We are now at the one-year anniversary of the notorious Burning Platforms memo, with which Nokia CEO Stephen Elop single-handedly destroyed Nokia's dominant market position in smartphones and caused 13.8 Billion dollars of destruction in Nokia handset annual revenues, and wiped out 4.4 Billion dollars of annual profits from Nokia corporation. The damage in Nokia's future, the smartphone division is even worse- Elop's memo wiped out 13.8 Billion dollars of annual sales and 3.9 Billion dollars of annual profits in just one year. Before the memo, Nokia just in smartphones was more than twice as big as Apple's iPhone. Today it is the opposite, the iPhone is twice the size of all Nokia smartphones. By crashing Nokia's smartphone market share, Nokia dumbphone market share, Nokia corporate revenues, Nokia average prices, Nokia corporate profits, Nokia share price, Nokia credit ratings, and the Nokia brand value, the Burning Platforms memo is the most damaging single management communication of all time. A year ago there were some (usually quite misguided tech experts who didn't understand mobile) who actually applauded Elop for this moronic memo.
(UPDATE 13 February - Please note I have added a brief comment to the end of this article, based on Elop's interview given in South Africa about specifically the Burning Platfoms memo. It gets beyond weird..)
At its anniversary, now is a good time to set the Burning Platforms memo into the proper context of reality and facts. To see just how idiotic it was. Because the memo was so error-laden, misguided and most bizarrely, even where Elop was right, his actions since have been against the 'sensible' parts of the memo, I have to do this blog properly. This is a long article, some 12,000 words. Take a cup of coffee before you start. This would be the length of a whole chapter in one of my books. But lets examine the Truth, the Whole Truth and Nothing But the Burning Platforms memo.
The Burning Platforms memo can be read at several locations including the Wall Street Journal. I have reproduced the memo here verbatim (in italics), but added my 'translation' from a Rumsfeld-Cheney'an deliberate distortion of reality by Elop, to the more commonly accepted definitions of 'facts' and 'reality' by the rest of the world that was not serving the George W Bush government.
Burning Platform Memo
(ie the Nokia destruction manual)
There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire.
(Note the 'sudden' explosion - this was not a gradual challenge by the rivals of Nokia like Apple for the past four years or Google's Android the previous two years: no. This all happened quite unexpectedly in February 2011, when suddenly the Nokia CEO Stephen Elop had set the world's biggest smartphone platforms on fire like a true arsonist)
In mere moments, he was surrounded by flames.
(in merely one full quarter after he started the fire, he found that Nokia smartphones had already lost half of their market share)
Through the smoke and heat, he barely made his way out of the chaos to the platform’s edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters.
(there had been a strong other platform at Nokia called MeeGo, but Elop had set it also on fire, this is why the man could not see anything except the Atlantic)
As the fire approached him, the man had mere seconds to react. He could stand on the platform, and inevitably be consumed by the burning flames. Or, he could plunge 30 meters in to the freezing waters. The man was standing upon a “burning platform,” and he needed to make a choice. He decided to jump.
(the decision was 'encouraged' by Elop who fired more than 10,000 Nokians that had refused to jump, and then in upcoming months, fired many thousands more. He has fired 30,000 Nokians by now)
It was unexpected.
(because it was 100% unnecessary, and a totally self-induced injury by the CEO)
In ordinary circumstances, the man would never consider plunging into icy waters.
(because under normal circumstances any sane CEO makes decisions that are good for the company, not detrimental to the company and its employees)
But these were not ordinary times
(as Nokia had clearly been taken over by someone, who based on this mad Memo was called a 'delusional psycopath' by the most influential expert of the mobile industry, the most published author of the mobile industry who lectures on mobile at Oxford University and whose words are so trusted he is referenced in 120 books by other experts. Nokia's own staff were aghast as were almost all reputable experts of the mobile industry)
– his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a “burning platform” caused a radical change in his behaviour. We too, are standing on a “burning platform,” and we must decide how we are going to change our behaviour. Over the past few months, I’ve shared with you what I’ve heard from our shareholders,
(who have loved the way Nokia's new CEO Elop had grown Nokia share price by 11% in the first five months he was in office, while Nokia's perilous decline in profits was reversed to strong growth, and Nokia's smartphone saless were now growing strongly. They did not need any change to Nokia's strategy. But after this memo, Nokia share price has fallen more than 55%)
(who appreciated how much Nokia had invested in Symbian to modernize it, and how Nokia had gone out of its way to let the operators/carriers join in the Ovi store ecosystem with Symbian and did not want Nokia to abandon Symbian for the hated Microsoft OS; and Nokia's upcoming MeeGo ecosystem had achieved the ultimate prize - the world's biggest mobile operator/carrier China Mobile had signed up to MeeGo - China Mobile alone is more than twice the size of all USA carriers/operators added together)
(who loved the fact that Nokia had invested in a migration path for the 400,000 strong Nokia developer community - by far the biggest in the industry, carefully nurtured and developed over the previous ten years - to migrate their apps from Symbian via Qt to MeeGo and S40)
(who were having steady growth in their business supplying Nokia with components but are now reporting quarter after quarter of failing performance)
and from you
(Nokia employees who believed passionately in creating highly loved high quality handsets in every price segment, from the affluent markets of the West to the low-cost handset markets to the Emerging World)
Today, I’m going to share what I’ve learned and what I have come to believe. I have learned that we are standing on a burning platform.
(which means I am either insane, or I have a hearing disorder)
And, we have more than one explosion – we have multiple points of scorching heat that are fuelling a blazing fire around us.
(because the CEO Elop has set those multiple explosions himself not only setting fire to Symbian, but also to MeeGo, to the Ovi Store, to Nokia's Qt developer tools environment, to Nokia's cloud computing solutions and Nokia's services such as Navteq and its mobile advertising)
For example, there is intense heat coming from our competitors, more rapidly than we ever expected.
(actually the competition was not providing intense heat to Nokia, it was destoying weaker rivals like Palm, Motorola and Windows Mobile. Nokia was experiencing only modest market pressure and actually was growing smartphone unit sales, revenues and profits; and its Ovi store had overtaken all other rival app stores except Apple's and was now closing the gap to that)
Apple disrupted the market by redefining the smartphone and attracting developers to a closed, but very powerful ecosystem.
(which is why Nokia had long before Apple built its ecosystem on the principle of an open ecosystem with its partners, with several times more developers, an installed base 8 times larger than that of Apple, and current sales of smartphones more than twice the size of Apple)
In 2008, Apple’s market share in the $300+ price range was 25 percent;
(which is why Elop acted in 2011 so detrimentally to Nokia, that today Apple's market is not just 25% of premium smartphones, it is literally 25% of all smartphones just one year later)
by 2010 it escalated to 61 percent.
(this growth rate for Apple was fast yes, but Nokia itself had also a good growth rate of 48% year over year while some rivals like Palm and Motorola were declining - and Nokia's growth rate was speeding up at the end of the year, not slowing down, so you'd think the CEO was happy things were not just good, they were improving at Nokia)
They are enjoying a tremendous growth trajectory with a 78 percent earnings growth year over year in Q4 2010.
(Nokia's own growth rate was far better - on a completely different level in Q4, with profits in Nokia's smartphone unit jumping 65% in just 3 months from Q3 to Q4 of 2010 under Elop's leadership! If compounded for the full year to be comparable to Apple, what Elop had was an annual growth rate of his smartphone unit profits of 741% !!!! - Almost 10 times stronger growth in profits at Nokia's smartphone unit than Apple !)
Apple demonstrated that if designed well, consumers would buy a high-priced phone with a great experience
(which was exactly why when Nokia designed its own touch-screen phones well, like the N8, Nokia too found that consumers buying the high-priced phone with great experience - still one year later, that N8 is still a top seller in many markets such as China)
and developers would build applications.
(just like Nokia's own developers who had developed apps for the Ovi store that was now the second best-selling app store in the world, and the Ovi Store was the bestselling app store in every country where the native language was not English, Japanese or Korean, and Ovi was now closing the gap to Apple)
They changed the game, and today, Apple owns the high-end range.
