Business, Hardware

What Now? Microsoft Throws Nokia Under the Bus



In the last two weeks we’ve heard a lot of disastrous news for Nokia. I reported on ‘what we now know‘ after the Nokia latest profit warning (and Nokia share price fell a Nokia-record 18% in one day). As I was preparing to do an update of the forecast for Nokia’s smartphone performance based on that announcement, there came news of the Microsoft tablet – and more bad news, the second bombshell relating to Nokia: none of the current smartphones running Windows Phone 7 will be able to be upgraded to Windows 8. Nokia dropped another 11%.

What does all this mean? First, that this April-June Quarter, Q3, is, as Nokia already warned us, going to be bad news in terms of Nokia smartphones, both Lumia and Symbian based. What with the N9 project with MeeGo being closed down, some countries (such as Finland and Sweden) have already stopped selling the N9 even though it is highly regarded, popular and profitable. The Symbian based award-winning 808 PureView is, for some bizarre reason, not currently being sold everywhere, even where Nokia is desperate for premium Nokia smartphone sales and profits – like in the traditionally Nokia strong smartphone market of Australia. When I made my forecast of Nokia market shares, revenues and profits for the year 2012, I expected the CEO to engage in smart, sensible behavior and try to sell as widely as possible. Now, we learn, from the profit warning two weeks ago, that Elop’s ‘solution’ is to increase sales by shrinking sales efforts. Nokia will not continue its global sales but rather, now focus only on selected key markets. This is exactly how Siemens, Motorola, and Palm died in mobile phones. Exactly the same pattern. When your sales stumbles, you start to cut your sales effort. I am reminded of the quote by Paul Harvey: "Marketing executives who stop advertising to save money are like people who stop the clock to save time."

We knew Q1 was bad. We expected Q2 to be worse. We hear now, that Q2 is even worse than we thought from the Nokia profit warning announcement. Then we get the bombshell about Windows 8. And now, on top of all else, we find that the total Lumia line has been Osborned, not by Elop, but by Ballmer.


This time it was not Nokia CEO, Stephen Elop, who ‘Osborned’ the Nokia smartphone line as he did with the Elop Effect last year. This is something Steve Ballmer specializes in, the serial Osborning of Windows based smartphones. He did it with Windows Mobile by announcing no upgrade path to Windows Phone. At its peak, just before the iPhone, Microsoft had a bevy of Windows Mobile smartphone manufacturing partners – including 8 of the Top 10 biggest smartphone makers, Samsung, LG, SonyEricsson, Motorola, HTC, Palm, Dell and Fujitsu. Microsoft had 12% global market share in smartphones, but when Ballmer decided to cut the migration path, the partners started to depart and the share diminish. By the time Windows Phone launched in 2010, Windows Mobile share was down to 3%. And even after Nokia was brought in, today the combined market share of Windows Mobile and Windows Phone is down to 2% globally. Now, Ballmer says there won’t be a migration path for Windows 8 either. Your existing WP7 based smartphone is an expensive paperweight: you have to buy a new smartphone to enjoy Windows 8 – the Microsoft handset partners team has shrunk to four: Nokia, HTC, Samsung and Huawei. Three of them – Samsung, HTC and Huawei do the majority of their smartphones on Android. And Samsung has not just one, but two of its own smartphone OS platforms as well – bada already in production and Tizen coming out later this year (with four handset manufacturers already confirmed).

So the pipe-dream of the ‘third ecosystem’ is fully busted now. Microsoft’s smartphone ‘play’ that once was the second largest OS in the world, is now ranked 6th and sells only 2% of all new smartphones (with share still falling). That was before the current line of all Windows Phone based smartphones by all makers became instantly obsolete this past week. If I was the CEO of any of those companies, I would have learned my lesson by now, and never put most of my eggs in the Microsoft basket. In fact, like Samsung, if I was a Microsoft partner, I would be frantically building my own OS to replace Microsoft. And if I was Nokia with not one, not two, but three smartphone OS platforms – Symbian, MeeGo and nearly-completed Meltemi – I would certainly keep those well in production to be sure I would not be damaged by the whims of the Ballmer. BUT WIN 8 IS GREAT

So you liked the Microsoft PR show about Windows 8? It?s a great OS that will make great phones and tablets and be an ecosystem with great features and apps? This is a completely and comprehensively irrelevant point. In the PC market, in the videogaming market, in the music player market, it matters how good or bad your device is. It does NOT matter in the mobile phones market. Look at the picture below. Which of these lines is Nokia running the ‘obsolete’ Symbian?

