Stephen Elop will run an expanded Devices team at Microsoft and report to his old boss, Steve... [+]
Almost exactly a year ago, Nokia CEO Stephen Elop shared the stage with Microsoft CEO Ballmer to talk up their mobile ambitions at a much-hyped partnership event in New York.
It was the perfect marriage of convenience.
Nokia, the once mighty leader of the phone market, desperately needed a hit to revive its flagging fortunes after Apple’s iPhone lured away most of its high-end customer base. Elop, a former Microsoft executive hired in September 2010 to lead a turnaround at the ailing Finland-based phone maker, decided to hitch his fortunes to Microsoft’s new Windows Phone mobile operating system. That move that came after ditching Nokia’s homegrown Symbian OS, with Elop’s rationale spelled out seven-months earlier in his now-famous “Burning Platform” memo to employees in which he called out how Nokia’s dire prospects and the need to “build, catalyse or join an ecosystem” as quickly as possible.
For Microsoft, Nokia was a suitor — one of the few — willing to bet that Windows Phone OS could successfully compete against Apple’s iPhone, iOS software and huge app ecosystem and Google’s Android OS, which now powers millions of smartphones made by Samsung and others and has attracted the software developers needed to build mobile apps.
Elop said the partnership would make the mobile market more of a “three-horse race” and turn Windows Phone into a “challenger” to Apple and Google. Ballmer said the new ecosystem of devices and apps built around Windows phone “represents the single-largest opportunity for software developers today.”
A year after Microsoft and Nokia made their boasts, Ballmer is on the way out, announcing last month he will step down as CEO within 12 months. And Nokia, after releasing a line up of well-reviewed Lumia smartphones powered by Windows Phone, announced this week that Microsoft will buy its mobile phone business for $5 billion and pay another $2.2 billion to license its patent portfolio. Elop has now jumped to the top of the list of potential candidates to take over from Ballmer and make good on Microsoft's recently announced strategy of turning the world’s biggest software maker into a “devices and services company.”
“It’s as much about getting Elop back as it is getting into the handset business,” said Jack Gold, an analyst with Jack Gold Associates. “Buying Nokia is the most logical way to get into the mobile device business quickly, since Nokia is wholly dependent on Windows Phone and Microsoft anyway…They already know each other extremely well.”
The questions are, of course, whether deepening its commitment to Nokia will give Microsoft the horsepower it needs to take on Apple, Google, Samsung and other mobile device makers, and whether Elop, 49, is the right man for the job.
Gold is skeptical. He’s not alone. Microsoft shares fell 4.6 percent, or $1.52, to $31.88 in regular Nasdaq trading today. That’s a 8.3 percent drop from the closing price of $34.75 on Aug. 23, the day Ballmer announced his impending exit.
“At the end of the day, Microsoft has to compete on the attractiveness to the end user for its products, and just having a device producer on board doesn’t get them there,” Gold said. “Nor will having Nokia on board dramatically extend Microsoft’s ecosystem in mobility, which is another problem for them to deal with.”
A League of Their Own?
“The heat may be off for Nokia’s shareholders, but for Microsoft’s investors the fire is only just being stoked,” said Tony Cripps, an analyst with research firm Ovum. “While Microsoft and Nokia have jointly been increasing the money flow through the Windows Phone marketing faucet of late, it will take mega bucks to take on Apple and Android-head-cheerleader Samsung for marketing volume and volume shipments. We need to see that kind of commitment coming before we can really count Microsoft in the same league as its two main competitors.”
N. Venkat Venkatraman, who serves as chairman of the Information Systems department at Boston University’s School of Management, said the transaction is “fraught with problems.” Microsoft may have a hard time convincing third-party phone makers that it won’t give preferential treatment to Nokia hardware. While Google has to deal with the same concerns since it owns handset maker Motorola, the Windows Phone market is so much smaller than the Android market, making the problem more acute, he says.
Windows Phone is a distant third in the market for smartphone operating systems, with a 3.3 percent market share in the second quarter, according to research firm Gartner. Android led the market with a 79 percent share. Apple's iOS had a 14.2 percent share.
Microsoft said it will fund the deal with some of the approximately $70 billion in overseas cash it held as of June 30, “implying the company saves about 35 percent by not having to repatriate the cash to the U.S. and pay taxes on it," said Barclays analyst Raimo Lenschow. Even so, investors may be “cautious” about the transaction.
“Management seems adamant that the deal will enable the company to bring more compelling smartphones to market by more tightly integrating the hardware and software,” Lenschow said. “However, we are forced to be cautious on the potential success of this strategy for several reasons. First, Microsoft has yet to prove it can successfully bring to market a compelling device that can gain meaningful traction with consumers, with Surface being the most recent example of the risk of this strategy. Secondly, although Microsoft will acquire the Nokia’s product engineering and design, Nokia has been bleeding market share in both the smartphone (~25% share in 2011 down to ~3.5% share today) and overall handset (~25% in 2011 down to 13-14% today) market in recent years. Thus there is considerable work to be done to turn the business around.”
As for Elop, the sale to Microsoft makes him a hero to investors in Nokia, which was burning through cash. He made a series of tough calls as part of his turnaround efforts, including firing more than 40,000 workers, replacing 9 of 11 executives on Nokia’s leadership committee, selling Nokia’s headquarters in Espoo, and shutting down the last handset factory in Finland. Even so, Nokia remained on shaky ground, earning him the nickname “Stephen Eflop.”
A Canadian who was the first non-Finn to run Nokia, Elop served in executive roles at Lotus Development Corp., Boston Chicken, Macromedia, Adobe Systems and Juniper Networks before joining Microsoft in 2008 and leading the Business Division that oversees Microsoft Office.
He'll return to Microsoft and “lead an expanded Devices team, which includes all of our current Devices and Studios work and most of the teams coming over from Nokia, reporting to me,” Ballmer said in an e-mail to employees. In an interview today with the Wall Street Journal, Ballmer revealed his close ties to Elop, saying he was one of the few people he called before announcing his decision to retire.
Gold said that bringing Elop back into the fold shows that Microsoft needs “new thinkers” when it comes to management and product strategy. “Elop did a good job at Nokia given the cards he was dealt and his presence may spur Microsoft to rethink some of the strategy.”
Venkatraman of Boston University isn’t quite as big a fan. “Elop as a possible CEO to succeed Ballmer is risky as his experience is rather limited and Microsoft's future should focus on a much more expansive view of how software drives the future of business and society,” he said. “Ballmer seems to be solidifying his devices-plus-services strategy by looking backward rather than towards the future.”
In an October 2012 interview with Forbes, Elop said critics of the company were being too harsh and that history would prove them wrong. “People are just beginning to discover what experiences are possible with a device that’s packed with sensors, technology, computing power and cloud [access],” he said. “Things can change rapidly. … It’s still a wide-open field.”