(which obviously was utter poppycock. Only after Elop destroyed Nokia premium smartphone sales in 2011, did Apple gain much of the high-end range, and even then it shares it with Samsung, HTC, SonyEricsson etc.)
And then, there is Android.
(Android the open source, Linux based smartphone platform that is supported by Nokia's Qt application developer tools - just like Nokia's MeeGo smartphone platform which also is open source, Linux based and supported by Nokia's Qt developer tools - but unlike Microsoft's Windows Phone which is a closed system and needs proprietary development tools)
In about two years, Android created a platform that attracts application developers, service providers and hardware manufacturers. Android came in at the high-end, they are now winning the mid-range, and quickly they are going downstream to phones under €100.
(so Android is following Nokia whose Symbian smartphones were already selling in the sub 100 Euro market and Symbian was far more capable to function on low-cost, low-specification handsets)
Google has become a gravitational force, drawing much of the industry’s innovation to its core. Let’s not forget about the low-end price range. In 2008, MediaTek supplied complete reference designs for phone chipsets, which enabled manufacturers in the Shenzhen region of China to produce phones at an unbelievable pace.
(meanwhile Nokia had not only the world's largest mobile phone factory also in China, but Nokia had more highly effective mobile phone factories much closer to its customers, from India to Brazil)
By some accounts, this ecosystem now produces more than one third of the phones sold globally
(whereas the reality is that this Chinese Shenzhen based 'ecosystem' produced more than two thirds of all the phones sold globally - facts very widely available - and Nokia itself was a major part of it so this is known very well inside Nokia. Where was Elop getting his 'facts'?)
– taking share from us in emerging markets. While competitors poured flames on our market share
(The competitor who poured flames on 'our market share' was of course Nokia CEO Stephen Elop himself, who compounded this idiotic memo with the partnership announced with Microsoft when he had no phones to show and thus crashing Nokia sales, and then not supporting the MeeGo handsets N9 and N950 to start even more fires to Nokia platforms)
what happened at Nokia? We fell behind
(by "falling behind", Nokia was twice as big as its nearest rival in smartphones and far bigger than its nearest two rivals, added together. Boeing or Toyota or Sony or Coca Cola would love to "fall behind" this badly and be literally more than twice as big as the nearest rival)
we missed big trends
(by "missing trends" Nokia had a touch screen phone before the iPhone, QWERTY phones before the Blackberry, an app store before Apple's iPhone App Store, 3G before either Apple or RIM made 3G phones, and currently Nokia already sells NFC Near Field based phones to enable mobile commerce, Dual SIM phones, etc. Nokia has not missed any trends. Not big trends, not even medium trends like forward-facing cameras, multitasking, folder views, Xenon flashes etc. Nokia has yes, sometimes executed poorly its first version of a given new trend, but Nokia has not missed any 'big trend' in mobile phone handsets, ever. Not one!)
and we lost time. At that time, we thought we were making the right decisions
(which of course means here on Planet Earth where people deal with reality, that Nokia was making the right decisions - app stores, touch screens, full internet HTML browsers, multitasking, front-facing second cameras, NFC, dual SIM, etc - all were right decisions, sometimes they were executed poorly or with severe delays, but the decisions were all the right calls)
but, with the benefit of hindsight, we now find ourselves years behind.
(by "finding ourselves years behind", of course Nokia was years ahead. So much so, that later in 2011, Apple settled its lawsuit with Nokia and had to pay Nokia royalties for stealing Nokia inventions for years past for treading on numerous Nokia patents, and pays currently for every iPhone made, while Nokia does not pay Apple a single cent. Similarly while Apple and Microsoft sue Samsung, Motorola and other Google Android partners, Nokia is not due any patent violations to Microsoft, Samsung, Motorola or anyone else)
The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience.
(in fact 'first iPhone' was so deficient, that Apple spent the next three years making 15 major revisions to it, fixing its bugs, upgrading its hardware, operating system and software - where 14 out of those 15 upgrades and changes - that were celebrated by Apple as its biggest innovations in the official Apple press releases announcing the iPhone 3G, iPhone 3GS, iPhone 4 and their related iOS software updates - were all already deployed on Nokia's top smartphones before the first iPhone shipped in 2007. Yes, when Elop sais 'we still don't have a product close to their experience - that may be how President of the Moon Colony Newt Gingrich speaks, when normal people here on Planet Earth will actually look at the data and find that up to 2011, Apple hadn't yet caught up to Nokia smartphones from four years before.)
Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes. Unbelievable.
(Unbelievable indeed, because it was not true in February 2011. Only one analyst house, Canalys claimed this bizarre 'fact' and their published numbers illustrated blatantly a huge math error obvious to the naked eye. Even the other major industry analysts mocked Canalys for the massive math error it made in its market share calculation)
We have some brilliant sources of innovation inside Nokia
(brilliant innovation which Elop has tried to stifle, like the highly praised swipe technology of the Meego operating system on the N9)
but we are not bringing it to market fast enough.
(while not fast enough, Nokia still was doing the innovation far faster - four YEARS faster - than Apple for example, see Patent court settlement in the above - Apple was stealing from Nokia not the other way around)
We thought MeeGo would be a platform for winning high-end smartphones.
(it also clearly is. The market reception for MeeGo based N9 is overwhelmingly superb. The MeeGo based N9 is rated by tech analysts not only as Nokia's best smartphone ever, but that both the hardware and the software are rated on par with the iPhone 4S in most reviews, and incredibly for Nokia, some actually rate the N9 and MeeGo better than the iPhone 4S and iOS. The N9 is rated far above all other rivals running on Android or Blackberry or Windows based operating systems, including Nokia's own Lumia series. This is the best reception of any Nokia handset, and especially any new smartphone software ever to carry the Nokia brand)
However, at this rate, by the end of 2011, we might have only one MeeGo product in the market.
(Sure. Like Madonna said to Wayne and Garth on Saturday Night Live: "And monkeys might fly out of my butt." Anything 'might' happen but the reality is, that even after Elop personally terminated one ready-for-sale MeeGo unit in early 2011, and then torpedoed the MeeGo staff, resources and funding, Nokia still managed to create two more MeeGo handsets - the N9 and N950 - both that went to production well before the first Microsoft handset appeared. The truth is, Nokia was fully able to have three MeeGo devices on the market were it not for Elop's personal meddling)
At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America.
(by 'non competitive' in North America, that Symbian was still outselling Microsoft's own Windows Phone OS in the USA at the time, until Elop later killed all Symbian sales for the USA in the summer of 2011. But the reality is, that 'markets' is more than just one market of the USA. Symbian had over 75% market share in China, now the world's largest smartphone market, bigger than the USA. Symbian had over 60% market share in Singapore the country with the highest penetration rate of smartphones globally. Symbian had over 70% market share in India, the mobile market with the biggest growth rate. Symbian was the biggest handset platform in Japan, the country with the most advanced phones, a country where the original iPhone was literally obsolete when it launched in the USA in 2007. Symbian was the biggest smartphone platform in Europe, a market both bigger than North America and more advanced in both maturity of smartphones, generation of smartphones, new market sales size of smartphones, and penetration rate of smartphones. Symbian was also the run-away market leader in Latin America and Africa. Symbian was the bestselling smartphone on five of the six inhabited continents and Nokia's Maemo was the bestselling smartphone on the uninhabited continent of Antarctica too. The only continent where Nokia's Symbian was not the clear market leader was North America where six other smartphone operating systems were all produced by domestic rivals, manufactured by North American handset brands. SIX local rivals! iOS, Blackberry, Android, Palm, Windows Mobile and Windows Phone. And even in this market, at the time, Symbian managed bigger sales than two highly praised domestic rivals, Palm and Windows Phone at the time)
Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development
(which is why Nokia developed Qt as its application development tools and environment. Qt would support not only Symbian which powered more than half of all smartphones in use worldwide, but also supported Android and soon also Blackberry smartphones reaching more than three quarters of all new sales of smartphones; plus supporting Nokia's featurephone system S40 which more than doubles the accessable market for app developers, plus supports Nokia's Linux based future platform, MeeGo. Developers using Qt have rated it by far the fastest way to create smartphone apps compared to tools for any platform including iPhone, Android and both Microsoft platforms)
and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.