TomiAhonen Consulting based on Company Data. This image may be freely shared
This image may be freely shared

The one that represents Nokia – with the ‘obsolete’ Symbian – is the top line (in blue). Nokia was selling more than the iPhone and all Samsung smartphones combined. Nokia was not declining – when everyone, including me the perennial Nokia optimist, admitted that iPhones and Samsung Galaxies were better smartphones than Symbian based Nokias. The reason Nokia was able to do this was not that it made ‘the best smartphone? but the carrier relationships.

Why did Palm die? It had a superb phone, the second best-rated smartphone this side of the iPhone. Palm died because it didn’t have the right carrier relationships. Why did Microsoft’s Kin phones die in only 6 weeks – a world record? Because the originally committed carriers suddenly refused to offer it. In the mobile handset market, it is the carriers who decide. Not who has the biggest ‘ecosystem’ or the most apps, best phone or best user interface. If the best phone wins, Apple would not have suddenly doubled USA sales when Verizon came onboard. In mobile, the deciding factor is carrier relations, nothing else. Look at that picture again. Nokia lead over Apple’s iPhone had grown – not shrunk – in the two year period. Does that make any sense? I know it doesn’t, to those who live in the USA and see only the US market where Nokia was tiny. But Nokia held 77% market share in China – the world’s biggest smartphone market where Apple had a pittance and Windows didn’t register on the charts. Nokia (with Symbian) was easily the biggest smartphone maker of India, Africa, Latin America etc.

(The dotted lin
e is when Elop was hired to join Nokia and here is the second part of that slide, showing what I originally used it for, to explain the madness of the Elop Microsoft strategy:)
TomiAhonen Consulting based on Company Data. This image may be freely shared
This image may be freely shared


I have reported in this analysis that the Elop Effect resulted in the ‘Osborning’ of Nokia smartphones and also that the Burning Platforms memo destroyed resale confidence in the Nokia handset portfolio. The sales collapsed (as we can see from the above picture, strong sustained growth reverses immediately into steep decline right after the Elop Effect). I said the stores would reject selling Nokia smartphones, a hotly contested point. Since then, Nokia has repeatedly complained that its the retail channel that is the problem. Elop said so at the Shareholders Meeting. He said so again with the latest profit warning when explaining that the Lumia line is a good phone but retail stores do not support the phone sales. I call this a sales boycott. I explained why it happens. It has been confirmed by Nokia’s own CEO, there is a worldwide retail sales problem, where sales retail is reluctant to sell Nokia handsets. That is what I call the First Boycott. It started first, in February of 2011, with the Elop Effect. Even Elop himself admits it openly to the Nokia shareholders meeting and admits his Burning Platforms memo did hurt Nokia smartphone sales. And looking at that graph, you see how badly it?s damaged mostly Symbian based Nokia sales since February of last year.

One, this sales retail problem is real, it was caused by Elop and he admits it. And two, the problem is systematic. Therefore, three, it cannot be fixed by cosmetic measures like a new phone handset or an update to the software or some nice apps in the app store. The problem is systematically against Nokia. Note, it does not hit other Windows based manufacturers, but it obviously hits hard at Nokia’s Symbian based smartphone sales and even Nokia’s featurephones. SECOND BOYCOTT CAUSED BY SKYPE

Then there is the second boycott. I reported on this blog that the carriers have revolted against Microsoft after it bought Skype one year ago, and carriers put all Windows based smartphones into sales boycott. That has since been independently verified by various US based news outlets from California to Boston to New York City. We got a final confirmation from Nokia CEO Stephen Elop, who admitted to the Nokia Shareholders Meeting that carriers don’t like Skype ‘of course’ and that some carriers have taken the step to even refuse to sell any Windows Phone based smartphones, explicitly because Microsoft owns Skype. He even explains to Nokia shareholders the revenue loss logic behind that reasoning, and is so well known, Elop uses the words ‘of course’. Read the full Elop quote and see the video.

