On a slushy morning in early March, Stephen Elop, a Canadian executive who built his résumé at U.S. technology companies, found himself in front of 2,000 Finns delivering a speech about failure. Six months earlier, Elop had been hired away from Microsoft (MSFT), where he oversaw the company's Office products, to lead Nokia (NOK), the world's largest manufacturer of mobile phones. At its peak, in 2002, it contributed 21 percent of all of Finland's corporate tax revenue, and its success over the past dozen years has fueled the nation's sense of possibility in the same way that General Motors (GM) once propelled the aspirations of the U.S. Elop's message to his employees in the factory town of Salo was that, despite the 450 million phones the company sold in 2010—402 million more than Apple (AAPL)—almost everything Nokia had done since 2007 was wrong.
Without slides or props, Elop stood in the town's gymnasium and explained his signature decision as chief executive officer: to dump Nokia's homemade Symbian software, which has shipped on some 400 million phones, in favor of Microsoft's nine-month-old Windows Phone 7 software that runs on a mere 4 million. Elop spoke in his usual manner, an engineer's earnest, you-know-as-well-as-I-do appeal to reason. As he marched through his logic, the Nokia employees, aware that their new boss had only recently arrived from the very company whose software they would now be humiliatingly forced to use, betrayed no signs of emotion. Rather, a heavy silence filled the room, as if Elop were a defense attorney being watched for signs of inconsistency.
Much of what Elop had to say wasn't news to his audience, but it was still distressing. In his measured telling, Apple and Google (GOOG) had changed the industry from handset-focused to software-focused. Symbian had fallen too far behind to have any hope of catching up. Worse, the company's great hope for the future—a software platform created with chipmaker Intel (INTC), called MeeGo—wasn't ready to pick up the slack. He tried to negotiate a deal with Google to run Android, but Google refused to give the world's biggest phonemaker any advantages over its smaller partners, meaning Nokia's corps of 11,600 engineers would have next to no ability to add their own innovations to Google's software. "It just didn't feel right," Elop says to the crowd. "We'd be just another company distributing Android. That's not Nokia! We need to fight!"
For a moment, Elop, 47, lays into the complacency he sees settling over the company. When he asks how many people in the crowd use an iPhone or Android device, few hands go up. "That upsets me—not because some of you are using iPhones, but because only a small number of people are using iPhones. I'd rather people have the intellectual curiosity to understand what we're up against."
Finally, after emphasizing that he believes mismanagement—not a lack of innovation—is what ails the company, Elop gets personal. "I'm deeply apologetic that I can't give you every bit of information about how this will impact each of you. That really sucks," he says of the layoffs destined to hit Salo's employees as a result of abandoning Symbian and MeeGo. "But my commitment to you is that we will get through this as quickly and transparently as we can. And I think we're going to make the best choices for the future." Within minutes the crowd has dispersed and headed back down the snowy road to the Nokia factory that since 1928 has been cranking out radios, TVs, and, more recently, cell phones. By Finnish standards, it could have gone worse. "It wasn't exactly a standing ovation, but people didn't walk out feeling resentful," says Ram Kuppuswamy, the plant's manager. "The disappointment doesn't go away. But this helped."
Pride can kill a company. So can bad management. Nokia suffered from both—and terrible timing, too. Four years ago it was the undisputed king of cell phones. Now its share of the smartphone market has plummeted from 49 percent, prior to the 2007 introduction of the iPhone, to 25 percent in the first quarter of 2011, according to Gartner Group (IT). It's still the largest maker of simpler, non-smart phones—it sells a million a day, many of them in China and India—but the company is already getting hurt by a throng of lower-cost Asian rivals. Sensing a giant on the ropes, recruiters from Intel and Google have set up shop in Helsinki hotel rooms, hoping to poach Nokia's top technologists. Thus far there haven't been mass defections, a testament to the value of national pride and extensive benefits. "Something is holding people there," says Benoit Schillings, a former Nokia executive who is now chief technology officer of mobile software maker Myriad Group. "These are extremely dedicated people, but there's a limit."
Each day, Nokia draws closer to that limit. While it delivered a surprisingly strong quarter ending Apr. 21, Elop announced dismal news on May 31: The company's sales and profits for the second quarter of 2011 will come in "substantially" below expectations, due to ferocious pricing pressure in Asia, Android, and mismanagement in China. The outlook is so dismal that Nokia disavowed its forecasts for the rest of the year.