(by falling further and further behind, Nokia was massively bigger than any of its rivals - in smartphones Nokia Symbian smartphones sold more than the next two biggest rivals - combined! And Nokia grew smartphone sales strongly in 2010 at 48% per year, while ending the year with renewed strong growth in profits)
At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us. And the truly perplexing aspect is that we’re not even fighting with the right weapons.
(And what 'right weapons' would that be? Is that why Elop created the Lumia range, USA designed smartphones that were released in Europe? The same Europe where Nokia's European designs have dominated being the biggest smartphone sellers literally in every European country in 2010. While most US based smartphone designs are seen as synonymous with total failure such as Palm, Motorola, Danger, Compaq, HP, Dell, Kin, etc)
We are still too often trying to approach each price range on a device-to-device basis.
(by which strategy outside of USA, Japan and South Korea, the only three countries where there are several domestic smartphone makers - in the rest of the world where 93% of the total population of Planet Earth lives, Nokia smartphones had a market lead in literally every other country except these three. The strategy was somehow 'failing' in Elop's mind apparently)
The battle of devices has now become a war of ecosystems,
(which is exactly why Nokia was the first smartphone manufacturer to create a smartphone centered ecosystem years before there was an iPhone - and Apple itself did not even let the original iPhone owners install apps to the original iPhone 2G. Apple then copied Nokia's ecosystem thinking in developing the App Store - but Apple did it obviously better, like Apple always does - and since then, Nokia's Ovi store was taking lessons from Apple's innovative thinking and inspite of that, Ovi was still the second bestselling app store of the planet, far ahead of rivals such as Blackberry, Windows or Palm etc)
where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem.
(Reality check! In 'hardware' and 'software' ie the operating system (OS) - Nokia was in installed base of smartphones 4 times bigger than its nearest rival. In new sales of hardware Nokia was more than twice as big as its nearest rival. In the OS war, Nokia's Symbian was still selling more than Android at the time. With 'developers' Nokia's developer community was more than twice as big as the nearest rival. In 'applications' Nokia's app store (Ovi) had the second most apps behind only Apple at the time. In 'eCommerce' Nokia's Ovi store sold all forms of digital content as one of the world's biggest digital content stores and by far the most global store across more than 100 languages. In 'advertising' Nokia's mobile advertising unit was one of the biggest in the world. In 'social applications' Nokia was one of the pioneers on mobile from Nokia Live Blog and Club Nokia to various social and community services since. In 'location-based services' Nokia's Navteq was the biggest and powered many rival systems not just Nokia's world-leading mobile mapping. In 'unified communications' Nokia had been extending Ovi services to messaging. There is no area in the ecosystem as defined by Elop, where Nokia was not a major player or the market leader. On most of them, Nokia's ecosystem including Symbian, Ovi and Qt was the run-away leader. Apple's iPhone and App Store, Google's Android, RIM's Blackberry, HP's Palm, and Microsoft's two platforms, Windows Mobile and Windows Phone were all dwarfed just on these metrics as mentioned by Elop, not to mention when other Nokia assets are mentioned such as carrier billing support, language support, open source, Linux support, handset partner ecosystem, etc)
This means we’re going to have to decide how we either build, catalyse or join an ecosystem.
(So when Nokia CEO finds he has the biggest, best, most dominating ecosystem ever seen in mobile, that was growing at 48% per year, he somehow wants to abandon it?)
This is one of the decisions we need to make.
(this is a decision only a moron would make. There is no decision to make! If you are winning so comprehensively that you crush the competition - more than twice as big as your nearest rival - and you do that while growing strongly, and with growing profits -that is no place for any 'decisions'. As CEO you thank your organization and step out of the way, and let the competent staff continue to wipe the floor of the global market with rivals that are puny by comparison.)
(Let me add a personal comment here. I am 100% certain, that at this point in the memo, any sane Nokia employee knew they had a lunatic as a boss, and all the best brains started to plan an exit from Nokia. The CEO lost all credibility if he utters the above statement, that there is a 'decision we need to make' when you dominate the market currently, you are growing, you have correctly anticipated the changes that are now happening in that market, and you are profitable doing it. This is the obvious trend where the industry is headed and Nokia was poised to continue to dominate it long into this decade, not joining some mythical third (in reality 8th) ecosystem but rather owning and controlling the clear first ecosystem of mobile. When Elop felt he needed a decision here, shows he was incompetent and just for saying that in his memo, proves he is not fit to lead Nokia. He will never be trusted by his staff as a sane CEO who is interested in what is best for Nokia.)
In the meantime, we’ve lost market share
(this is natural and inevitable and unavoidable if there is a genuine market opportunity. Nokia invented the smartphone and started with 100% when it had no rivals. As rivals came in, of course Nokia lost market share. Sony lost market share when other music player makers started to copy the Walkman. Daimler Benz lost market share after other car manufacturers appeared. Apple lost market share when others launched rivals to the iPad. The point is, that Nokia towered over its rivals and only a fool would abandon a lead when you have essentially lapped the whole field of rivals)
we’ve lost mind share
(yes! Nokia had lost mind share badly to Steve Jobs led Apple. It was well known that past Nokia management was not good at the mind share war. This was one of the skills the Board hoped to find in the next CEO, not to change Nokia's strategy, but rather to communicate Nokia's dominating position more succinctly to the analysts and investors, to bring Nokia's reality more in line with the distorted impressions in the war of the 'mind share')
and we’ve lost time. On Tuesday, Standard & Poor’s informed that they will put our A long term and A-1 short term ratings on negative credit watch. This is a similar rating action to the one that Moody’s took last week. Basically it means that during the next few weeks they will make an analysis of Nokia, and decide on a possible credit rating downgrade.
(since then Elop's actions have demolished that rating with three more downgrades by all three ratings agencies, and today Nokia's rating is at junk status)
Why are these credit agencies contemplating these changes? Because they are concerned about our competitiveness.
(Elop's direct actions caused a comprehensive global collapse of Nokia market share in smartphones falling from 33% in 2010 when he took over to 12% by Q4 of 2011. Now Morgan Stanley projects that the Microsoft partnership will be so damaging to Nokia smartphone sales that they sell only 37 million Lumia phones in 2012 and by 2013, the Nokia smartphone market share will be at 8%. The reality is likely to be far worse still)
Consumer preference for Nokia declined worldwide. In the UK, our brand preference has slipped to 20 percent, which is 8 percent lower than last year.
(so Elop not being satisfied with Nokia preference slipping in the UK, decided to devastate it, and now Nokia has lost 80% of its market in the UK. No Nokia smartphone reached the 10 bestselling smartphones in the UK for Christmas. A year before, Nokia sold four out of every 10 smarpthones in Britain)
That means only 1 out of 5 people in the UK prefer Nokia to other brands. It’s also down in the other markets, which are traditionally our strongholds: Russia, Germany, Indonesia, UAE, and on and on and on. How did we get to this point? Why did we fall behind when the world around us evolved? This is what I have been trying to understand. I believe at least some of it has been due to our attitude inside Nokia. We poured gasoline on our own burning platform.
(by 'we' Elop is not talking of Nokia employees. He is using the Royal pronoun meaning himself. Yes, after personally setting Nokia's strong solid platforms on fire, he then proceeded to pour gasoline onto his own platforms all through the year with one catastrophy after another (Microsoft announcement, N9 and MeeGo damage, Ovi rebranding, Nokia numbering/naming, patents, factories, layoffs etc etc) resulting in Nokia's brand being kicked out of the 10 most valuable brands globally, for the first time ever)
I believe we have lacked accountability and leadership to align and direct the company through these disruptive times.
