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Photo Gallery: Nokia's Smartphone Ambitions

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

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.

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.

Killing Nokia's Creative Soul

No one was paying attention to the fatal side effects that would result when this strategy was translated into mass production. Instead of having the devices developed by closed teams, Nokia divided up the tasks across the board. For example, while one group dealt with cameras, another handled browsers -- but there was no one left to approach the overall development of the device as a creative product. "The products became characterless telephones assembled from standard parts -- and ones that were almost indistinguishable," a former Nokia executive told the Finnish newspaper Helsingin Sanomat. "The stranglehold of this factory way of thinking effectively crushed every wild idea and every vision."

Likewise, the number of people involved in decision-making swelled with the number of devices, and middle management ballooned. Hundreds of vice presidents were expected to prove their worth, and competing sometimes meant torpedoing the good ideas of a rival. Even worse, project managers avoided taking risks because their departments were classified as independent profit centers, meaning that they would be judged by their production figures on a quarter-by-quarter basis.

As a result of these changed circumstances, there was growing frustration in the development departments, where bureaucracy and a multi-level decision-making process were increasingly quashing creative ideas.

Giving Up too Fast

Still, it was not at all the case that Nokia had run out of ideas. Instead, some of them were premature, and sometimes employees simply lacked faith in their own creativity.

For example, before Apple conquered the cell phone market in 2007, it was Nokia that had developed the touch-screen cell phone. Three years earlier, it had introduced the 7710 model, which boasted a large, touch-sensitive color screen. Still, since it didn't sell well, it was dropped from production. And eight years ago, the Finns were already offering small downloadable programs like the apps that currently dominate the market. But, once again, since they didn't enjoy immediate success, all further development was aborted.

Nokia only revived its app business in 2007, and two years later it opened its "Ovi" online store. It offers close to 20,000 programs that can be downloaded for the Nokia system. But that's still considerably fewer than the hundreds of thousands of apps available for the iPhone and Android phones.

Losing the PR Battle

Today, market observers tend to scoff at Nokia for having squandered its opportunities. But, truth be told, those same observers share at least part of the blame.

For example, American analysts -- whose assessments often had a direct impact on stock prices -- routinely dismissed Nokia's innovations. For example, they concluded that the touch screen might appeal to business customers but certainly not to the mass market. And they wrote off applications as mere gimmicks that nobody really needed.

In fact, before the iPhone's debut, the cell phone market in the United States was relatively out of sync with the times, and the cutting-edge visions coming from Northern Europe only puzzled the average American consumer.

Ollila should have recognized this. Just as Apple was to do later on, he should have won over the US market to the idea of smartphones and developed the necessary infrastructure. But, instead, Nokia was happy to merely supply the United States with second-class devices.

And the consequences have been drastic: These days, Nokia is viewed as a cheap brand in the United States, and it enjoys hardly any relevance there anymore. In May, Nokia closed its flagship store in New York -- a symbol of how the company gave up an important market almost without a fight.

Getting Stuck in the Success Rut

Perhaps this mistake could have been avoided if Ollila had placed the company in the right hands, someone with vision and the power of persuasion. But, instead, Ollila groomed long-time associate Olli-Pekka Kallasvuo to be his successor. A lawyer by training, Kallasvuo more or less continued to run the business as it had always been run -- to be a maker of cell phones, a producer of hardware.

"Our problem was that we were simply too good at what we did," explains Sebastian Nyström, who is in charge of applications and services at Nokia. "Even when Apple hit our vital nerve, we just kept on doing what we were doing. After all, we were still making a lot of money."

Nyström, a former management consultant with McKinsey, is familiar with how companies work. "If you're successful for 15 years, you believe that you can make the rules," he says. "You simply cannot imagine that someone would come along and change the rules, just like that."

So far, the Finns have not managed to come up with a model that can compete with Apple and Google. But doing so is much more than a question of honor. If it fails to succeed in the smartphone segment, Nokia will lose its market dominance. It is the part of the business with the highest returns and the fastest growth. One in five cell phones is already a smartphone, and that figure continues to sharply rise. Indeed, no matter how proud the Finns are of their massive sales of inexpensive cell phones in emerging markets, in the long run, the real money will be made with computers you can carry in your pant pocket.

But, for now, Nokia is ailing, and its share price is plummeting. These days, the company is only worth about €30 billion -- or 90 percent less than its market value in 2000.

"Our smartphones are solid, but missing the magic dust," admits Jo Harlow, senior vice president of Nokia's smartphone division.

Dolling Up an Outdated Operating System

To generate that magic, Nokia would have to reinvent itself -- and switch to a more modern operating system. But that's a step Stephen Elop, Nokia's new CEO, hesitates to take.

The Nokia supervisory board took far too long to rid itself of the hapless Kallasvuo and hire a software expert. And now -- for the first time in its 145-year history -- a non-Finn is at the helm of Finland's flagship company. But even Elop, a Canadian, can't start from scratch.

The company, its production processes and its value chain are strongly geared toward the Symbian platform. But as much as the developers despise the cumbersome operating system, having its own OS at least guarantees Nokia some degree of independence.

If the Finns decided to focus on producing the devices and purchasing their software from elsewhere, they could very well end up in a position like that of the manufacturers of personal computers. What's more, without their own programs, they would eventually wind up in a suicidal price war. And against its low-cost Asian competitors, Nokia wouldn't stand a chance.

It is this logic that has led Nokia to keep Symbian alive. In the fall, Elop promised to make ongoing improvements to the aging system. And Symbian 3, the latest version, already has 250 changes.

Still, Elop can no longer get the tech community excited about Nokia with such promises. In fact, the influential device testers at Gizmodo.com even initially refused to test the new N8. "The phone was, unfortunately, irrelevant before it launched," one Gizmodo reviewer explained. "Like a top-of-the-line horse-drawn carriage released shortly after Neil Armstrong stepped on the moon."

Gearing Up for the Final Battle

The worst thing about this assessment is that Nokia indirectly encourages it. Despite all its professions of support for Symbian, Nokia's hopes to fend off the competition actually rest on an operating system called MeeGo, which it is jointly developing with the American chipmaker Intel.

Marko Ahtisaari, Nokia's design director, raves about the system, saying that the quality is something completely new, something unprecedented, and that a new era is about to dawn.

And Harlow, the vice president of Nokia's smartphone division, also insists that MeeGo will make it possible for Nokia to regain its dominance in the smartphone business. Though she refuses to say why the top developer of MeeGo left the company a few months ago, she will say that it's definitely too early to write off Nokia.

"We will improve aggressively," says Stephen Elop.

"We are fierce competitors," says Harlow.

"We play to win," says Nyström.

They sound a bit like soldiers drumming up their courage before a key battle. And, next year, Nokia will be facing exactly that.

Translated from the German by Christopher Sultan
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