And this was not just hitting Nokia Lumia smartphone sales, it was hitting all brands of smartphones running Windows. Elop explained further that for more than a year, Microsoft had tried to negotiate with the carriers to get some resolution about the Skype issue – with kind threats like ‘Skype will come in any case’ (unhelpful) and that after a year of such ‘persuasion’ there were exactly zero carriers who had taken Microsoft’s offer.

Understand, this isn?t about which smartphone has or doesn’t have Skype on it (we’ve had Skype on many smartphones for years) and the current Lumia line doesn’t come with Skype on it. This is about Microsoft now owning the hated Skype and being able to bankroll the biggest threat to the existence of mobile operators/carriers. I have explained why carriers hate Skype – and why Microsoft ownership of Skype is the issue, not whether some smartphone has it or not.

So this Second Boycott is not about Nokia, it is aimed at Microsoft. However, any manufacturer who makes Windows phones will be hurt by it, including Nokia obviously. Elop openly admits this problem to Nokia shareholders. The same was echoed by Dell when they said they are quitting Windows and also by HTC with explaining why they were shifting from Windows Phone to Android. LG and SonyEricsson had echoed similar themes a to why they were shifting away from Windows – who wants to make phones that the stores refuse to sell? They happily sell Android.

Because of the Anti-Microsoft boycott, the Windows Phone partnership has seen LG, SonyEricsson and Dell quit Windows Phone totally (in favor of Android) and HTC and Samsung reduce their Windows offering in favor of more Android. Before the Anti-Microsoft boycott, Microsoft’s combined Windows market share of Windows Mobile and Windows Phone was 3%. That collapsed to under 1% by the time Nokia’s first Lumia phones launched. And again, this is not my conjecture, this was verified by Nokia CEO talking to the Nokia shareholders saying the carriers hate Skype and because of Microsoft?s owning Skype, are now reluctant to sell Windows based smartphones. This was before Skype was integrated into the Windows smartphones.

The anti-Microsoft boycott, boycott number 2, is real. This is a systematic problem with Windows and Microsoft. It cannot be fixed with a new operating system or some pretty new tiles on
new phones. This problem is real today, and it will only get worse with Windows 8, when Skype is fully integrated to the PC, tablets (and smartphones). I am not saying there won?t be sales of Windows 8 based smartphones – but am saying that since there is already a crippling sales boycott in place after one year of Microsoft ‘negotiations’ (aka threats and bullying), this problem will be far worse in Windows 8.


Now we get the Windows 8 news. No upgrade for any current Windows Phone based smartphones by any manufacturer to Windows 8. The total Nokia Lumia line is instantly Osborned, this time, by Ballmer. Anyone who bought a Lumia will seem a fool to knowledgeable friends. The carriers who sold Lumia (and Samsung, HTC and other Windows Phone handsets) will be blamed for selling an obsolete product – there will be record returns and complaints, especially from those who are on two year contracts. Those customers will demand to be released from those contracts.

This means that the current stock of all four Lumia phones is instantly undesirable. What we thought when Nokia profitability and average prices were falling, will be far worse. Now these obsolete phones have to be sold for pennies on the dollar. The carriers will demand to return their existing stock and refuse to accept delivery of placed orders. The mere transport costs of handling the returns will add massively to Nokia’s costs, now, in late Q2, and into Q3. This means further big losses beyond the profit warning.

Any carrier/operator or handset retailer who has Nokia Lumia in stock, will try to return it to Nokia. If not, they will sell it at huge discounts. That means that in all markets where Lumia is sold, the prices collapse. That hurts all Nokia brand sales, including Symbian and MeeGo based smartphones and including featurephones. Who is willing to pay 100 dollars for a mid-priced Nokia branded featurephone/cameraphone if there is a brand new Nokia Lumia for 25 dollars in the basket in the same store, on fire sale. All Nokia prices are now collapsing in all markets where Lumia had launched – bearing in mind that a collapsing Lumia price in your competitor store, will hurt your sales even if you do not offer Lumia yourself.

