Star-crossed partners

Until very recently, we believed our competitive position in smartphones could be improved with Symbian, as well as MeeGo, and our strategy based on those platforms. We are now of the view, however, that for the longer term our Symbian platform is not sufficiently competitive in leading markets.

Nokia’s SEC Form 20F.

The company’s fiscal year, which ended in June, was one of the worst to date for the mobile space. Although in development since 2008, the Kin was pulled after just over six weeks of sales and amounted to a $240 million write-off before including the $500 million to buy Danger. Windows Mobile’s ramp down is partly intentional as Microsoft is rebooting the platform with Windows Phone 7 and is investing $500 million in marketing to spark new interest.

Microsoft CEO bonus cut for Kin flop, lack of iPad rival | Electronista

One irony is inescapable: the world’s largest device company can’t build commercially successful software and the world’s largest software company can’t built commercially successful devices.

Another irony is that the competitive threats that both companies face came from challengers that were not perceived as such a few years ago.

Google was not a platform vendor three years ago and Apple was not a phone vendor four years ago.

The largest incumbents in separate industries sought salvation in each other after the market they strove to build went to unforeseen challengers. All in a span of three years.

I cannot think of a more succinct testament to the process of disruption.

One can only speculate about the probability of success of this pairing, however, I struggle to find a historic precedent where this type of relationship succeeded.

  • One irony is inescapable: the world’s largest device company can’t build commercially successful software and the world’s largest software company can’t built commercially successful devices.

    epic description of the reality these two giants face.

  • eyez00

    Can we find historical comparisons in the auto industries? Did motor vehicle makers, who started the market pre-Ford (say) get swept away by distruptive new competion or did they have time to adapt and re-organize their manufacturing process(es) from coach/bicycle builders?

    What about other consumer electronics? TV makers? They seemed to have changed dramatically 1950s – 1970s. Were existing market leaders able to merge successfully to beat off Japanese entrants to the market?

  • JDT

    "…world’s largest software company can’t built commercially successful devices." They seem to have finally created one with the Kinect, although I question it's sustainability.

    • dms

      The Kinect is a success, for sure, but it's not a stand-alone device. It adds more functionality to the XBox console.

    • CndnRschr

      The big deal that Microsoft is making over the Kinect is a reflection of how dire their overall product roadmap is. I wonder if Kinect profits actually cancel out the Kin/Danger flops.

    • chano

      They bought it. They did not invent it.

      • so what? Apple bought Fingerworks for that matter, it's quite the same thing

    • Fake Tim Cook

      The Kinect will be a nice accessory to the AppleTV Extreme.

    • Hamranhansenhansen

      Kinect is just an accessory to an existing product with a large user base. It’s a joystick. It doesn’t make up for Kin.

  • The closest example from the industrial era is Daimler Benz and Chrysler in the auto sector. It is easy to see the logic of joining forces with friends. Familiarity and continuity of status quo is more pervasive than managers admit. Academic research has long established that companies are more comfortable dealing with exploration closer to the core (in terms of knowledge and skills) than explore in unfamiliar areas. In this case, Nokia's CEO has done what he is familiar. Microsoft has given him a $1 billion carrot to do the deal. The real question is if the ecosystem will be a credible #3 or even #4 in the end? Or will we see this disappearing right in front of our eyes in the very near future?

  • One could argue that the Wintel duopoly is still strong these days. However, the mobile space is very different with lower barriers to entry; the hardware components are more easily sourced and there are many alternatives. Apple and Google have done a lot of the hard work of creating the software, but at the same time extracted the most value out of the ecosystem, though in different ways.

    • CndnRschr

      Wintel as a duopoly is slowly dying. Intel is looking further afield than Microsoft. I don't blame them. Meanwhile Microsoft is porting Windows to run on ARM silicon as they've finally realised that waiting for Intel to release a tablet-class processor that can handle the overhead of Windows is futile. Even with its A4/5 sourcing to others, Apple has become a very important partner to Intel. They buy their higher end processors and its no coincidence that the latest Sandy Bridge (not faulty) processors were in the MacBook Pros first. The volumes may be lower, but the profit margins are higher when selling to Apple. PC makers also offer these higher performance cpus, but the majority of their sales are of low-end cpus.