(by lack of accountability Elop means that his actions bear no correlation with his own words and by leadership he means that most senior Nokia execs who had invested decades into the company, have suddenly fled the company many resigning in protest. To address the 'lacked leadership' Elop then admitted he miscalculated how big the loss would be in Q1 of 2011, then admitted he was surprised to have to announce a profit warning for Q2, then showed Nokia leaderhip in refusing to give annual guidance. And after promising 150 million Symbian devices up to 2016, he has since reneged on that promise too, now suggesting the Symbian line will be terminated this year producing only half the promised amount. This is Elop style of 'leaderhip' and 'accountability')
We had a series of misses.
(which led Nokia to tower over all of its rivals selling more than twice as many smartphones as Apple sold iPhones in 2010, and more than four times as many smartphones as Samsung - and Nokia did this in 2010 generating healthy profits in its smartphone unit. If that is what Elop calls a 'series of misses' I would like some of that please. Series of misses makes you twice as big as your nearest competitor, while making a big profit. Yes. But how does Elop fix that? Today both Samsung and Apple alone sell more smartphones than Nokia and Nokia's smartphone unit under Elop is generating huge losses)
We haven’t been delivering innovation fast enough.
(by 'delivering innovation fast enough', we now see how Elop delivers innovation. Nokia had introduced innovations such as forward-facing cameras and multitasking years before the iPhone; and were known for such high utility features as microSD memory card expansion slots, removable batteries and full Bluetooth file transfer ability that Apple still doesn't support; and recently added such market leading features as 12 megapixel cameras, Xenon flashes and NFC (rumored to be in the next iPhone). Elop then produced Lumia smartphones which are genuinely regressive in ability removing all those 'staples' of Nokia flagship smartphones, going back in ability and past Nokia smartphones now exceed these new phones in ability. So Nokia's past flagship smartphones have had these features, but the Lumia 800 does not! That is how Elop understands 'delivering innovation fast enough'. Elop must have gone to the same school of speaking as Rumsfeld. Whatever he says, he will then literally do the exact opposite. Elop now delivers innovations - EVEN MORE SLOWLY than before. When Nokia had literally delivered innovation faster than any rival - on points Apple is so proud it mentions them in the headlines or first paragraphs of the press releases for the newest iPhones - Nokia has been as much as four years ahead of Apple. Not on trivial details, these are the top-line items Apple itself celebrates in its hardware AND its software. Now Elop shows us how he intends to run Nokia. Two first two new Lumia phones have we seen a regression in Nokia flagship smartphones never seen before.)
We’re not collaborating internally.
(so therefore Elop sells whole business units of Nokia, creates massive organizational and procedural changes, makes idiotic management decisions, half of which he then back-tracks and flip-flops to further confuse and stress his staff and confuse the market, media and analysts, while compounding the problems of collaborating internally by firing people by the thousands)
Nokia, our platform is burning.
(it wasn't before Elop came to town, but it is now)
We are working on a path forward — a path to rebuild our market leadership.
(and Elop's way of building is to exchange 33% market share in 2010 for 12% in Q4 of 2011 and as low as 8% for 2013)
When we share the new strategy on February 11, it will be a huge effort to transform our company.
(by 'our company' he must have been talking of Microsoft, which desperately needed Nokia to come and rescue the Windows Phone platform which was truly a market disaster by this time, having fallen from 12% market share to 2%. But yes, even after this memo, Microsoft's brand new Windows Phone OS market share fell by another half, to about 1%, and it is still outsold by its older Windows Mobile sibling)
But, I believe that together, we can face the challenges ahead of us. Together, we can choose to define our future.
The burning platform, upon which the man found himself, caused the man to shift his behaviour, and take a bold and brave step into an uncertain future. He was able to tell his story. Now, we have a great opportunity to do the same.
WE WILL BE GREETED AS LIBERATORS
The Burning Platforms memo disaster was to mobile phones what the Rumsfeld-Cheney communications were about the war in Iraq. We know where the weapons of mass distruction are, said US Secretary of Defense Donald Rumsfeld on TV. We will be greeted as liberators, said Vice President Dick Cheney. Its a slam dunk case, said CIA Director George Tenet about the weapons of mass distruction. etc. The costs of the war would be paid by the oil revenues according to Paul Wolfowitz, the logic of "known unknowns and the unknown unknowns" by Rumsfeld etc. The militarist wing of the George W Bush administration ended up with a whole slew of faulty statements about what would happen. When Elop released his Burning Platforms memo, that memo had enough warning signs, that it too was like a handgrade rolling around Nokia headquarters with the pin pulled, waiting to explode. Now we know and can measure the damage. But Elop is like many North America-trained executives, a great communicator. He spun his poisonous web with the sweet smell of lies and innuendo.
So lets be clear. As I wrote a year ago, the sentiment in the memo was totally correct. Nokia was facing ever tougher competition, at the high end from the Apple iPhone and Google's Android. At the low end from Chinese handset manufacturers. And that the battle for the future for Nokia would be ever more about smartphones and their ecosystems. I totally agreed with that sentiment a year ago, and I still totally agree with it today. Nokia had been in the process of changing, but needed to change much more still. The sentiment was all correct. I fully supported the sentiment in the memo.
The so-called facts in the memo were wrong throughout, as I have indicated in the above. I wrote my first analysis of the blatant errors in the blog back on 9 February 2011. Elop himself has walked back more than a dozen of those statements, admitting often that he had been wrong.
But the dastardly part of the memo is that Elop said one thing, while clearly doing the opposite. So where the sentiment and main themes of the memo were indeed the right direction for Nokia - Elop then took the past year and did the exact opposite. Yes, Mr Rumsfeld, did you say 'we will be greeted as liberators?'
The Burning Platforms memo said the future would be about smartphone ecosystems. Elop then took the world's largest and strongest ecosystem and torpedoed it. He then proceeded a few days after this memo to announce that Nokia replaces the Symbian, MeeGo, Ovi Store and Qt development tools based ecosystem - by far the biggest in the world, and being open source based, it was also the most robust and strongest for the future. He replaced it with the smallest and weakest of them all, the one by Microsoft called Windows Phone, which is not open source and where Nokia has no control of its future, becoming in effect the slave to Microsoft. We are just celebrating Black History Month in the USA. Imagine after the US Civil War which freed the slaves, if some slaves who were free (Nokia) would then voluntarily move to some other country where they still had slaves (like many countries in Latin America) and voluntarily sold himself and his family as slaves again? How idiotic is this?
One year ago, in February 2011, Windows Phone was already so weak, the then-new OS was already shrinking in size perilously, YES! All other new operating systems grow - Microsoft Windows Phone was already shrinking. Microsoft gave away 2 million Windows Phone handsets but couldn't then maintain that level in real sales. A year ago, it was already being outsold by not just bada of Samsung, but Microsoft's own older OS, Windows Mobile. Still now, the latest quarterly data from the USA, Microsoft's best market - tells us that Windows Phone cannot outsell even Windows Mobile. The tiny market share of Windows Phone fell by more than half in the next nine months after Elop selected it.
Elop proceeded to destroy his existing strong ecosystem, from abandoning the promised evolution path for developers from Symbian to MeeGo, to terminating the Ovi store branding, to shifting away from Nokia's long-standing supplier chain partners, to selling sets of its patent portfolio, to selling its advertising arm, to selling whole factories and thousands of designers and programmers. Elop talks one thing, he does the exact opposite.
THE CRUEL BOTTOM LINE
This kind of management communication is one of the future strategy of a corporation. The effect of that strategy is best measured 'by the bottom line' ie how did Nokia do, before and after this memo.
In 2010, Nokia Corporation as a whole (including the networks unit and Navteq and other parts, including handsets obviously both smartphones and dumbphones) had sales of 42.2 Billion Euros (about 57 Billion dollars). Where the hardware side of the mobile industry where Nokia competes against Motorola, Ericsson, Samsung, Alcatel-Lucent, Apple, RIM, Huawei and ZTE - grew by 12%, Nokia's sales also grew.. by 4% from the difficult year 2009 before. Nokia's growth was hampered by the NokiaSiemens Networking unit. The growth engine for Nokia was its smartphone unit, which generated 17% growth in revenues for Nokia in 2010.
