Which New Nokia Is Worse?
Now that the Microsoft-Nokia deal is officially done, the heads of the two Nokias -- the Finnish company that is now primarily a telecom equipment maker and the Microsoft Devices Group, which for the time being still brands its mobile phones Nokia -- have told the world what they intend to do. One, Rajeev Suri, has a cautious strategy. The other, Stephen Elop, has a pitiful copycat marketing idea.
Nokia, rid of its money-losing handset business (its net sales in the first quarter of 2014 were 30 percent lower than in the same period last year, and its operating loss expanded to $423 million from $101 million), appointed Suri to replace Elop as its chief executive officer today. Suri, a dapper Indian who speaks with a clipped, precise accent, is reputed to be calm in any storm. He saved Nokia's network-equipment division, which he has run since 2009. Though the division was, and remains, a global leader in its field, it was bleeding cash, and Suri downsized ruthlessly to improve margins. He sold large parts of the operation, such as those producing optical network equipment and business support systems.
People in the industry wondered how Suri could give up such important businesses, but he was intent on keeping only the most profitable ones. He thought his division had grown too fat. In 2011, the Nokia arm under Suri's command employed 74,000 people. Now it has 48,500. The company's gross margin improved from 29.3 percent in the last quarter of 2011 to 39.6 percent -- the highest ever -- in the first three months of 2014.
The rump Nokia isn't a very logically structured business. It's basically the network equipment division plus two comparatively small units: Here, which develops maps, and Technologies, which holds the company's varied patent portfolio.
At this point, however, Suri isn't talking about spinning off the small businesses or seeking a merger to increase market power in telecom equipment, though rumors of possible mergers with France's Alcatel or U.S.-based Juniper Networks have swirled about. Suri's plan is to reward shareholders with a total of $2.5 billion in dividends by the end of 2015, a big share repurchase and a $2.8 billion debt paydown. His idea is to hold on to Nokia's market share in telecom, working primarily with large European, Chinese and Indian carriers, which have remained the company's loyal clients, and see what other opportunities come up.
This caution is natural for a survivor of Elop's reign as Nokia chief executive. Having essentially destroyed the company's handset division by betting on Microsoft's unpopular mobile operating system, Elop is now cheerfully back at Microsoft, where he had worked prior to his Finnish tour of duty. In a live chat on Nokia's Conversations blog, the freshly-minted executive vice president for devices said Microsoft eventually would drop the Nokia brand, probably still the division's best asset: Its YouGov brand index is second only to Samsung in the mobile phone category. The new name is still a secret, but it won't be Microsoft Mobile, ruling out the other strong brand the company owns.
In marketing the next Lumia smartphones, Microsoft is betting on the most banal idea possible: colors. "You may have seen a video today on YouTube that celebrated Nokia's arrival within Microsoft, and the theme was 'more colorful,'" Elop said, speaking from Nokia headquarters. "Here in Espoo today, we are all wearing the bright colors of our devices." He added that "this colorful personality" would "transcend into" Microsoft.
In its first promo video since the Nokia deal closed, the company indeed presents the Lumias' brightly colored cases as some kind of rebellion against competing brands' black-and-white starkness. Microsoft, however, is, in typical fashion, late to that particular banquet: Apple already tried multiple colors with the IPhone 5C. The move yielded mixed results: The 5C is reportedly selling less well that the higher-end 5S but outselling all other manufacturers' flagship models.
Elop's first moves at Microsoft promise another expensive fiasco, like the one Nokia has barely managed to live down. Suri must be breathing a sigh of relief as his company prepares to sail off with a reduced crew and no ballast. At Microsoft headquarters, his schoolmate from the Manipal Institute of Technology, CEO Satya Nadella, should prepare to make some tough decisions soon. In Nadella's strategic vision, the mobile handset is just another conduit for Microsoft's cloud services. There are better ways to sell those, however, than advertising the colors yellow and red.
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Leonid Bershidsky at email@example.com