Any carrier or operator or retailer who had signed up to Lumia but hasn’t yet started its sales, will immediately stop and refuse delivery. The biggest carriers/operators will try to muscle all kinds of concessions and refunds from Nokia further damaging Nokia’s profitability.

Am I imagining things? No. This is the immediate response from T-Mobile (as per TamsPPC): Because there is no upgrade to Windows 8, while T-Mobile had originally committed to sell the Lumia 900 in Germany and even advertised it already, it will not do so. No Lumia 900 to be sold by T-Mo in Germany. Note, T-Mobile is Germany’s biggest operator/carrier and Germany is the headquarters for the T-Mobile group, one of the world’s 20 largest mobile carrier/operator groups. If this is what T-Mo does and announces in public, you can bet it ain’t the only one.


And now, we see Stephen Elop and his ‘management style’. What did Motorola or LG do when Windows Mobile sales tanked? What did HTC and Samsung do when Windows Phone did not sell well? What did Dell and Sony do when they noticed Windows Phone had a carrier boycott? All of these smartphone makers had an alternative, in every case at least Android. All of them – of course – shifted away from the platform that was having problems in retail, and shifted to the platform(s) that didn’t have a problem.

And Elop has three smartphone options. He can right now sell tons of smartphones on Symbian – like China Mobile, the world’s largest mobile operator/carrier (that is, about seven times AT&T). They said no to Lumia, they have the equivalent to the Lumia 800, as the Nokia 801T, which runs on Symbian – and has a 4 inch touch screen, 8 mp camera, WiFi, 3G, NFC (and TV tuner). If your customers don’t want the 800 Lumia, give them the 801T. Or the 808 PureView, running Symbian.

And not just that, what of MeeGo? It isn?t obsolete and Osborned by Microsoft. The smart CEO would immediately react to the Microsoft announcement by recommitting to MeeGo – the most loved OS ever made by Nokia. The N9 running MeeGo is the only smartphone ever made by Nokia that has consistently been rated as good as or better than the iPhone. The N9 won the D&AD Award for Design beating not just the Lumias, but the iPad 2. Who wins a design award ahead of Apple? And what dimwitted CEO doesn’t celebrate this award by flooding the world market with this superb device?

And what about its sister smartphone, the N950, also running MeeGo, also not Osborned? Why not launch the N950 now, while there is still interest in the MeeGo OS, and, as a gimmick, promise to bring Android compatibility to MeeGo (they are both running the same Linux base) so most Android apps will be compatible with these two MeeGo devices? If the Nokia CEO was really concerned about Nokia’s best interests, that is what he’d do now, when Microsoft is pulling the rug out from underneath the Windows Phone platform.

Any sensible CEO over at Sony or LG or Samsung or HTC or Dell would have no qualms about doing that. In fact they have all done that. Why is Elop afraid? Because he is beholden to Microsoft, he was never honestly pursuing Nokia’s best interest after all.

And that third option for Nokia is Meltemi. Elop just announced that he is firing the Meltemi staff. He hasn’t done it yet, only announced. This Microsoft bombshell now destroys pretty much all of Nokia’s plans to expand Lumia to low-cost smartphone markets and poisons carrier relationships – and there is still time to reverse the decision to fire the Meltemi staff – the Meltemi OS is nearly finished! Why not finish it now, rush those low-cost smartphones to the market (use the Lumia 610 model, for example, but issue it with the new Meltemi software) and Nokia would have a low-cost OS option where Windows 8 is not fit. There is still time. Any sensible CEO would do that, once being burned by Microsoft.