    • asymco

      One could also argue that the Wintel duopoly is not so strong these days:

    • Hamranhansenhansen

      No, Wintel is not strong. OS X was ported to Intel in 2005 and then Apple took almost all the high-end Intel away from Windows. OS X was ported to ARM in 2007 and took the Web off Intel onto ARM as well, and now iPad is replacing low-end Intel systems. Most of all, ARM chips and their licensing model are replacing Intel chips and their licensing model. Look at Apple TV going from Intel to ARM between first and second generation. Windows (NT, the real Windows) is being ported to ARM right now because Intel tablets have not sold. Even on servers, multiple ARM cores do more with less power and cooling.

      Wintel depended on the idea that there was nothing else. The Intel Mac and ARM iPhone and iPad demonstrated that there is something else.

    • Steven

      Nope, Jason, Wintel is probably as weak as it’s ever been. You must remember, the Wintel "duopoly" is not just Microsoft and Intel – it includes, and is dependent upon, the OEM's. The cracks have been forming for some time, starting with OEM adoption of AMD processors. However, it's my contention that the cracks became crevasses during Microsoft's "Laptop Hunters" campaign. Microsoft spent 3 billion dollars marginalizing its OEM partners, painting their products as cheap alternatives to the Mac. If PC's weren't viewed as commodity products before then, "Laptop Hunters" certainly pushed them over the edge.

      Since then, OEM's have been looking for whatever ways they could possibly wean themselves from the Windows teat, as it were, beginning with Linux on netbooks. Just when Microsoft managed to lasso that calf, HP decides to go with webOS. How many times has Ballmer gone onstage with a product that never made it to market? Whereas OEM's would have never dared embarrass Bill Gates in such a manner, they have no qualms about snatching the rug from under Ballmer.

  • CndnRschr

    Two wrongs don't make a right. Double-downing on failed strategies is hardly a winning strategy. This is like two drowning men trying to hold each other above the surface.

  • BobShaw

    It is a wise thing to partner and obtain the needed competencies from outside rather than continue to burn large sums of money on in-house R&D to develop them. Also It takes a lot of courage for a company to admit that its platform is burning and would seek help from outside to rescue the situation. Nokia is no average company. It has a history of reinventing itself and the probability is very high that it should be able to pull off this partnership with Microsoft successfully.

    Regarding Apple, if Apple would have partnered with hardware vendors rather than trying to do everything in-house it would have been Apple rather than Microsoft controlling 95% of the PC market. Worse those strategic missteps by Apple almost pushed the company to bankruptcy in 1997-98 and had to be rescued by none other than Microsoft.

    • kevin

      Apple clearly made many strategic missteps between 1985 and 1997 but partnering with multiple hardware vendors was likely not one of them. No other OS from that period succeeded by partnering with multiple hardware vendors.

      Refuse to accept the conventional wisdom, take the blinders off, and look more deeply, and you'll see the many other factors and missteps that led to Apple's decline. The iPod succeeded and the iPod touch is succeeding without any hardware partnering. (The HP iPod episode of a few years ago likely made no difference in iPod's success.)

      That said, Nokia had several choices: partner with MS, partner with Google, buy Palm, buy RIM, develop MeeGo/Qt. It will be quite a treat to see and analyze how their choice unfolds..

      • kevin

        Obviously, that should be "No other OS other than Windows from that period…"

    • jaquin

      Both companies do have competencies that could be useful to each other. One reason Nokia is in the pickle, is that they could not get their hardware and software teams together on the same page when they were both in house. What new obstacles present when they work with MS. Both Apple and Google seem to stress the importance of the software over hardware, does that mean then that MS will be the Daddy?? Will Nokia accept such an arrangement gracefully?? Do they have any choice?