If Elop had won any ground with Nokia's disillusioned investors since arriving, he lost it with this news. The stock plunged 19 percent, to $6.70, despite the fact that it was already selling at a 13-year low (shares fell 14 percent the day the Microsoft deal was announced). In the last four years, Nokia has shed 75 percent of its market value, leading to widespread speculation that it might be a takeover target. On June 1, a rumor started by a blogger had Microsoft buying the company for $19 billion. Elop calls the rumor "baseless." Asked if he had ever discussed an acquisition with Microsoft, he replies, simply, "Nope."
Amid the negative press and sudden rumors, Elop was, as usual, measured. "When you go through a transition like this," he says, "there are going to be bumps in the road." Investors, he notes, hate uncertainty, "and we've entered a period of uncertainty." "Bumps" and "uncertainty" understate it, but Elop insists he knew things would get worse before they got better. He remains committed, he says, to his process, and especially to the "management journey" he undertook to get Nokia back on track. From September 2010 through January, he shifted between 10-hour-a-day sessions with his team and more than 57 international trips to meet with phone carriers, suppliers, and others to craft a strategy they might support.
Despite his attempts to overcommunicate, however, Elop says his software deal with Microsoft was misconstrued as a Hail Mary to the receiver with the worst hands in the business. Microsoft had just 4 percent of the overall market prior to the Nokia deal. What Nokia didn't gain in market share, however, it hopes to gain in flexibility. The contract grants Nokia the right to stuff almost any innovation it can muster into its Windows Phones. Combine that with world-class hardware design and a strong distribution network, and, says Elop, "I'm as optimistic as ever." He adds: "I've got a working Windows Phone in my pocket now, and it's been less than three months since we began working with Microsoft. We're moving at a speed that's faster than Nokia has ever moved before."
Windows-based smartphones are the first stage of Elop's three-part comeback plan. One huge incentive for dumping Symbian was to cut the company's bloated costs. With an estimated $1.4 billion annual savings from discontinuing Symbian, he says he will invest more to protect and build Nokia's massive low-end phone business in emerging and yet-to-emerge nations in Asia and Africa, which brought in 33 percent of Nokia's sales in 2010. Reinvesting in emerging markets is Part Two. "If you live in the U.S., you can't really understand their power," says Paul Jacobs, CEO of chipmaker Qualcomm (QCOM), whose technology is used in all Windows Phones. "They're going to be a great partner."
Elop's third priority has been dubbed New Disruptions. It's a fully sanctioned skunkworks, with teams in Helsinki and Silicon Valley, staffed by top technical talent from the discontinued Symbian and MeeGo efforts, especially MeeGo. That initiative began when Nokia hired a crew of inventive open source evangelists in 2009 with orders to dream up entirely new devices. A few months later they were reassigned to develop a replacement for Symbian. The goal, as Elop told a group of engineers in Berlin on Feb. 29, is once again to "find that next big thing that blows away Apple, Android, and everything we're doing with Microsoft right now and makes it irrelevant—all of it. So go for it, without having to worry about saving Nokia's rear end in the next 12 months. I've taken off the handcuffs."
Recent history has hardened employees to the opportunities of a new era. "Under OPK, you could work on something for four years" before a decision was made to halt it, says Tuomas Artman, a former employee and Nokia contractor. OPK is Olli-Pekka Kallasvuo, the former CEO frequently accused by ex-Nokians of running a politicized, indecisive organization. Kallasvuo did not reply to a request for comment.
On his visit to Salo, Elop was shown a hi-fi speaker that encloses a phone, giving a richer sound. Another engineer handed him a phone and asked him to toss it into a tank of water. When the engineer dialed its number, the device, still submerged, rang. A nanoscale coating makes electronic parts water-resistant. "This kind of stuff has been sitting around people's desks, because it's too hard to get anything done around here," Elop says. "If we can get some of this to market—that's what gives me confidence."
Nokia's initial reaction to the iPhone is the most embarrassing example of what went wrong. When Steve Jobs unveiled the device in January 2007, "it was widely disregarded," says former manager Dave Grannan, who now runs Burlington (Mass.)-based voice recognition company Vlingo. "The attitude was that we'd tried touchscreens before, and people didn't like them." It had no multimedia messaging (MMS) capability. The reception and sound quality were poor. It couldn't be used with one hand. There was nothing to fear.
