Outsmarted by Apple: Nokia Looks to Recover the 'Magic Dust'

By Michaela Schiessl

For years, Nokia effortlessly dominated the cell phone market. But then Apple and Google muscled in on its turf and changed the game forever. The Finnish company is pinning its hopes on a new operating system, but it might be too little, too late.

Photo Gallery: Nokia's Smartphone Ambitions Photos
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Stephen Elop is unavailable. The man they call "The General" hardly ever appears in public. His employees say he's busy, which is undoubtedly true -- busy saving Nokia.

For the last three months, the former Microsoft executive has been at the helm of the Finnish cell phone maker. And, during that period, the company has been inundated with bad news. Elop finally took action last week, when he fired 560 software developers, presumably for proven incompetence.

Nokia much-touted new flagship smartphone, the N8, was released onto the market in October after delays caused by software problems. Then, a number of new devices suddenly started crashing and couldn't be restarted. In fact, it was such an unparalleled PR disaster that tech blogs were already declaring the new product dead on arrival.

A few days ago, Elop delayed shipment of the new E7 smartphone, apparently to avoid another disgrace. And then, to make things worse, the revolution has also been delayed: Nokia had hoped that the new MeeGo operating system would put it back on top and shock the competition -- but now it won't be up and running until sometime in 2011.

Cult Status

For years, Nokia has been the uncontested leader in the cell phone market. But, these days, it can't seem to get anything right.

Indeed, for many, Nokia was long proof positive that the Europeans actually could compete with the Americans when it came to high-tech devices. Management textbooks were written about how Jorma Ollila, the long-time CEO and now chairman of Nokia's supervisory board, turned a former rubber boot maker into a technology giant.

At the time, in the mid-1990s, Nokia succeeded at practically everything it put its hand to. Its cell phones were technically sophisticated, reliable and indestructible. And they captured the zeitgeist. Indeed, it was chic to have a Nokia, and the cell phones from Finland quickly acquired cult status around the world.

At the turn of the millennium, the company was worth €300 billion ($395 billion), and it accounted for several percentage points of Finland's GDP.

"We are deathly afraid of becoming too fat and inflexible," Ollila said at the time. But, ironically enough, it was his decisions that made Nokia so fat and unwieldy that it must now fight to stave off its own demise.

The iSpoiler

Granted, the Finns continue to sell more devices across the world than any other company. And, indeed, almost one out of every three cell phones bears the Nokia label. But while cheap phones sold in emerging markets account for the lion's share of its sales, Nokia's proportion of the crucial, cutting-edge market for web-enabled smartphones is rapidly shrinking. And the beneficiaries of Nokia's decline in this market are Apple and Google, two Californian competitors that weren't even in the business a few years back.

In fact, the Silicon Valley companies did more than just establish a new level of quality for smartphones and their operating systems. They actually reinvented the entire business, a business that had formerly been based primarily on hardware -- and on rules set by Nokia.

These rules were invalidated practically overnight. Companies that redefine an industry are called game-changers. But, for Nokia, they weren't just changing the game -- they were spoiling it.

The iPhone that Apple CEO Steve Jobs unveiled in 2007 wasn't just an elegant and user-friendly cell phone. It also came complete with its own operating system and a unique Apple universe. The core of that universe is the App Store, which now offers about 300,000 miniature programs known as apps. With just a few clicks, customers can download software that transforms the iPhone into something else: a navigator, a currency converter, a game console -- you name it.

Apps have now grown to become a giant business. Thousands of independent developers are constantly expanding the product line in the App Store -- and Apple is making good money off their products. What's more, these same developers have added an element of fun and effortless user-friendliness to the world of cell phones. And with the iPhone, the mobile Internet has finally captured the mass market.

The Android Nightmare

At the same time, the search-engine giant Google has also muscled its way into the market by developing its own cell-phone operating system, Android, to be a rival to Apple's perfectly integrated product. Although Google's Nexus phone was a flop, the open-source Android system has been a success.

Since then, Android has become a favorite for software developers -- and a nightmare for Nokia. Cell-phone makers that had been using Nokia's Symbian operating system, such as Sony Ericsson and Samsung, are now pre-loading the more elegant Google system onto their devices. Already by the third quarter of 2010, more than a quarter of all smartphones were running on the Android platform, up from only 3.5 percent the previous year. During the same period, Nokia's share of the smartphone market plummeted by 8 percent, to 36.6 percent, where it stands today.

Indeed, though it sounds absurd, the biggest threat to the world's market leader in cell phones now comes from a company that doesn't even make cell phones -- or, at least, not at the moment.

A Model for Every Taste

Google's success reflects a fundamental change in the smartphone business: the shift in focus from hardware to software. Nokia executives recognized that this would happen early on. As long ago as the 1990s, Ollila predicted that being able to use cell phones to make calls would soon be little more than an extra feature. He was convinced that the future lay in the ability to access the Internet -- with all its services and applications -- while on the go. And he also recognized that Nokia would have to partially transform itself into a software company.

Initial attempts at this were very promising. In 1996, Nokia scored a major coup with the introduction of its Communicator 9000, the first cell phone to offer a calendar, an Internet browser and e-mail. Still, it never did become a big seller.

Then, in early 1999, Nokia unveiled the 7110, the first cell phone with a WAP browser. Accessing the Internet was cumbersome and slow, but it was still a breakthrough.

At that time, Nokia was developing about two models a year. But that changed in 2000. Ollila wanted to serve the booming market more comprehensively, and the new marching orders from Helsinki called for between 40 and 50 new models a year -- that is, a model for every type of person and every taste. And it is this same strategy that the company is still pursuing.

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BTraven 12/27/2010
Next year I hope I can celebrate the tenth anniversary of my Nokia mobile phone. I am still quite satisfied with its performance. Everybody who uses a phone so long should be awarded because he/she has contributed to save the rain forest in Africa where coltan which is essential to get a phone running is mined under inhumane conditions for those who have to dig the material out.
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Graphic: Comparison of smartphone operating systems

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