Now in 2011, guided by the Burning Platforms memo, while the mobile telecoms hardware industry grew again by about 12%, Nokia did not see growth in revenues. Nokia total corporate revenues fell by 9% to 38.7 Billion Euros (52 Billion dollars). So Elop's Burning Platforms memo and his subsequent actions swapped revenue growth of 5% for revenue decline of 9%. The true 'bottom line' destruction in Nokia revenue growth was a decline of 14% in revenue growth - this while the industry grew 12%. The effective damage was thus 26% to Nokia's relative position against all its major rivals like Samsung, Apple, Sony, RIM, HTC, Ericsson, Alcatel-Lucent, Huawei etc.
DRIVEN TO LOSS-MAKING
Usually, when a CEO forces his company 'on a diet' to make sacrifices, it is because the corporation has become loss-making, then the CEO forces austerity measures to help a smaller company recover profits. Elop seems to be doing the opposite. Again, remember 'Greeted as Liberators' - Elop does strictly the opposite of what he tells is the smartest thing to do.
For the full year 2010, Nokia total profits grew by 72% from 2009 when the annual profits had shrunk to perilously low levels. Even so, throughout the economic crisis of 2008-2010, Nokia was the only major legacy handset maker with a full portfolio of both smartphones and dumbphones - who generated a profit in the handset unit in every quarter of the economic crisis. The crisis pushed Samsung, LG, Motorola, SonyEricsson etc into loss-making and finished off several of Nokia's long-standing rivals like Palm and Motorola, and resulted in Ericsson finally ending its handset production last year, selling its share of the SonyEricsson partnership to Sony. But yes, Nokia was the only major full-portfolio handset maker who weathered the economic crisis so well, that its handset unit never reported a loss in even one quarter.
After the Burning Platforms memo, for 2011, Nokia profits plunged into loss-making. This took Elop by surprise and Nokia issued a profit warning and all three ratings agencies have issued warning after warning downgrading Nokia ratings. The profits now for 2011 had vanished and instead of 2.1 Billion Euros of a Profit as Elop inherited in 2010, he now pushed Nokia into generating its first annual loss ever since Nokia Corporation reogranized and focused on the telecoms sector two decades ago. Nokia's corporate loss for the full year was 1.1 Billion Euros. So his memo and Elop's further destructive actions directly caused 3.2 Billion Euros of losses to the company for the full year.
MAYBE WAS NOT THAT BAD?
So maybe Tomi is now 'cherry-picking' the most extreme data points? Maybe the year 2010 was particularly rosy and the full year data for Nokia was particularly bad, but the trend is perhaps a lot better? Lets examine.
Q4 of 2010 was the first full quarter, where Stephen Elop was in charge of Nokia. Nokia had been in trouble before Elop came onboard. The previous management by Olli-Pekka Kallasvuo had mismanaged Nokia badly and I have said so here. And Elop took early decisive steps to help drive Nokia back to healthy profits, including some painful layoffs that many in the industry - including me - agreed was the right thing to do.
So I am not trying to revise history. Lets stick to the numbers. If we look at the first full Quarter that Elop had run Nokia, the total Nokia corporate revenues that quarter, Q4 of 2010, grew 23% from the previous Quarter ie Q3, before Elop. Similarly profits, Nokia Q4 operating profit grew 72% from Q3 of 2010. Nokia had been in trouble in 2009, but since Elop took charge in late 2010, Nokia was clearly on the mend and feeling healthier again.
Since then, now the latest Q4 of 2011, the latest achieved by Elop, compared to the only one he did before the Burning Platforms memo, the revenues of Q4 2011, compared to Q4 of 2010 - are down 21% !!!! So the trend is actually far worse than the overall annual data.
The Nokia corporation operating profit in just Q4 of 2010, the first Quarter Elop was in charge, was 884 million Euros (1.2 Billion dollars) - note that was in just the one quarter. Now one year later, in Q4 of 2011, Elop's new Burning Platforms-based Nokia produced a corporate loss of 954 million Euros (1.3 Billion dollars). So the trend is even worse than for revenues overall. In profits, Elop found a very healthy, 'recovering' Nokia corporation, that was able to generate 1.2 Billion dollars of profits in just the Q4 quarter, and with the Burning Platforms memo and the rest of Elop's mad management style, he now swaps the strong profits for massive 1.3 Billion dollar losses per quarter!
WHAT OF THE HANDSET BUSINESS?
The Nokia corporation total business has four major elements, handsets form two of those, the smartphones and dumbphones. The third large unit is the Networking division NokiaSiemens Networks, and the fourth but far smaller is the Navteq unit with maps, navigation etc. Nokia has been in the process of selling the NSN unit and Navteq is not generating profits. Lets not include those, and lets look at Nokia's primary business, the handset side which generated two thirds of Nokia revenues when he took over. That is clearly the future for Nokia as Elop is trying to sell the NSN unit, so the handsets division is what Elop should be prioritizing. Maybe the above is not the real full picture, and the reality is better at handsets.
Well, first of all, the handset industry overall grew by 14% from 2010 to 2011. Nokia's handset unit sold a sliver under one third of all handsets of the world in 2010 and the unit had growth of 5% in total handset unit sales from 2009 to 2010, and also 5% growth in revenues generated by the handset unit from 2009 to 2010. How did the Burning Platforms memo help Nokia's core business?
Nokia's handset business turned from growth to decline, right after the Burning Platforms memo. The next quarters Nokia reported declines in unit sales and revenues. Today we see the results for the full year 2011 and Nokia exchanged an annual growth rate of 5% in handset unit sales, to a decline of 8% from 453 million to 417 million handsets. The loss in Nokia's growth rate due to the Burning Platforms memo was a true decline of 13%.
But that does not take into account the strong growth of the industry, so as I said, the world's handset market grew by 14% in the past 12 months. So when comparing Nokia to its competitors, under Elop's past 12 months, Nokia has fallen behind its competitors and the market overall by - 27% !!! Note, this is not just 'smartphones' (which is far worse). This is the overall total handset business, Nokia's core business. The Burning Platforms memo and Elop's subsequent mismanagement turned Nokia's growing handset unit into declines. Elop has wiped out a quarter of Nokia's core business.
All the news from the handset unit is bad. Not just unit sales are down. Revenues are down 13% when the global industry grew. Profits in the handset unit are down by nearly a third from 17% contribution margin in 2010 to 12% today. And that modest profit obviously now is all produced by the low-cost 'dumbphones' as the smartphone unit has been plunged into loss-making.
IS TREND ANY BETTER
So if we again look beyond the full-year results, and look only at the last quarter, for the latest trend signs. Are things getting better or are they getting worse at Nokia? Because Nokia changed its accounting units, we can't do an apples-to-apples comparison in the quarterly data all the way back to 2009 but we can compare Q4 of 2011 to Q4 of 2010. The new reporting unit for Nokia includes handsets and services called Devices and Services (so this is even more in line with Elop's 'ecosystems' thinking) but most of the revenues are coming from handsets, not services still today. So this is close to comparable to the old 'handsets unit' of Nokia.
A year ago for the Christmas Quarter, Nokia's Devices and Services unit generated sales revenues of 8.5 Billion Euros (11.5 Billion dollars). That has crashed 29% in the past year to 6.0 Billion Euros (8.1 Billion dollars) today. The trend is FAR WORSE looking at the latest quarter, than the full year. 29% decline for the latest quarter, vs 17% decline comparing the full years. Yes, the situation is far worse.
Nokia's handset average sales price (ASP) was 69 Euros (93 US dollars) it is down 23% to 53 Euros today (71.50 US dollars). Nokia's operating margin in the Devices and Services unit was 12.1% in Q4 one year ago, it has fallen by 61% to 4.9% today. Nokia total profits generated in Q4 a year ago by the main business, the Devices and Services unit of Nokia was 1B Euros, or on an annual basis, 4 Billion Euros (5.4 Billion US dollars of annual profits). That has cratered to 295 million Euros in Q4 of 2011, or 1.2 Billion Euros annually (1.5 Billion US dollars).
The Burning Platforms memo, comparing the last full quarter before it, when Elop was already in charge, to the latest quarter with Elop in charge after the infamous memo - means Nokia has destroyed 3.9 Billion dollars of annual profits - this while the global handset industry grew by 14%!