As iPhone sales took off, Nokia remained strangely detached, say a dozen current and former executives. The company didn't sit still, exactly. It opened its own app store, Ovi—but never put marketing muscle behind it. With no runaway hit like the iPhone, app developers largely ignored it. When Elop euthanized the Ovi brand name on May 16, it had 50,000 apps; Apple had 500,000. "It was an ignorant complacency, not an arrogant complacency," says Nokia human resources head Juha Akras.
Whichever variety, complacency was rampant, and it left Nokia particularly vulnerable to Android. While Apple cleaned up the high end of the market, Google flooded the low and middle by giving away its sophisticated software to all of Nokia's handset rivals. Nokia executives seemed content trumpeting their success selling marginally profitable low-end phones in Asia, until Android's smartphone share flew from 4 percent to 23 percent in 2010. Says Elop: "It's often hard to see a challenger when you're dominant, but what happened with Android was faster than anything we've ever seen."
Most of these problems could be traced back to Symbian. Never beloved by users, it became hopelessly buggy as Nokia tried to make the 10-year-old dog pull off iPhone-like tricks. Until last month, the company hadn't delivered a single new smartphone on time or without major software glitches since 2009, in part because of delays as scores of different hardware teams lobbied to get their pet capability—a new camera, say—built into Symbian. And while Apple and Google focus on making one operating system to power a wide variety of devices, software at Nokia had been seen as just one more "component" to enable hardware teams to craft their latest models. "The terminology shows the mindset," says Mark Wilcox, a former Nokia engineer. "The focus was on the phone, because Nokia had this amazing factory that could crank out 100 million units a year if you got a hit." And while Apple and Google have created software tools that help outside developers to easily create apps, Nokia's equivalent tools gave developers fits. "Developing for Symbian," says Artman, the former Nokian, "could make you want to slice your wrists."
Software expertise was the main reason Stephen Elop made the list of candidates to become CEO of Nokia. According to Chairman Jorma Ollila, the board initially was leaning toward replacing OPK, a lawyer by training, with an internal candidate. By spring 2010, though, Symbian had been identified as the principal cause of Nokia's woes. "We needed some awesome, strong leadership" from the outside, says Ollila.
Over breakfast at a Redmond hotel last June, Ollila was quickly impressed with Elop's experience and biography. As head of Microsoft's $19 billion Office business, Elop had run one of the world's largest, most profitable software units. That included the successful launch of the latest version of its flagship Office suite, which was the first to include free scaled-down, Web-only versions of programs such as Word and PowerPoint. Elop developed a reputation for embracing challenges and resolving internal conflicts. While attending Canada's McMaster University, he graduated second in his class, also finding time to help lay 22 kilometers of Ethernet cable around campus to create one of the first Internet networks in the country. He worked so many hours that he would roll down the windows on the way home and sing the national anthem to keep from falling asleep at the wheel.
After a six-year stint as CIO of Boston Chicken from 1992 to 1998, Elop became CEO of Internet company Macromedia and brokered its $3.4 billion acquisition by Adobe (ADBE) in 2005. He then joined router maker Juniper Networks (JNPR) as chief operating officer, buoyed by assurances that he would soon replace CEO Scott Kriens. Days before he was to be named CEO (the press release had already been written), Steve Ballmer called to recruit him to Microsoft. Elop's choice to accept and leave Juniper in the lurch was "the hardest decision I've ever had to make." By comparison, joining Nokia, Elop says, was simple, despite the move to Helsinki and time away from his wife and five kids, including triplets, who live outside Seattle.
Having run a well-oiled machine, he hungered for a turnaround. He says he even demurred when Hewlett-Packard (HPQ) sent out feelers about replacing Mark Hurd in mid-2010. "He jumped head over heels for the Nokia job because he can help create one of the most important companies in the world," says Steve Miles, a CEO coach with the headhunter firm Heidrick & Struggles (HSII) who has worked with Elop for years. "And he's willing to go into the smelly end of the trench to do it."
On Sept. 21, his first day, Elop sent an e-mail to every employee asking what they thought he should change, what should be left alone, and what they feared he wouldn't understand. There were more than 2,000 responses, mostly about accountability. (One of Elop's favorites: "At Nokia, everybody and nobody is accountable for nothing.") Elop personally responded to each one, and word got around that the new boss was serious about addressing their concerns.
