The Smartphone Wars: Elop&#8217;s Burning Platform
<p>Wall Street Journal&#8217;s TechEurope is running the full text of an <a href="http://blogs.wsj.com/tech-europe/2011/02/09/full-text-nokia-ceo-stephen-elops-burning-platform-memo/?mod=rss_WSJBlog">astonishingly candid memo by the CEO of Nokia</a>.  Read the whole thing, in which Elop says Nokia&#8217;s performance and strategy over the last few years has been a disaster and it&#8217;s time to jump off the burning platform before the company is consumed by flames.</p>
<p>I think we can deduce three things from this memo.  First, Elop&#8217;s appreciation of how bad a fix Nokia is in is complete.  Second, he&#8217;s going to jump Nokia to WP7 or Android when the promised strategy announcement happens in two days from now.  And third, there are some subtle pro-Android clues in there.</p>
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<p>If this memo does nothing else, it proves that Elop is not afraid to look facts in the eye and propose drastic remedies for a near-terminal situation.  I cannot recall ever hearing in my lifetime a CEO&#8217;s assessment of his own corporation that is so shockingly blunt about the trouble it is in.  The degree of candor here is really quite admirable, and does more than any other evidence I&#8217;ve seen to suggest Elop has the leadership ability to navigate Nokia out of its slump.</p>
<p>It&#8217;s clear from the memo that Elop is preparing his company to change their flagship smartphone OS.  You can&#8217;t get more obvious than &#8216;We too, are standing on a “burning platform,” and we must decide how we are going to change our behaviour.&#8217;</p>
<p>The available alternatives are Android or WP7.  Apple&#8217;s iOS is right out because Nokia needs to be able to sell cheap on a huge range of handsets. RIM and WebOS are tied to one company each. MeeGo&#8217;s been tried and failed.  There are no other realistic contenders. </p>
<p>I think we&#8217;re being given some subtle clues that it will be Android.</p>
<p>Microsoft can dream all it wants of creating a third force in the smartphone OS market, but the brute economic fact it can&#8217;t make go away is that it can only price-compete with Android by selling every copy of WP7 at a loss, forever.  Google can write off its Android NRE because Android is a feeder to a robust ad business &#8211; they did exactly what I taught them to in &#8217;99 and found a secondary market to monetize. Microsoft doesn&#8217;t have the same option.</p>
<p>This fact has stark implications for a Microsoft/Nokia tie-up. Because, basically, Nokia can&#8217;t afford to pay license fees to Microsoft. Consider what HTC and Samsung would do, playing Nokia&#8217;s volume-production game against Nokia with an OS that is <em>already</em> clobbering the living shit out of WP7 in market perception and has a lower bill-of-materials feed-through to consumer pricing.</p>
<p>If Microsoft wants to use Nokia to grab market share, they&#8217;re going to have to subsidize Nokia to the tune of billions of dollars in foregone license revenue to get it.  And where would the returns to Microsoft come from?  I don&#8217;t see any strategic gain here, nor revenue enhancement for their core businesses.</p>
<p>Elop has shown by writing this memo that he&#8217;s not stupid.  He has to have figured out that WP7 would put Nokia at a serious competitive disadvantage absent huge subsidies, and that if huge subsidies were in the deal they wouldn&#8217;t be sustainable for Microsoft.</p>
<p>That&#8217;s the business logic.  Now let&#8217;s look back at the text of the memo.</p>
<p>Android and Apple&#8217;s are the only competing smartphone platforms mentioned by name.  RIM gets no mention, Microsoft gets no mention.  There&#8217;s no groundwork being laid here to justify moving to either of the latter.   If Elop <em>were</em> contemplating WP7 seriously, I&#8217;d have expected the memo to include at least some attempt to spin WP7&#8217;s truly godawful performance in its first quarter.</p>
<p>(Reminder: WP7 is selling so badly that Microsoft won&#8217;t utter a sales figure and <em>lost</em> 1.5% market share this last quarter, according to comScore. One of my commenters turned up a report that they&#8217;re seeing 50-80% returns on WP7 devices, and other sources report WP7&#8217;s being outsold by <em>Windows Mobile</em>.  A firm foundation for future success this is not.)</p>
