Like a big collective cow, the blogosphere is continuing to chew on the Nokia-Microsoft announcement. It seems to be one of those rare events that forces people to stop, step back, and reconsider their assumptions.
I think it's impossible to say today what impact the Nokia-Microsoft alliance will have, because we don't know how well Nokia will execute. If Nokia executes poorly, there won't be any change at all -- both Microsoft and Nokia will continue to gradually decline in mobile. If Nokia executes well, I think the impact could be pretty big. Not asteroid-killing-dinosaurs big, but a very large meteorite, with effects felt worldwide.
For the purposes of this note, I'm going to assume that both Nokia and Microsoft will execute well. That's a risky assumption -- they would not have formed this alliance if they had been executing well in the past. But for today we'll give them both the benefit of the doubt.
How many platforms can we stand?
Ignore the hype from Nokia about the "third platform." The reality is that we're on track to end up with four or five significant smartphone platforms in the US and Europe: Apple, Android, RIM, Windows Phone, and HP/Palm if their new products are excellent. Japan as usual will be very different, and I don't think all five players will be equally active worldwide.
You might ask if the market can accommodate five platforms. There's a school of thought that says the smartphone market is destined to go the way of the PC market -- eventually almost everyone will coalesce on a single platform that has the most applications and licensees. If that's how smartphones are destined to work, nobody seems to have told the customers. Platforms with small numbers of apps (RIM in particular) have continued to sell well. Also, back when I was at Palm and we had far more apps than any other mobile device, it didn't let us destroy Pocket PC, or RIM, or Symbian.
I think apps do matter in smartphones, but so far they appear to matter less than they do in PCs. Without any apps, a PC is useless, whereas most smartphones ship with a lot of functions built in: voice telephony, texting, e-mail, browser, camera, etc. Third party apps are more gravy than steak, at least for now.
So maybe the magic number is two platforms. In marketing, many experts believe customers can hold only two major brands in their heads for any market: a leader and a challenger. Think Coke and Pepsi, Hertz and Avis, Airbus and Boeing. On the other hand, there are plenty of markets which have dozens of competitors. Automobiles, for instance. You can have huge numbers of successful brands there because the market is heavily segmented -- Rolls Royce doesn't compete with Mini Cooper.
I believe the number of smartphone vendors and platforms is going to depend on the actions of the smartphone companies themselves. If they treat smartphones like a single consolidated market, a shakeout is probably inevitable. If they segment the market, creating brands and devices that serve different groups of customers differently, I think there's room for all the platforms to survive.
Unfortunately, at this point most of the smartphone companies are focusing only on slavishly copying Apple. Even RIM, a company with differentiated communicator products, is trying desperately to turn them into iPhone clones. That's a great strategy to ensure commoditization and market dominance by Apple.
Since we're giving Nokia the benefit of the doubt today, let's assume they create differentiated products that help to segment the market. I think that would stimulate other handset companies to do the same thing, leading to a relatively stable multiplatform world.
Here's what that means to the rest of the industry...
For the Android licensees, there will be intense competition for shelf space
In a five platform world, I think it'll be hard for all of the Android licensees to survive. Picture your typical Verisprint store a couple of years from now (Vodorange if you're in Europe). It probably carries three iPhone devices, because Apple has diversified its line. There are a couple of RIM devices with keyboards. We're assuming Nokia and Microsoft are successful, so there are a couple of Nokia smartphones on display. Since we're giving the benefit of the doubt, we'll also assume HP has paid big comarketing dollars to get two of its devices shelved. That's nine smartphones. How much space is left for Android models? I figure maybe two or three devices, split between Samsung, HTC, Motorola, SonyEricsson, LG, etc. Life gets very uncomfortable for a couple of those companies.
Or maybe they get lucky and a RIM or HP gets knocked out of the picture. That would leave space for more Android vendors. But the Android licensees can't control that -- they're counting on Google to drive one or two of the other handset platforms out of business. Is Google prepared to fight that sort of alley knife-fight against an HP or RIM, companies that might otherwise be Google partners?
Android was a fun product for Google when all it meant was bleeding Microsoft. But it eventually made Apple into an enemy, and now Nokia. HP is next, and RIM will come after unless it licenses Android. Is that the lifestyle Google wants? I doubt it.
By the way, I think the Android shelf space problem is one of the reasons why Nokia went with Microsoft rather than Google. Nokia has more control over its fate as a Windows Phone vendor, and it knows Microsoft is willing to do anything to win.
What happens to the other Windows Phone licensees?
It's really hard for me to picture them sticking with the platform in more than a token fashion. They avoided Symbian because it was a stacked deck in Nokia's favor; I think Windows Phone now looks the same. The only way they'd invest more is if Nokia's WinPhone products started to take off strongly in a couple of years, and they were afraid of being left out. I presume that's what Microsoft is counting on (it's how they dealt with IBM in PCs).
Can HP really be the fifth platform?
HP is by far the weakest of the five mobile platforms. Although it has a great legacy, it has neglected its developers tragically and its products are late. The recent HP event shows it still has a legacy of goodwill in Silicon Valley, and you can't count out the world's largest PC company. But HP's success depends on great execution. If its products are timely and deliver on their promises, I think it has a good shot. I am especially impressed by the things HP wants to do to link its products together (another on the long list of things Microsoft fumbled years ago).
But can HP execute? It's been steering a zigzag course in PCs. For several years it invested heavily in differentiation, and hired a lot of former Apple staffers. But in the last year it laid off many of those people, killed its advertising campaign, and focused on Acer-style price competition. Now suddenly HP is talking like it wants to go back to being a differentiated premium vendor. That sort of inconsistency will be deadly when competing directly with the other smartphone platforms.
