful blindness to trends. Its love affair with European markets, for instance, led Nokia to undervalue explosive potential in the United States. The focus on networks and handsets likewise made Nokia miss the shift toward wireless operators: Powerful carriers began dictating device shipments—which, in the U.S., would have meant producing flip-phones like the Motorola Razr. Nokia refused to stop concentrating on the peasant-chic candy-bar phones.
Nokia also focused overwhelmingly on making devices for the global GSM wireless network standard, which was pervasive throughout Europe and Asia, while ignoring the CDMA standard that was gaining popularity in the U.S. and Canada. Unfortunately, the next global trend in cellphones happened to be North American: the smartphone, a device that Research In Motion basically invented with the BlackBerry, only to be upstaged by Apple's iPhone. While Nokia was shipping millions of "dumbphones" to Asia and Eastern Europe, North American companies like RIM and Apple were making astronomical margins selling devices whose advanced features were beginning to make Nokia's offerings look poky. The predictable happened: While Nokia had a burnished brand and 58.5% of the entire mobile phone market in the Middle East and Africa, its share of the North American market diminished to just 5.8% over the past decade, with brand shrinkage to match. "They locked themselves out of half the market, essentially," says Charles Golvin, an analyst with Forrester Research. "It
wasn't that they couldn't sell smartphones to Verizon or Sprint. They didn't have any. They were only making GSM smartphones. The last nail in the coffin was the iPhone."
And so the board came to Elop, hoping for a reboot. News of the offer came to Stephen Miles as he drove along a country highway toward Atlanta, Georgia. Miles had been Elop's executive coach since the Macromedia days, and Elop was calling his cell. Miles pulled over to listen: Nokia wanted to make him CEO, Elop told him. It wasn't ideal to leave Microsoft that soon, Miles muses, but the move made sense. "If he wanted to make money, he would have just stayed at Microsoft. They're literally printing money. Presidents at Microsoft are making $10 million-plus. And they had just released a new version of Office—they'll be milking that for years," says Miles, who runs executive recruiters Heidrick & Struggles' leadership advisory team. "If it was all about Stephen, he would have stayed at Microsoft. This is about wanting to change a world-class company."
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As he climbed each rung of his career, Elop's high-tech Rolodex had been swelling (Miles alludes casually to Elop having "Jobs and Ballmer" on speed-dial). And when he sat down in Espoo, he took it out. And then got on a plane. Then he got on another. Elop began meeting with every significant competitor and every significant wireless operator he could think of, racking up 57 flights of three hours or more in six weeks.
He was on a software hunt. Nokia actually makes a lot of popular, low-end smartphones; it's the high-end ones, such as the N900, that have mainly been duds. A lot of analysts attribute this record to Nokia's Symbian operating system, which is clunky and outdated. Sinking millions into MeeGo, a newer platform in development, wasn't getting Nokia anywhere. And in the meantime, Android was only accelerating, Nokia's handset rivals only gaining more ground. The board was desperate. "There's a 10-year history of Nokia insiders trying to reverse the trend," says Martti Häikiö, author of Nokia: The Inside Story. "Something dramatic had to be done."
That's why this very Finnish company reached out to hire a Canadian guy with little hardware and no handset experience, someone with an explicitly software-oriented background and a record of captaining tech supertankers—because pulling Nokia through this tumult was going to be transition by fire, a scaled-up version of what confronted Elop at Macromedia during the bubble bust. "We were able to lead through those changes and take [Macromedia]to even greater heights. The whole world had changed around us, and we came out stronger than we had ever been before. That's a good experience to draw on," Elop says. "I had quite an appreciation for the software aspects of technology. ...Given the critical new elements in the mobile environment, I think there was some value placed on that."
Nokia had lagged into near obsolescence as the "battle of devices" morphed into the "war of ecosystems," as Elop likes to put it. With the iPhone's incredible popularity and the iOS ecosystem layering onto Apple's new iPad tablet computers, developers were churning out tens of thousands of innovative apps for Apple's growing audience, in turn making its devices even more compelling. Much the same thing was happening with Android—except that it was running on a variety of devices, at varied price points, and so the growth was even more explosive. Elop admits that the lack of a coherent and all-encompassing mobile operating ecosystem was preventing Nokia from bringing its latest, most innovative features to its devices, while keeping the cupboards bare at the Ovi Store—Nokia's older but lamer version of Apple's Mac App Store.
But now that he's in charge at Nokia—still the world's largest mobile device maker, "bar none," Elop reminds me—the new chief executive has a cocksureness befitting his new-found clout. He refers casually to the fact that Google was, you know, sort of interested in having Nokia's new CEO adopt Android. With the swish of his signature, Elop could have extended Android's growth beyond high-end smartphones to what he calls "the next billion" in emerging markets, the folks who have yet to go digital. But Elop also had to consider Microsoft's fledgling Windows mobile operating system, which had garnered good reviews but seemed to come out with no momentum, too late, after too many failures (remember the Kin, which Microsoft pulled from the shelves?). "Of course, they had another consideration," Elop says. "And that was 'Boy, what happens if Nokia goes Android?' Bad news for Microsoft. Very bad news for Microsoft. And therefore, as a result, the conversations with Microsoft were also very interesting and dynamic. And lots of fun, obviously." And thus Nokia goes from doomed and written-off to being a kingmaker and potential dragon-slayer rolled into one. At least in this telling.