He was not all sunshine, though. In one of his first meetings with employees, Elop recalls, he complained that there were different keystrokes required to mark an e-mail unread on the various Nokia phones he used. When an engineer in the crowd stood up and said Elop was wrong, the CEO invited him on stage to prove it. After some tapping, the engineer sheepishly backed off. "You're right," he admitted.
Three weeks after arriving, Elop launched a sweeping review of the company, code-named Sea Eagle. Day after day the executives would self-flagellate and sigh deeply. "Stephen forced us to look in the mirror and to really be real about what had happened," says human resources head Akras. Visitors to Finland are often warned to expect long silences, as people think through what they want to say, or if they want to say anything at all. This, at least, Elop has solved. "If you don't raise your hand, he'll say 'Hey, you didn't say anything,' " says Chief Financial Officer Timo Ihamuotila. Mary McDowell, a former Compaq executive who runs the low-end phone business, adds: "I've heard my colleagues speak more in the last four months than in the last 10 years."
From the start of his tenure, Elop hedged Nokia's bets on Symbian in case it proved unfixable. When technology analyst Tim O'Reilly offered to broker a meeting with Google's Eric Schmidt, Elop flew to Silicon Valley to let him know Nokia might have big decisions to make. Ballmer agreed to preliminary talks, too. In November, Elop and three lieutenants waited for a limo at the Bellevue Hotel near Microsoft headquarters when a super-extended prom-mobile showed up instead of a taxi. "I wanted to get out and walk the last block," says Elop.
If it was odd asking for a visitor badge at the same building he'd recently worked in, the déjà vu would only get more intense. Two years before, Elop led negotiations with Nokia over many of the same topics, but from the Microsoft side. Back then, Microsoft was trying to get Nokia to make a line of phones using Windows Mobile, and in return would make a version of Office to run on Symbian devices. Nokia wanted more; it asked Microsoft to use its Navteq mapping service and share revenues on ads that would appear with the maps. Unable to get the larger deal, the companies announced one to get Office onto some of Nokia's Symbian models.
In a small conference room, Elop and three colleagues met with Ballmer, Internet services chief Qi Lu, mobile unit president Andy Lees, and head of Windows Phone engineering Terry Myerson. After some ribbing about being back at Microsoft, Elop stated the case simply: Nokia would either decide to stay with its own software or partner with Android or Microsoft, but it wouldn't delay. "I'm going to announce the decision at the analyst meeting in early February," he said. Sticking with MeeGo would avoid the need for a massive strategic and cultural shock, but going with the best offer could help Nokia's bottom line and gain it a fresh start in smartphones. "It was classic Stephen," says Myerson, who worked for Elop at Microsoft. "His superpower isn't his great intuitive judgment. It's his amazing ability to create a transparent, fast process that reasonable people can feel good about."
In Finland, unbeknownst to Microsoft, Nokia's bargaining power was diminishing. On Jan. 3, Chief Development Officer Kai Oistämö walked over to his boss's tiny cubicle to share his concerns about the MeeGo software that was supposed to be Nokia's answer to Apple and Android. The pair decided to quietly interview two dozen influential employees about MeeGo, from executives to rank-and-file engineers.
Before the first interview, Elop drew out what he knew about the plans for MeeGo on a whiteboard, with a different color marker for the products being developed, their target date for introduction, and the current levels of bugs in each product. Soon the whiteboard was filled with color, and the news was not good: At its current pace, Nokia was on track to introduce only three MeeGo-driven models before 2014—far too slow to keep the company in the game. Elop tried to call Oistämö, but his phone battery was dead. "He must have been trying an Android phone that day," says Elop. When they finally spoke late on Jan. 4, "It was truly an oh-s--t moment—and really, really painful to realize where we were," says Oistämö. Months later, Oistämö still struggles to hold back tears. "MeeGo had been the collective hope of the company," he says, "and we'd come to the conclusion that the emperor had no clothes. It's not a nice thing."
Without an internal platform to stand on, Elop would need to choose between Android and Microsoft. (Apple and Research in Motion (RIMM) make their own hardware and software and were out of the question.) Wall Street was expecting to hear his plan to save Nokia at an event for stock analysts in London on Feb. 11.
The obvious choice would have been to jump on the Android bandwagon. Attracted by Google's free software, every other major smartphone maker except Apple and RIM had already done so, and almost every large carrier was supporting Android as the only genuine Apple alternative. But Google was riding so high that it essentially refused to negotiate, offering no concessions to Nokia despite its global presence. Elop later told the Salo employees that Google "acted like they'd already won. Apple and Android deserve some real competition."