I can't figure out if the HP guys are Jedi knights or middle-aged paunchy men playing with plastic swords. Based on history, I'm about 60-40 in favor of the plastic swords.
For the mobile operators, all of this produces immense happiness
Sometimes it's better to be lucky than good, and the Nokia-Microsoft deal is a huge stroke of luck for the operators. They have always wanted the handset vendors to be barefoot and pregnant, too weak and divided to fight with them for control over phone customers. A five-platform world is immensely attractive to them because the platforms can be played off against one another. If RIM gets too uppity, you can just tip the product mix toward HP, or vice-versa.
The downside of this for the operators is that five platforms are a lot more work to support. So they'll have conflicting temptations -- carrying more platforms gives them more leverage, but adds to their costs. I think the biggest operators will choose the leverage; Verizon proved that it's not healthy to be cut off from a successful platform, and you can never tell which one is going to be successful next.
For app developers, there will be more pain
The prospect of a five platform market is a nightmare for developers. It's already hard to support two platforms (Apple and Android); the idea of supporting five is a logistical nightmare. Most developers will focus on one or two, but that limits their potential revenue because the available market is smaller.
This situation favors large established developers that can afford to do ports to all the platforms. Unfortunately, large software companies are usually the slowest to innovate, so I fear the net result of a five-platform world is likely to be less innovation in mobile apps.
There will probably be intense interest in cross-platform development environments that let a developer write once and deploy anywhere. The platform companies will resist, and probably governments will eventually get dragged into the debate as they are asked to define what constitutes restraint of trade in an online app marketplace.
The one silver lining might be if the platform vendors start to compete for developers by giving them benefits -- for example, by loosening restrictions in their app stores, and taking a smaller cut of revenue. I hope that will happen, but it's not enough to make up for the fractured development platform.
What it means to Nokia: A chance to survive
Although Europe is really a collection of nations rather than a single place, there are a few things that seem to tug on heartstrings across many European countries. The Eurovision song contest is one, Airbus is another, and Nokia is a third. It represents European style and marketing prowess, and it proves that people in Europe can lead a high-tech industry. So the deal with Microsoft represents far more than a business deal; it feels like a betrayal of a European jewel at the hands of a rapacious American company.
It's important to understand what the alternative was for Nokia. If the company had continued at current course and speed, the decline in gross margins would have put it close to breakeven this year, and it would have started losing money in 2012. Things were already so bad that restoring 10% operating profit this year would require laying off about a third of the company. Obviously the cuts won't be that severe because Elop is aiming at a multiyear recovery, but the numbers show how close Nokia was to a death spiral in which spending cuts and revenue declines start reinforcing each other.
Nokia was like a plane rapidly losing altitude. If you don't pull back on the yoke in time, there's nothing you can do to avoid hitting the ground. The company was very close to that point.
I believe Nokia's directors knew this when they hired Stephen Elop, and his charter was to restructure the company radically before the problems became unsolvable. In that sort of situation, you don't ask what products you ought to save. You figure out how much money you can spend, you make a prioritized list of everything you do, and you start cutting from the bottom of the list until your activities fit into the budget.
I think when Elop and the board did that exercise, all of Nokia's OS business was below the line. They just couldn't afford it.
Although stepping back from OS is emotionally devastating to many Nokia employees and fans, I don't think it's necessarily bad for the company. Operating systems are like plumbing; they don't actually add much value to the building, but if they're built wrong they can destroy it. Symbian advocates talked persuasively about its superior power management and ability to run on low-cost hardware, but as far as I can tell that was never reflected in higher margins for Nokia smartphones. Most Symbian users didn't even know the OS was there, and if they had they would not have paid extra for it. Symbian was enormously complex and difficult to work with, and it cost Nokia a fortune. According to Nokia's annual reports, it paid about $800 million when it bought Symbian, and it reportedly employed at least 2,500 Symbian engineers (link). Those engineers probably cost about $500m a year, or about $5 per Symbian phone sold.
Nokia went into the OS business because it was afraid of depending on someone else's plumbing. Now it's betting that Microsoft is weakened enough that it'll actually cooperate with Nokia. Microsoft will reportedly end up paying Nokia more than a billion dollars to adopt Windows Phone (link), and Nokia can reassign the Symbian engineers to tasks that will actually differentiate Nokia's products. The deal with Microsoft could end up being not a surrender for Nokia, but a liberation.
But as I've said before, it all depends on execution. For the folks inside Nokia, things will feel worse before they feel better. The layoffs are still to come, and until then it will be hard for employees to focus on their jobs. Even after the layoffs are done, it will be a lot of months before Nokia can ship new devices designed to take advantage of Windows Phone. Until then, Nokia is unlikely to reverse its gradual loss of share in smartphones.
When I first held a Nokia n97, I was lost in admiration at how beautifully the hardware was put together. Everything from the shape of the case to the motion of the sliding hinge screamed elegance. Then I tried the software and I wanted to toss it out a window. Nokia's smartphone task is now very simple: produce some great devices like the n97, marry them cleanly with Windows Phone, and partner with Microsoft to get them distributed as broadly as possible.
If Nokia targets those products at real customer needs, and differentiates them from the iPhone rather than just trying to top it, it has a good chance of creating the multi-platform future it's talking about.
It's not as much fun as conquering the entire tech industry, but it's a lot better than going broke. And it's probably the only choice Nokia had.