At this stage, if the retail channel refuses to sell the smartphones running Windows, then it?s time to say thanks and switch. For RIM it would be a long and costly shift away from the Blackberry OS, because there is nothing else. If they wanted to switch, say to Android, it would take 18 months. But at Nokia they have two alternate OS platforms currently in production! Why not sell those phones now, everywhere? And as Windows is clearly a pointless platform, end that development path. Who cares what the costs of breaking that deal is? Clearly, Microsoft doesn’t care one bit about its ‘strategic partner’ Nokia’s interests. Let them sue you, pay back the 750 million dollars of marketing support and escape the dead end of the Windows path. As I wrote previously, the Windows path is a Certain Road to Death. That was before this deliberate Osborning of the Lumia line by Microsoft. SO WHAT HAPPENS

I was the most accurate forecaster of how badly the Elop Effect would damage Nokia sales last year. I hit the end-of-year market share and this Q1 market share within one percentage point. Since then, I also gave my forecast for 2012’s Nokia market shares by quarter. That has now again been destroyed, so I will have to revise (and thus downgrade) my forecasts for 2012. But yes, I predicted Nokia would end in Q4 of 2012 with 3% market share in smartphones (it was 33% when Elop took over less than two years ago). Now that number will need to be downgraded. I will return with those numbers as soon as I have them.

If you thought you knew how bad Nokia would be this year – with globally collapsing sales, two reseller boycotts, one directly hitting Nokia due to the Elop Effect, and the other aimed at Microsoft but hitting Nokia’s new Windows and Lumia strategy – and that together pushed Nokia’s smartphone unit from strong profits to big losses last year, and bigger losses now – that all got worse. Now there are THREE boycotts hitting Nokia: one on all things Nokia (due to Burning Platforms and Elop Effect). One due to Microsoft?s buying of Skype. And now, the third, courtesy of Ballmer’s Osborning of the Lumia line with no upgrade to Windows 8.

Nokia smartphone market share was collapsing. The speed of collapse is increasing. Nokia’s handset unit is generating a loss. Those losses will now get bigger. Nokia’s market share was in freefall in smartphones and dumbphones. That was before Elop’s emergency measures of ‘increasing sales by reducing sales’ and means Nokia’s market shares will shrink even faster. The Nokia brand is badly burned by the past year, and this latest Lumia upgrade disaster burns Nokia’s brand even more, causing even more of traditionally loyal Nokia carrier partners to bail.

The Lumia line is now dead and cannot be resurrected. Even if Nokia were to try to reuse the Lumia line with Windows 8, it would be badly damaged branding, and Nokia is better off creating a totally new brand. The most expensive handset launch of all time has been a total fiasco, mismanaged from day one by incompetent CEO Stephen Elop. The Lumia handsets will be laughingstocks and sit in discount bins in stores, polluting the Nokia brand.

I can see why there are rumors of Microsoft branded smartphones, following the Microsoft tablet. These rumors further support the idea that Microsoft itself sees the Nokia project as having failed. Which somewhat intelligent CEO of any carrier or operator will ever trust Stephen Elop, or Microsoft, or Steve Ballmer ever again? Why would they ever allow Windows Phone based smartphones to jeopardize their customer relationships? Especially when there is a highly desirable Android alternative, and the iPhone, and soon, this autumn, the Tizen OS from Intel and Samsung, with already four handset suppliers committed to it. The Windows dream of smartphones is now dying and money thrown by Nokia into this bottomless pit is money wasted.

We should have learned from the past disasters of ‘partnering’ with Microsoft in mobile, like Sendo, Motorola, Palm, Nortel, LG etc. Yes, Nokia is a dead man walking.

I did not think the bad news for Nokia could get any worse, but again, last week, it did.

About the Author
Tomi T Ahonen is a nine-time bestselling author of hardcover telecoms/tech books who has also released a series of multiple eBooks starting in 2009. An independent consultant and motivational speaker in the converging areas of mobile telecoms, internet, media, advertising, credit and banking, social networking and virtual reality, Tomi is based in Hong Kong. Mr Ahonen is credited as the father of several of the industry’s most used theories, tools and concepts, and a founding member of several industry groups. Tomi Ahonen has been quoted in over 300 press articles starting with the Wall Street Journal, Financial Times, Business Week, Economist, etc and is regularly seen on TV; he writes several columns and articles to industry press every year. He blogs daily, twitters, and has profiles on Facebook and LinkedIn.