COMES DOWN TO SMARTPHONES
The Burning Platforms memo was about all of Nokia, and not only about smartphones. But the emerging consensus view of the handset industry is that the future of handsets is smarpthones. And increasingly experts are coming to the view that in the near future, all phones made will be what we now define as 'smartphones'. So the critical item of the future of any legacy handset maker is how they manage the transition from dumbphones to smartphones. Note, Apple, HTC and RIM don't need to suffer this painful and expensive transition, they all started in this industry only recently, as 'pure' smartphone makers. The older legacy manufacturers like Nokia, Samsung, Motorola, SonyEricsson, LG etc have to manage a costly transition from selling basic dumbphones to the more modern, more expensive and more profitable smartphones. All but Nokia had suffered loss-making quarters in that painful transition - only Nokia managed the change profitably in its handset unit. Some of Nokia's legacy full-portfolio handset makers did not survive the transition from dumbphones to smartphones, see Siemens, Motorola and now Ericsson out of SonyEricsson partnership.
Nokia invented the smartphone. Nokia provided QWERTY based business-oriented smartphones four years before the first Blackberry by RIM. Nokia then invented the consumer-oriented smartphone, again four years before the first iPhone. Nokia provided touch-screen smartphones, an app store based ecosystem etc long before the iPhone. When Elop took over, Nokia was not just bigger than RIM, or bigger than Apple in smartphones, in 2010, Nokia's smartphone unit alone was literally bigger than all smartphones sold by RIM and Apple - combined. That is what you call market dominance. It is far bigger a market lead than what Coca Cola has over Pepsi, or what Toyota has recently had over General Motors (and now GM seems to have taken the lead again). It is far more than Airbus's lead over Boeing. It is far more than Samsung's lead over Sony in televisions. It is hard to find any recent consumer technology industry that has existed for more than ten years and where there is genuine global competition, where the market leader is so much stronger than its nearest rivals.
There was (and still is) a widely-held misconception in the USA, that Nokia had lost to the Apple iPhone and Google Android. This was because Nokia had, indeed, fallen behind in the US market. What Nokia had focused on, instead, was the rest of the world. When any investor is told the truth about the mobile phone global market, that the USA accounts for only 5% of all mobile phone accounts - and that Nokia was the overwhelming market leader on all other continents except North America - both in dumbphones and yes, smartphones - then the picture changes. In almost any other industry from car sales to airplane sales to movie box office revenues to music sales to computers to advertising revenues, the USA accounts for the lion's share of the world market. That is not the case in mobile phones. The world's biggest smartphone market is no longer the USA, it is China. In 2010, Nokia's market share in Chinese smartphones was 76% according to Canalys. Who cares, if Apple had 22% of the US market - the US total mobile phone market had reached 100% penetration level in 2011 and was stagnant, the only growth in smartphones was the migration from dumbphones to smartphones. Nokia was crushing Apple in China in smartphones - by 20 to 1 in 2010 - and the Chinese smartphone market was still growing strongly. This year 2012 China's smartphone market will be 50% biggert than that in the USA, and in two years will be more than twice as big. And China is not even the fastest-growing mobile market in the world - that is India - another market where Nokia crushed Apple in smartphones by more than 20 to 1 in 2010. This is the debate about the 'mind share' what Elop was hired to manage for Nokia, to help educate the investors and partners, that Nokia globally was the giant and Apple and RIM and HTC were the little start-ups who did, yes, sell a lot in the US market but globally, were utterly dwarfed by Nokia. But Elop didn't want to deal with that reality. He wanted to change the strategy that was winning.
That is what Elop found when he came to Nokia. Nokia's smartphone unit had been in trouble before, yes, with delayed handsets and soaring costs, but that situation had been mostly past by the time Elop took over. Look at Nokia smartphones in Q4 of 2010, the first quarter Elop took over. Nokia's smartphone division had grown unit sales 48% for the full year 2010 compared to 2009. The revenues at the smartphone unit had grown 17% for the full year. And while Nokia didn't break down the profitability at that time, since then after Nokia's changed internal accouting, we found out that in Q1 of 2010 the profit margin for the smartphones unit was 9% so using that percentage for the year 2009, Nokia would have had about 1.1 Billion Euros of profits in the unit for the full year 2009. That had now grown in 2010 to 1.4 Billion Euros, so Elop's critical smartphone unit had seen a growth of profits of 27% in one year.
Most importantly, the first full quarter Elop was in charge, in Q4 of 2010, Nokia smartphone division profits exploded by 65% in just three months! This is the future of the industry, this is the future of Nokia, this is what Elop gets to run and manage, and his flagship unit is strongly roaring back into strong profits. The 25% of Nokia handset sales generated nearly half of Nokia corporation's total profits essentially subsidising the loss-making Networking unit at the time. If that was not a 'winning asset' for the new CEO, nothing can be. You tower over your rivals, you are profitable - and you grow strongly, and your profits are growing fastest
The global smartphone industry grew 71% in 2010 from 174 million units of smartphones sold to 298 million. Nokia did not match the industry growth rate, and thus did see some erosion of its market share, but Nokia did grow 48% of Nokia branded smartphone sales in 2010. And Nokia still sold more than a third of all smartphones sold worldwide that year, with a market share of 34% for the full year 2010. Nokia was still recovering from the troubled global economy, but did see total smartphone unit revenues grow by 17% and its profits in the smartphone unit grow by 27%. If you are the CEO and see a loss in market share, but that is exchanged for an increase in profits, it is usually not a bad thing, especially if your company was already profitable and it still grew overall company sales at a very healthy rate, with increasing profits.
Now the Burning Platforms memo. Since then, in 2011, the global smartphone industry grew by another 63% from 298 million to about 485 million units (we still await the final numbers from some analyst houses). Nokia's major smartphone maker rivals like Apple and Samsung grew very strongly, Apple nearly doubled its smartphone units in size, while Samsung grew by nearly 3x in size last year.
How did Nokia's vital smartphone unit do in the past year, powered by the Burning Platforms memo? Nokia took a smartphone growth rate of 48% per year, and replaced it with a decline of .. 25%. Nokia smartphone sales collapsed from 104 million in 2010 to 77 million in 2011. This while the industry exploded by 62% growth! When you go from 48% growth per year to 25% decline, it means your growth rate declined by their combined rate or 73% ! Nokia's CEO has demolished 73% from Nokia's growth in its most critical smartphone unit, in just one year.
That is not the full picture. Because the industry grew so strongly, Nokia needs to be compared to the industry growth. If Nokia held steady with only the rate of the industry growth in the past year, and thus grew 62% like the industry (bearing in mind Apple almost doubled in size and Samsung nearly tripled in size) then Nokia should have sold 168 million smartphones this year. Instead, Nokia only sold 77 million. So in a very literal sense, for the full year, Elop has demolished 55% of Nokia's smarpthone market. But that picture is not giving the full story, because Q1 of 2011 included China gift-giving seasonal sales, which happened just before the Burning Platforms memo. So for us to see how big the damage is, we really have to compare Q4 of 2011 to Q4 of 2010.
TREND IN SMARTPHONES, Q4 TO Q4
The Nokia smartphone unit in Q4 one year ago, in 2010, had unit sales of 28.3 million units. Just compared to the immediate previous quarter, the smartphone unit had seen 7% growth (quarter-on-quarter, not year-on-year). Nokia's smarpthone unit in Q4 had just seen a jump of 22% in revenues in just one quarter, and a giant leap in profits just in one quarter, of 65%. The profit margin in the smarpthone unit was 12%.
One year ago, in Q4, the Nokia smarpthone unit was the strongest unit in all of Nokia, delivering only 25% of Nokia's handset sales, but 33% of Nokia's total revenues, and 45% of Nokia's total profits. Compared to the previous quarter (and the time before Elop) the Nokia smartphone unit was growing unit sales very strongly, growing revenues even more strongly and jumping profits massively.