    • Hamranhansenhansen

      No, Apple could not have been Microsoft. Apple had no IBM monopoly to leverage.

      And anyway, Apple is currently winning that battle its own way. They have 90% of high-end PC’s, the most profitable part, they have (Intel) Thunderbolt exclusively for another year or more. They are eating low-end PC’s alive with iPad. And Apple also has a higher market cap, revenues, and soon profits than Microsoft, and is not far from besting the combined Microsoft+HP.

      Do you really think Jobs would trade positiins with Ballmer? No. And Ballmer just got his bonus axed because he has no iPhone and no iPad.

      Microsoft did some dirty tricks and leveraged the IBM monopoly into a monopoly of their own, but they are going to be a footnote in history. Apple was there before that happened and will be there long after, still making the best personal computers in the world, as always (if you include the combined Apple/NeXT).

  • Famousringo

    There is a vast difference between inventing a technology and bringing it successfully to market. Microsoft spent a lot of resources developing Kinect into an affordable and popular consumer product. Microsoft may not deserve credit for inventing the technology, but they do deserve credit for implementing it in a fashion that's proved popular with millions of consumers, and that's what real innovation is.

    For example, Edison didn't invent the light bulb. He perfected it, bundled it with electrical systems, and successfully brought it to market. He's credited with inventing the technology, but really he innovated it.

    That said, I agree with dms. Kinect is a solid success of a gaming peripheral. It pales in comparison to what a solid success in smartphones or tablets might have been worth.

    • FalKirk

      "There is a vast difference between inventing a technology and bringing it successfully to market."

      Agreed. I would re-word it slightly to say that there is great value both in inventing a product and in successfully bringing a product to market. I can't tell you how many tech heads seem to only find value in the inventing of a product and no value whatsoever in successfully transitioning that invention to marketability/profitability. It's such a narrow and almost backwards point of view. Inventing a product is intrinsically a wonderful thing. But its extrinsic value is obtained when it is used by others.

      Let's give Microsoft credit where credit is due. Microsoft didn't invent Kinect. But they'e turned Kinect into the greatest selling gadget of all time (surpassing sales of the iPad 1). That's a worthy success.

      • Hamranhansenhansen

        Kinect did not surpass sales of iPad 1. What is said to have happened is Kinect got to sales of 10 million faster than iPad 1. So what? Kinect is just an accessory for an existing Microsoft product, not an entirely new product category. Convincing an XBox owner they need a $150 Kinect is not at all the same as convincing a consumer they need a whole new $625 (ASP) tablet computer plus accessories for that tablet computer such as apps and cases. Further, Kinect launched in the holiday quarter, while iPad launched in the spring, and iPad was out of stock all the time for its first 6 months.

        When you also consider about 40% of iPads replaced Windows PC’s, it is really poor consolation for Microsoft that their new joystick sold quickly to their own userbase who were looking to improve their ancient XBox devices. When you also consider iOS is the hottest thing in the gaming industry for the past couple of years, then we are getting just ludicrous bending over backwards to say something good about Microsoft.

    • Hamranhansenhansen

      Kinect is just a joystick, an accessory for the existing XBox product, which is either not profitable or is barely profitable. There is no Kinect market, it sells to the existing XBox userbase.

  • chano

    Poetic justice in motion.
    Aiming for world domination is the first step towards abject failure.

  • FalKirk

    Not so fast there, Vinner57. I know what you're implying, but let's give this a bit more thought.

    In 2007, the leading mobile phone operating systems were made Microsoft, RIM and Nokia with over 90% share. Then Apple introduced the iPhone. Four years later, in 2011, the market share of all three of those companies is dropping like a stone.

    In 2010 the leading computer makers operating systems were made by, well, they were made by Microsoft alone with over 90% share. Then Apple introduced the iPad. Where do you think Microsoft's computer market share will be in the year 2014?

