Elop Fights Nokia Traditions in Race to Ship Microsoft Phone

Every summer for the last four years while Apple Inc. (AAPL) shipped a new iPhone, Nokia Oyj (NOK1V) managers vacationed at their lake cottages in Finland.

“In mid-July, Nokia House is a ghost town,” said Adam Greenfield, managing director of Urbanscale, a design consulting firm in New York, who worked for Nokia from 2008 to 2010. “If you need a decision and the key person’s at the summer cottage? Forget it. You’ll resolve that issue in September. It’s something that hampers their agility.”

Speeding up Nokia’s product development is at the top of Chief Executive Stephen Elop’s agenda as he tries to meld the Finnish company’s handsets with Microsoft Corp. (MSFT) software to narrow the widening gap to Apple and Google Inc. (GOOG) Nokia has delayed most of its top-end smartphones in the last two years, resulting in sliding profit and market-share losses. Its shares have dropped 25 percent since the Microsoft deal was announced.

Elop, a former Microsoft executive brought in as CEO in September to turn the company around, is relinquishing Nokia’s homegrown platforms Symbian and MeeGo for Microsoft’s Windows Phone 7. Nokia may provide a peek at its first Windows phone this year, though it’s promising volume shipments only in 2012.

“It’s risky even to wait that long,” said Rob Sanfilippo, a consultant with Kirkland, Washington-based consulting firm Directions on Microsoft. “It would be great if they had them out by the middle of the year, June or summer, even if it’s one device to show that there’s real progress happening quickly.”

‘First Proof’

Elop needs to narrow Nokia’s productivity gap to boost margins. Apple squeezes three times more revenue per employee than Nokia, while Taiwan’s HTC Corp. gets twice as much, Bloomberg data show. Microsoft’s revenue per employee is 1.5 times Nokia’s.

Both Nokia and Microsoft need the collaboration to work. Nokia’s smartphone market share has tumbled to 30.8 percent from 50.8 percent when Apple started shipping the iPhone in June 2007. Redmond, Washington-based Microsoft, with about 3.4 percent of the smartphone market, is piggybacking the world’s largest mobile-phone maker to dent the emerging dominance of Apple’s iOS and Google’s Android software.

An early test for the partnership will come as Nokia folds its services into Microsoft’s world: Office, Exchange corporate e-mail, Xbox games, Zune music products and Bing search.

“The first proof points will come when they start to put maps into Microsoft services and integrate them with Nokia services,” said Martin Garner, a London-based analyst at CCS Insight. “It’s in those announcements over the coming six to nine months that we’ll see how well it’s working before the phones start to arrive.”

‘No. 1 Issue’

Nokia’s record isn’t encouraging. A less-ambitious 2009 partnership between the companies still hasn’t produced an Office suite on Symbian. Nokia has delayed almost every top-end smartphone based on its own platforms since the N97 was shipped on time with buggy software in June 2009. It postponed the N900 in the fall of 2009, the N8 in the summer of 2010 and the E7 in winter 2010. The first MeeGo device was delayed to this year from 2010.

Mobile industry product cycles are down to six or seven months, said Bert Nordberg, the CEO of Android-based phone maker Sony Ericsson Mobile Communications Ltd. in January. In past years, Nokia probably spent between 18 months and two years developing hardware products, said Horace Dediu, the managing director of Helsinki-based Asymco, an independent research firm.

Elop, 47, said at a media summit in Abu Dhabi this month that speed and accountability are “by far the No. 1 issue” employees talk to him about. Nokia is changing on those fronts, he said.

‘Unparalleled Speed’

“We’re moving at a speed that is unparalleled for our company and I would argue is on par with anyone else in the industry,” Elop said. “The number of examples of difficult processes, of committees and boards and agencies and commissions, all these people who are spending time contemplating instead of aggressively moving forward is something that we’re already fundamentally changing.”

Investors remain skeptical. The drop since the Microsoft venture was announced have extended Nokia’s share decline to 70 percent since the iPhone was introduced, wiping out about 60 billion euros ($84 billion) in market value. Nokia rose as much as 3 percent to 6.15 euros in Helsinki today.

Nokia’s adoption of a new platform and the restructuring planned as a result means Elop may face clashes next month with unions, which over the years won Finland’s sun-starved workers four weeks of summer holidays. The talks will deal with pruning a 16,000-strong global development team in the shift to Windows. Elop said Feb. 11 there will be “substantial” job cuts.

‘Internal Fight’

“They cannot afford to lose time on internal fights when they have to win against competitors who are faster,” said Francisco Jeronimo, a London-based analyst with IDC. Samsung Electronics Co., the world’s No. 2 mobile-phone maker, can move engineering teams from one project to another in weeks, he said.

The Microsoft accord is also forcing a new mindset on Nokia.

Symbian, unlike Microsoft software, is “open source.” So is MeeGo, which Nokia has developed with Intel Corp. (INTC) Open source permits outside developers to take the code and modify it, and write any kind of programs to work with it. Google’s Android has also been open source. Microsoft’s Windows Phone 7, like Apple’s systems, is closed.

“The Finnish engineers I know are religiously committed to open source, and I could hardly think of a more implacable opponent to that philosophy than Redmond,” said Urbanscale’s Greenfield. “They are likely to lose a lot of talent that won’t want to work with Microsoft.”

Open vs Closed

In a speech in 2009, Anssi Vanjoki, a former Nokia executive vice president, who resigned shortly after Elop was appointed, likened closed systems to Stalinism.

Closed systems “are just like that experimental societal system led by a dictator who thinks control is best,” he said.

Before the rise of Nokia, Finland’s best known high-tech achievement was Linux, the open source system written by Linus Torvalds in the 1990s. MeeGo and Android are Linux-based.

Microsoft on the other hand jealously guards its software. It was investigated by authorities in the U.S. and in Europe for blocking third-party software like the Netscape browser, and made to open its interfaces and pay fines. Rich Green, a Sun Microsystems Inc. manager who’s now Nokia’s chief technology officer, was among people to testify against Microsoft.

With current makers of phones based on its software, Microsoft keeps a tight hold on product variation, specifying screen resolution, buttons, and electronics. The standards are expected to be relaxed for Nokia as part of their accord.

Loss of Control

“Nokia cannot be treated as a normal licensee,” said Carolina Milanesi, a Gartner Inc. analyst in Egham, U.K. “I don’t think it would be beneficial for Microsoft to continue to work with that mindset that ‘we know best and you take what we give you.’”

Microsoft spokesman John Hipsher declined to comment.

Nokia’s loss of control over software hasn’t gone over well with everyone. On Feb. 24, Valtteri Halla, a MeeGo manager representing Nokia in talks with partner Intel, quit, becoming among the higher-profile casualties of Elop’s shift.

“The things I’ve worked for don’t seem to be continuing in a way that would make it good for me to work here anymore,” Halla said in an interview with business website Taloussanomat.

Most employees are hunkering down to see what Elop’s changes will bring.

“There’s broad terror because people don’t yet know who is going to be laid off and who isn’t,” said Tero Kuittinen, an analyst at Greenwich, Connecticut-based MKM Partners. “Uncertainty and fear have been maximized, just when the company needs everyone to focus on development work.”

Nokia can’t afford that.

“The mid-tier iPhone may be announced this year, and if Microsoft and Nokia are not quick enough to compete, they will have to buy market share,” IDC’s Jeronimo said. “That’s always a lot more expensive.”

To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

To contact the editor responsible for this story: Vidya Root in Paris at vroot@bloomberg.net

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