Now one year later, in Q4 of 2011, Nokia's smartphone unit sales are down to 19.6 million units. A year before, Nokia was growing 48% in smartphones, now under Elop, Nokia's key smartphone division saw unit sales crash by 31%. He caused damge to Nokia's growth of 79%. Compared to the industry growth, Nokia should have sold 52 million smartphones in Q4 of 2011, if only Nokia had held its share from 2010. Instead under Elop, Nokia smartphone sales collapsed and Nokia smartphones produced sales that are down 63% from what it should have been.
Nokia's market share has crashed. Nokia sold 34% of all smarpthones in 2010. Now Nokia sells 12% of all smartphones globally. Nokia's ASP for smartphones has fallen 9% to 140 Euros (189 US dollars) which obviously is now under 200 dollars for the first time in Nokia's history. And it should be noted, that this is an artificially high number, as it reflects 250 million dollars of Microsoft cash given to Nokia. If measured by money paid by consumers, the 'true' Nokia ASP is down to 127 Euros (172 US dollars) and reflects a crash of 18% from the 154 Euros it was in Q4 of 2010.
Nokia smartphone division quarterly revenues have collapsed 38% from 4.4 Billion Euros (5.9 Billion US dollars) one year ago at Q4, to 2.7 Billion Euros (3.6 B US dollars) now in Q4 of 2011. This all while the global smarpthone industry grew 62% in 2011. Just comparing quarter-to-quarter one year ago, Elop's memo has demolished 2.3 Billion dollars of smartphone sales revenues - per quarter! That means the equivalent damage of 9.2 Billion dollars of annual revenues. Elop is not the 8 million dollar man, he is the 9 Billion dollar man. He wiped out 9 Billion dollars of revenues from Nokia's division of the future. And thats before we account for any growth. If Elop had not touched anything, and Nokia had grown 'anemically' slower than the industry, at 48% like it did in 2010, Nokia would have sold 42 million smartphones in Q4 and even at the ultra-lowly (without Microsoft) ASP of 127 Euros, would have produced quarterly revenues of 5.3 Billion Euros (up 21%) ie 7.2 Billion US dollars. At an annual level that reflects revenues of 28.8 Billion dollars. But rather than deliver that for Nokia shareholders, Elop gives them 3.6 Billion dollars in Q4 which reflects an annual revenue level of 14.8 Billion dollars. Elop has wiped out half the rate of revenues Nokia was capable of just a year ago. Wow, what a memo, eh?
And Nokia's profit engine? It was shut down by Elop, it new bleeds cash. One year ago, in Q4 of 2010, the profits in Nokia's smarpthone unit were up to 510 million Euros (reflecting a growth of 65% from just the quarter before). That has been replaced by increasing losses, the losses at Nokia smartphone division are now at 192 million Euros in Q4 of 2011. Ever since the release of the Burning Platforms memo, for the three full quarters that have reported since, the Nokia smartphone division has reported a loss every time. So Elop replaced 510 million Euros of profits with 192 million Euros of losses. Just in the smartphone unit alone, Elop cut away 702 million Euros out of Nokia's profits - per quarter. That is the equivalent of 2.9 Billion Euros of annual profits demolished (3.9 Billion US dollars of annual profits).
HOW BIG IS BIG?
Elop's Burning Platforms memo (and yes, Elop's subsequent actions since like Microsoft, MeeGo, Ovi, Navteq, Qt, N9, N950 etc) have destroyed - just at the smartphone unit of Nokia - 3.9 Billion US dollars worth of annual profits. Without allowing for any growth at all - at the very very bare minimum, ignoring any damage to Nokia overall brand and Nokia's other units - Elop's Burning Platforms memo has caused Nokia a decline of 3.9 Billion dollars of annual profits. How big is that? The Fortune Global 500 listing tells us that profits of 3.9 Billion dollars are ranked about 130th biggest profits on the planet. For example total annual profits in roughly that scale are those of Nissan or Tesco or Walt Disney or Telecom Italia or Annheuser Busch or American Express etc.
Or to put it in another way. Just in the smartphone unit, Nokia abandoned annual revenues of nearly 15 Billion dollars and profits of nearly 4 Billion dollars. The Fortune Global 500 listing for 2011 had Blackberry maker RIM annual data as revenues of 19 Billion dollars and profits of 3.4 Billion dollars. In very rough terms, Nokia CEO Stephen Elop and his Burning Platforms memo has wiped out from Nokia smartphones the size equivalent to that of RIM, the maker of the iconic Blackberry! And in 2010, RIM was the world's second biggest smartphone maker slightly ahead of Apple's iPhone by unit sales.
Stephen Elop is the ultimate internal assassin murdering all of Nokia's corporate future and success. Because there is one more metric
TRANSITION IS REVERSED
The world of mobile phone handsets is currently in a transition from dumbphones to smartphones. In 2010, 22% of all mobile phones sold worldwide were smartphones. In 2011 that is up to 30% and for Q4 we have passed the point of 33% of all mobile phones sold worldwide being smartphones. We expect that the global tipping point will happen in a little over a year from now, when half of all handsets sold worldwide will be smartphones. Motorola reported that it had migrated 80% of its handset sales from dumbphones to smartphones last year, and Sony said after it bought out Ericsson from the SonyEricsson partnership, that this year 2012, will be the year Sony(Ericsson) will complete the transition and for Sony all of its handsets sold will be smarpthones.
The clear global trend is from low-cost dumbphones to higher cost smartphones. And Nokia was fully aware of this. Every year Nokia's market share in smartphones was higher than that it had in dumbphones. So very literally, as Nokia migrated its customers from dumbphones to smartphones - Nokia was gaining customers! The reverse was the case for most rivals, I calculated a few years ago on this blog that Motorola was suffering so badly in the transition that it was losing 7 out of every 8 customers it had, when trying to migrate them from dumbphones to smarpthones.
In 2010, 22% of all handsets sold worldwide were smartphones. But Nokia's own sales had reached the level of 25% of all Nokia branded handset sales being smartphones. Nokia was strongly ahead of the curve and yes, literally, Nokia was picking up market share as it migrated customers - so where the 'conventional wisdom' suggested Nokia was only a cheap phone maker for Africa and Asia, in reality, Nokia was remarkably capable of gaining share as it shifted customers to smartphones.
How are we today, after Elop's Burning Platforms memo? In Q4 of 2011, 33% of the world's handset sales are now smartphones. And Nokia's own ratio? Thanks to Mr Elop's mad management, Nokia now only sells 17% in smartphones, of all of its Nokia branded phones sold worldwide. Nokia has regressed dramatically and is now going against the global trend. While all other major rival full-portfolio handset makers like Samsung, Sony(Ericsson), Motorola, LG etc are pushing for a shift from dumbphones to smartphones, Nokia is going int the opposite direction! Nokia's Elop has truly snatched defeat from the jaws of victory!
In the MBA textbooks (likely ebooks) published in the 2020s decade, the lessons will be had about how the most widely spread technology ever - mobile phones - were once ruled by Nokia and Motorola. How Motorola lost its lead when the handsets transitioned from analog to digital handsets and Nokia took over. But then came the transition from basic voice and text oriented '2G' handsets to the 3G oriented data-intensive smartphones. And that while Nokia invented that shift, and Nokia literally led its rivals in that shift (even as new makers like Apple and RIM and HTC came in to shake the field). Nokia saw a pivotal moment in 2011 when Nokia towered over its rivals, more than twice as big as Apple's iPhone - and suddenly Nokia lost the plot.