    Is it possible that Nokia just tied their companies' fate to a sinking stone?

  • CndnRschr

    I agree that there is more life left in Nokia. However, its heart has been wrenched and the gamble taken is a big one. The problem is that Nokia's previous reincarnations were not at the mercy of a third party. Microsoft certainly has a long term plan for Windows Phone but its model is not a good fit with the rest of Nokia. Both needed a major transformation or jump to regain relevance in the race against Google, Apple and (still fighting) RIM – they've both made the leap but its not clear there is solid ground to land upon. Microsoft used to be the default. This is not the case in terms of future thinking.

    The Microsoft "rescue" was a cash infusion of a couple of a hundred million which also paid for settling several patent disputes. It was important from a visual perspective and losing Apple as a competitor would have made Microsoft even more vulnerable in anti-trust cases. Microsoft cashed in their investment a few years later and made a handsome profit. Apple has chosen not to license out its hardware. It did take them to the brink in 1996 but this exact same strategy took them to being the second largest company by market cap on 2011. In other words, the model wasn't necessarily wrong, just the timing (and possibly some of the tactics employed by Microsoft).

    • BobShaw

      You may be right about Microsoft and Apple. Regarding Nokia, the final cost of licensing the OS from Microsoft is close to zero as Nokia will be paid by Microsoft for its patents, its Navteq Map and will also get a share of advertisement revenue from Bing Search Engine. Thus saving Nokia $Billion plus in smartphone OS R&D. Also the risk of using third party OS is significantly diminished if one can innovate and differentiate on top of the OS e.g. HTC with Sense Technology. Nokia has the most cutting age imaging technology and it can use it to innovate on top of the windows OS platform and thus differentiate itself. Finally Nokia's current source of revenue and profit remains largely untouched by its alliance with Microsoft for smart phone OS as the current revenue and profits are derived from its leadership in feature phones and sales of smart phones to emerging economies where the Nokia brand carries far more weight than the future status of its current OS symbian.

      • CndnRschr

        Aha – there is the rub. What does the deal with Microsoft bring to the feature phones that Nokia sells in such high volume? Clearly, you don't expect Nokia to be putting out Windows Phone 7/8 devices in that sector. WP7, like iOS and Android, also requires a data plan to be worth the investment and that pulls you out of the budget segment. I also don't see WP7 (let alone WP8 which will have even higher spec requirements) powering basic cell phones. The high end makes (some) sense but that is not where Nokia sells the majority of their devices. The compelling aspects of WP7 are its Xbox "integration" and ability to run various Office programs. These are hardly high on the list of buyers of feature phones. Nokia should still be able to sell Symbian into that market as the costs are sunk (and clearly Elop expects this). However, the value to Nokia of Windows Phone in its largest market segment is close to zero and I am just not sure that a deprecated OS will carry the day in Nokia's largest market.

        This is certainly a calculated risk by both parties. I just don't think either were particularly good at math (or are eternal optimists)!

    • Hamranhansenhansen

      No, Microsoft bought $150 million in stock as a good faith gesture to show their promise of making Mac Office for 5 years was real, after years of threatening to kill that profitable product in order to extract concessions from Apple. Apple had $2 billion in the bank at that time and did not need cash. The issue where Microsoft had stolen Apple code was also resolved, plus various patent cross-licensing was done to get Apple as uninvolved as it could be with Microsoft.

      Your version is the self-congratulated bigoted PC industry gloating version that was sold in the PC press. Not the real story.

      And it’s all worked out pretty well for Apple, hasn’t it?

  • Developer

    Microsoft didn’t rescue Apple, they capitulated after being caught by Apple violating copyrights. MSFT wad allowed to pretend they made an investment to save face.

    At the time if the $150M “investment” Apple had 1B in the bank.

    MSFT also paid several billions in licensing fees over the next several years as part of the deal.

    Microsoft got caught sealing apple technology- the only way they remained competitive and were such a success was because apple was unable to enforce it’s rights in the corrupt US courts. By all rights, Apple should have owned microsoft outright by 1995.