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Shortly after Elop announced the Microsoft partnership, Nokia's shares sank. Nothing new there: They'd also sunk in the days preceding the announcement. From a high of around $40, the shares have plummeted over the past decade to around $8. Nokia's global share of handset sales has shrunk from around 40% of all devices in 2007 to just over 30% at the end of last year. And by 2012, Canaccord Genuity expects that number to have withered to around 25%. Nokia's share of the mobile industry's operating profit, meanwhile, has collapsed from roughly 67% in 2007 to only 19% in the fourth quarter of 2010. That trend isn't slowing. Every Nokia division earned less profit between the last and the most recent quarters: Nokia's handset and services unit dropped 28%, with sales declines forecast for the next quarter; Navteq, the company's online mapping division, fell 46%; and Nokia Siemens Networks, which builds wireless networks for operators around the globe, fell 98%. All this while Apple sales and profits stupefy the Street.
The partnership with Microsoft, which will have Nokia devices running the Windows mobile operating system, to be shipped some time in 2012, is not the end of Nokia's troubles. It is the beginning of a transition that will call on Elop's crisis-management side more than his software side. When I ask him about the inevitable layoffs, he says there will be "more clarity" in late April. True enough: On April 27, Nokia announced that 4,000 employees will have to leave by the end of 2012, and that 3,000 employees working with Symbian will be shunted to Accenture, which was already handling some of the platform's services. Canaccord Genuity analyst Mike Walkley estimates that as many as 16,000 jobs may have to be cut eventually. "The layoffs, the pain, are about to hit—the impact of this decision. This is going to be a real test," says Forrester's Golvin. "Elop needs to be able to continue to rally the troops, to maintain that sense of marching to a better future. ...They've got a bunch of integration work to do. They've got to scale up the learning curve. But they have to get devices in the market. And the longer they take to do that, the worse it's going to be."
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The Microsoft pact means Nokia can quit fretting about the success of Android and Apple's iOS, and can have its own software experts develop phone features around a rich, fluid Windows ecosystem that comes to them straight off the shelf. Elop talks about a couple of these options—from mapping that's sensitive to within a few inches to editing crowd-sourced video. When Elop talks about making money from these things via location-based advertising, he could be just aping the location-based advertising rhetoric of Silicon Valley start-ups. Then one thinks about the hundreds of millions of Nokia phones in use throughout Asia, the Middle East and Eastern Europe, and the rhetoric changes into revenue. "Businesses are willing to pay for that, and companies like Nokia and others intend to profit from that," Elop says. "So: huge disruptive opportunity."
Oddly enough, another part of the rescue strategy relies on the nexus of Nokia's strength in emerging markets, a sense of corporate responsibility and Elop's earnest Canadian internationalism. It's almost as if he were cast from a maple-scented mould in Ottawa and sent on a Pearsonian mission abroad. While other tech CEOs rave only about margins and shareholder value and closed ecosystems that can fell entire industries (remember the music business pre-iTunes?), here is Elop, speaking to me about Indian crop prices and prenatal health care for women in rural China.
Nokia software called Ovi Life Tools sends daily text messages to tip off farmers which local markets will offer the most for their harvest. It also gives crucial health information to Chinese mothers-to-be. In Kenya, the company is helping register newborns so they'll be enfranchised when they get to voting age. All of this is brave thinking in an industry obsessed with margins and power; here is an ecosystem that could benefit humanity while burnishing Nokia's logo for two-thirds of the people on the planet. And as Elop works through a smartphone strategy with Windows mobile, he will benefit from Nokia's continued brand power and market share within vast developing markets. "Why do we do this? It's good for business, there's no question," Elop says bluntly. "Reaching the next billion of first-time consumers of mobile technology is an area where we're increasing investment, because that area represents roughly half of our business." The developing world likely needs a company like Nokia more than a company like Apple, but it is unclear whether the developing world needs Nokia specifically. The surge of new device makers like ZTE and network equipment makers like Huawei is putting intense pressure on Nokia. When Elop recently travelled to China, one of the developing markets where the Nokia brand is still respected, he was effusively praised by top government officials. In a few years' time, the red carpet may be reserved for someone else.
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Elop, like others in the tech sector, knows you can try to buy your way out of problems. Stumbling giants, even ones much younger than Nokia, tend to acquire their innovation one group of 20-and-30-somethings at a time. Buying the QNX operating system has sparked a renaissance at RIM, powering the PlayBook and the next generation of BlackBerrys. There are constant rumours that Nokia is looking to buy an instant smart-phone boost—namely HTC. Elop admits Nokia is constantly evaluating acquisitions, but asserts that it doesn't need a deal to compete in the new world order of mobile, either in the blossoming tablet space or in the smartphone wars. He assures me that the company will come out with a tablet, "either directly or in partnership," and that it will not be a "plus-one" tablet.
"Of course, he would say that, wouldn't he?" sniffs Carolina Milanesi, an analyst with tech advisers Gartner Inc. There may be brilliance in Nokia's labs, but it's not getting into the market. "Nokia had become too slow-moving," Elop says. "There were too many decisions left to large groups of people who would meet at great length and not actually come to the decision."
It's as if he's talking about a bygone era, but Elop has some long, dark days ahead, literally if not figuratively. "The Finnish winter is fine," he shrugs. "There's more snow than in Canada, but they have snowplows, unlike in Seattle."
That happens to be where his family lives. He says the reports that he only spends one day at home each month are overstated. "It's more than that." Still, one knows intuitively that saving Nokia isn't exactly one of those 9-to-5 jobs that facilitates something like beer-league hockey, even if Elop-watchers use folksy hockey analogies when pressed about his Canadian background or Nokia's Finnish culture. "He's regarded very positively. He has every chance to succeed from the Finnish point of view," says Häikiö, the historian. "He's a big fan of ice hockey. And as you know, in Finland the foreign players can be the local heroes."