That left Microsoft. Its Windows Phone 7 software is well regarded by technorati ("It's new, it's fresh, it stands out," says Gartner Group analyst Roberta Cozza), but very few people are buying Windows 7 Phones. Elop was certain, too, that he'd be accused of being a double agent for his former company.
With the clock ticking on the London analyst meeting, talks with Microsoft went into high gear. On Jan. 10, Oistämö and a few colleagues spent the morning negotiating in a windowless room in the basement of a London hotel. To that point, Microsoft had forced handset makers to obey strict rules about how they could customize Windows Phone 7, and they wanted the same from Nokia. Not only did Nokia respond that it wanted the right to innovate freely, it asked Microsoft to commit to using Nokia technology as a foundation of the Windows Phone platform, particularly its detailed Navteq maps database. Believing that Microsoft could not afford to let the largest phonemaker in the world throw its weight behind Android, Oistämö also asked for a large payment.
The sides reconvened that night for Indian food, and the deal was done in principle by dessert. "We got a deal that was completely different from anything they'd ever done before, and it's because we promised to do our best work for Windows Mobile 7," says Elop. He won't spell out financial terms but says there's a net benefit in the billions. Asked if the payment amounts to a high-tech shakedown, he smiles widely. "We call them marketing funds."
On Feb. 3, Elop gave employees as big a hint as he could of the announcement to come, without breaking disclosure laws. Standing in the wood-and-glass atrium at Nokia's headquarters in the Helsinki suburb of Espoo, hundreds of employees lined each of the eight floors to listen as Elop compared Nokia to a worker on a burning oil platform. He said the only choice for the worker was to do what would otherwise be unthinkable: leap into the frigid North Atlantic. In the story, the worker survived, but Elop warned: "Nokia, your platform is burning."
Ten days after confirming Nokia's epic fail, Stephen Elop is out selling the deal to employees. His first stop is the research and development facility in Tampere, the town that houses most of the MeeGo engineers—many of whom left early as a sign of protest on the day the Microsoft deal was announced. After apologizing for the effect layoffs will have on many—Nokia announced on Apr. 28 that it would lay off 4,000 people by the end of 2012 and transfer 3,000 to Accenture (ACN), which will handle Symbian updates for existing models—Elop implores the attendees to wait before meeting with recruiters from Apple or Google. "Who wants to help build the iconic Windows Phone? Who wants to contribute to the next big disruption? Are you in or are you not? I need to hear from you."
Given Nokia's troubles this quarter, many analysts expect its woes to get much worse in the near term. Sales of Symbian phones are falling faster than expected, but it will take more than a year to bring out a full line of Windows-based phones to compensate. Gleacher & Co. (GLCH) analyst Stephen Patel expects Nokia's smartphone share, at 27 percent now, to hit 14 percent in 2012. That assumes the Microsoft partnership doesn't turn into a disaster, as tech partnerships sometimes do. "The road ahead is going to be very challenging," says Patel, who predicts Nokia will be smaller and less profitable.
Yet the view inside tech circles on Elop's big call has improved as the shock wears off. Carriers unhappy at choosing between being pushed around by Apple or Google are quietly pulling for Nokia. The Gartner Group even believes Windows Phones will hit 19.5 percent market share in 2015—ahead of Apple.
Elop denies that Nokia's Windows-based phones set the stage for selling the company to Microsoft outright. Nokia's mass-market phones—80 percent of its total units sold—are not a good strategic fit for Microsoft, he explains, and neither company has the time to waste on a lengthy acquisitions and antitrust review process. "The way to think about this is that Nokia's business extends way beyond the smartphone business that is the basis of our relationship," Elop says. On a late-night Mar. 1 flight to Berlin, he was even more blunt. "Acquisition was never a topic of conversation" between him and Ballmer, he said. The partnership the two had entered into, he added, "is a lot easier than an acquisition." Then he took a bite of an after-dinner chocolate.
To convince Nokia's own employees that a comeback is quietly under way, he is not above quoting Sun Tzu's Art of War. One of its guiding principles, he notes, is " 'first, you must believe in yourself.' That's a message we have embraced." Does he ever doubt his choice in coming to such a challenged company? "I'm right where I should be," he says. "And I'm going to lead this company through this."