  • mmh I believe it's more that the 150m $ shares buy-in and the deal for Internet Explorer for Mac was just all Apple could obtain from MS given the situation (never heard about multibillions licensing fees before, I'd be curious to learn about that).

    MS did use Apple's OS as a case study to build its own, in some cases lifting software implementations straight from it. But this could happen because Apple was pretty naive in their legal and commercial relationship with MS.
    In the early days MS had a strong commercial position with Apple, having cleverly manouvered to be its sole supplier of BASIC. Gates used this in 1985 to gain license deals for GUI concepts and technologies for Windows 1.0 from Sculley, whose interpretations proved decisive in the 90s lawsuits. MS also made Word and Excel which were important for the Mac, and this allowed their developers to be deeply exposed to the innards of Apple's OSes.

    MS Windows was way inferior to Apple's OS at least until Windows 3.0, but during that time Apple kicked Jobs out, stagnated on innovations and executed badly.
    When Windows was already dominant in the market and approaching feature parity, Apple panicked and desperately started suing, but they couldn't get much out of it.

    I think these stories has much to do with Jobs doctrine for Apple 2.0: execute flawlessy, innovate continously, never let your competitors know your cards, never depend strategically on external vendors, be very thight legally…

  • JPA

    Perhaps one of the important conclusions is that monopolies end up badly because they grow fat, lazy and stupid on the monopoly rents over time. They become more and more engaged in monopoly defense and scorn innovation because they can always fall back on the monopoly money.

    Microsoft has not had a major success a la iPhone or iPad (do NOT use Xbox which is a shareholder wealth disaster…) in more than a decade.

    Even its efforts at monopoly buttressing (Vista) were a thudding failure.

    The problem lies with Ballmer. He clearly has no capability to marshall the resources to deliver compelling, innovative products. From PlaysForSure to ZuneForSure, his administration has been an abject failure. It is probably because he is addicted to management buzz: "driving innovation hard…" and such without any clue of what that actually means. For Ballmer, innovation is an utter black box because he us a marketing guy who has scant product knowledge. He only wants to sell without knowledge of what it is he is selling.

    MSFT will not regain financial health and begin to increase shareholder wealth until it gets someone who actually understands how to build great products and not field marketing campaigns on top of mediocre, third rate junk – at the very best.

    MSFT is focussed on defending its monopolies against all innovation. Good luck with that. It is like being World Focussed – an oxymoron.

  • Hamranhansenhansen

    The main problem I have with the Nokia/Microsoft deal is the Elop/Ballmer braintrust who showed up for a 13 minute kickoff presentation together with zero product. Compare to the Apple/Intel kickoff from Apple’s 2005 developer conference where Mac OS X, iLife, Creative Suite, and MS Office were shown off already running on an Intel Mac developer box which was then made immediately for sale to developers. Also notice that Jobs/Ottelini were a shining example of corporate communication, saying real things, demonstrating real respect and a real partnership between 2 companies. Elop/Ballmer were grinning idiots by comparison, spouting nonsensical buzzwords.

    And the Elop Trojan aspect is still really hard to get over. Also Nokia’s promise of Windows Phone exclusivity while Microsoft still plays the field.

  • Waveney

    These star crossed partners are also in the process of losing their lifeblood – they are both haemorrhaging talent at all levels. Some of my friends at Nokia are being laid off but their team leader brains are choosing to go with them too. I was told of one dept. where only 2 remain out of over 80 and where only 7 were planned redundancies. They were not reassigned, they quit. Hearsay, I know, but the mood is far uglier than what is reported. Nokia can't sustain this level of talent loss without there being knock-on effects to their future plans with WM7.
    I give it 3 years, after which time MS will buy up(assimilate) the carcass of Nokia for manufacturing experience. After another few years of failed product launches and massive losses, MS will exit the mobile arena – along with Ballmer probably.