Nokia was growing strongly in smartphones, generating healthy growth in revenues and huge growth in profits. Then the new CEO Stephen Elop in his bizarre madness refused all that, and instead plunged Nokia into a year of disasters and destruction. Elop caused Nokia growth to stall and collapse. Growth in handsets overall and more importantly growth in smartphones, turned into catastrophic decline. Revenue growth reversed into decline. Strongly growing profits turned into massive losses. The point where that started was not in 2009 under previous CEO management. Yes, Nokia had tons of problems, they were problems of execution, not of strategy. Elop was hired to fix problems of execution, not abandon Nokia's strategy. And the pivotal moment was that infamous memo, the Burning Platforms memo, which ignited the utter global collapse of profitable smarpthone-maker giant. Never in the history of mankind, have we seen the global leader of any 'platform' type of business like VCRs or DVD players or videogaming consoles or personal computers - or smartphones - abandon the race when they are leading it - towering over rivals in fact. Elop will be celebrated as the biggest fool in the economic history of mankind (and unfortunately for me as a Finn, the Nokia name will become synonymous with total suicidal surrender and commercial failure)
THE SENTIMENT WAS CORRECT
The Burning Platforms memo had a sentiment that was correct - Nokia was facing more competition and had to embrace change. There was strong competition from Apple and Android onto low-cost Chinese handset makers, and the fights of the future were to be won ever more on ecosystems. Elop could have used a revised/corrected memo to his advantage.
The actual memo however, had tons of errors in it, and its communication was interpreted globally as the CEO of the company bad-mouthing his own products, exactly like with the Ratner Effect. The damage from the Burning Platforms memo was immediate and comprehensive. We saw signs of it in the Q1 results last year, but that hided success out of China before the memo was released. So the real results were obvious in Q2 data and since then Nokia has seen a comprehensive global collapse of its business.
The Burning Platforms memo caused a collapse in the trust in the Nokia brand. The Nokia resellers boycotted which further fuelled the sales losses and crashed the value of the Nokia brand. Elop himself has repeatedly admitted that the situation is beyond his control, and he is helpless to steer his company. He admitted in quarterly results several times that the results surprised him, the unit sales loss was bigger than he anticipated, etc. He was ashamed to announce an unanticipated profit warning last Spring and since then Nokia has reported losses. The steady Nokia management was always known for reliable longer-term guidance for the next year, and Elop has ended that, admitting he is incapable of giving investors guidance on how Nokia will be in a year from now. That is all symptomatic of both incompetence and the immense damage done by this notorious memo.
NOW NOKIA IS BURNING
Nokia is bleeding. Elop is now firing staff and breaking what promises he had made. Previously Elop promised another 150 million Symbian based smartphones, now that is no longer true. Nokia is having a fire sale of its best assets, including trying to sell premium luxury phones unit Vertu, selling the advertising arm (what happened to a war of ecosystems haha) and already selling several batches of Nokia's best patents. Nokia has closed several factories including all remaining handset factories in Europe and obviously its last handest factory still in Salo Finland. Elop has already fired 30,000 Nokia staff or about a quarter it had when he took over.
Nokia was the 120th largest global corporation in the 2010 Global Fortune 500. After the damage by Elop, Nokia has already fallen so much it won't be in the top 200 when the next issue comes out this summer. Comparing the latest Quarter Q4 of 2011 to that one year ago, the total Nokia corporation has shrunk by 21% and turned from strong profits to big losses. Nokia's brand was the only European brand in the top 10 most valuable brands on the planet, and under Elop's leadership, the Nokia brand fell out of the top 10. Nokia's share prices were growing in the first five months under Elop's leadership - grew by 11% and had climbed past 8 Euros per share. Since this Burning Platforms memo, the Nokia share prices have fallen by more than half and are worth under 4 Euros today.
When Elop took over, Nokia smartphones were more than twice the size of the iPhones by Apple. Exactly one year later, by Q4 Apple's iPhone was selling twice as many smartphones as Nokia! Elop talked about ecosystems in his memo, but since the memo Elop has set fires to just about every Nokia-owned component of the world's strongest smartphone ecosystem, from ending the migration path for the developer community (via Qt) to eliminating various ecosystem parts or selling them like now with advertising.
The Burning Platforms memo did not mention Microsoft, the platform Elop next selected. I have not discussed the viability of the Microsoft strategy for Nokia (I have been analyzing it deeply on this blog before). It should only be said, that the current expectations by companies such as Morgan Stanley see the Nokia smartphones overall, led by the Lumia (Microsoft Windows Phone) platform to achieve something like 8% market share next year 2013. So Elop owned 33% of the global smartphone market, and now he might end with 8% next year? (and that 8% is seen by many as too rosy by the way, reality is more like 6% or 7%). Do I think this is a viable strategy? Of course not. Microsoft was yet another utterly futile decision by Elop, and one that was outrageously silly, as Microsoft's Windows Phone was literally shrinking in size even as Elop was selecting it - the smallest of 8 platforms and shrinking! This Elop would take to replace Nokia's platform which was the world's biggest - and still growing !
I'm sorry about the long rant on this blog, but I had to come back to the Notorious Burning Platforms memo for one, final, definitive analysis of how factually true - or not - it was - and what was its true effect. It will go down in history as the most damaging management communication ever about the existing products and services of any global Fortune 500 sized company. And as I explained, the memo has cost Nokia more than 14 Billion dollars just in its smartphone revenues (more in other units) and 3.9 Billion dollars of annual profits lost. It is the most damaging memo ever. And Elop should be fired just for the principle of holding management accountable for its mistakes. If you make the biggest mistake ever, you should be fired (for cause! So fired without any golden parachutes).
I LOVE NOKIA
A bit about me. This is not a hate blog about Nokia. I am a Finn, I was employed at Nokia HQ and left more than a decade ago. My first book was sold as an official Nokia book by Nokia. Nokia has used me and my consulting services widely over the past decade, all over the planet. I love Nokia. One of the phones I carry currently is a Nokia (the E7). My joke is that if you cut me, my blood is not red, I bleed Nokia blue. I love Nokia. I also felt Nokia was in trouble for many years, and was going in the wrong direction under Kallasvuo's management. I warmly welcomed Elop when he was hired and I wished him well here on this blog. I supported most of his actions in his first five months of leadership. It was this moronic Burning Platforms memo, which exposed to me, the true Stephen Elop as the 'delusional psycopath' who would destroy Nokia.
Delusion, you'll remember, means according to Wikipedia 'holding an absolute conviction despite superior information'. So if the CEO is shown superior factual data, he will still hold to his mistaken belief, and prefers to manage under a false perception, even as he is presented better factual information to the opposite. The Burning Platforms memo illustrates clearly that Elop was delusional when he wrote it - he even admits that with his words since, when he has issued statements correcting or backpeddaling from many of those idiotic statements in the memo.
Also remember the definition of psycopath again by Wikipedia, the pervasive pattern of violation of the rights of others - in this case the shareholders of Nokia and employees of Nokia and the company and its future as a whole. Elop has taken a willful pattern of deliberately destructive actions against the best interests of Nokia, and done it consistently. The only pattern an intelligent outsider can find, is to compare to the best interests of Microsoft. Elop's actions have been against Nokia's best interests - but can be explained as pursuing the best interests of another corporation, Microsoft - and as such, Elop is in breach of his fiduciary duty as CEO of Nokia. So please don't think Tomi hates Nokia. I love Nokia. But Elop is destroying Nokia and most dangerously, he is doing that inspite of superior information to the contrary. He refuses to deal with reality and has created a false world inside his head, to guide his management decisions. He has to be fired now, while there is a Nokia still left to save.
Elop correctly identified in the memo, that Nokia management had become lax and "lacked accountability and leadership". Yes, Stephen Elop, new CEO of Nokia. I will hold you accountable on this blog, even if the Finnish newsmedia seems silent, even if the major Financial press seem silent, even if the Nokia shareholders seem silent. You, Stephen Elop issued this management memo. You are responsible. You must account for the permanent damage you have caused. Because of your mismanagemenent Nokia is now selling assets like factories, firing tens of thousands of truly competent and skillful staff - who had been winning the war before you stepped on their success and ruined it for Nokia. You Elop said Nokia needs accountability. This is accountability. You are the biggest management failure of all time (of any Fortune 500 sized company CEO) and by EVERY measure you reversed growing profits and leading the industry for declines, losses and abandoning the leadership positions.
UPDATE FEBRUARY 13 - Stephen Elop was interviewed at Business Day the daily financial newspaper of South Africa. He said among other things "Nokia is no longer on a burning platform" and compared to the Burning Platforms memo time of a year ago, today Nokia was "facing a new era of growth". He added "Nokia's future was secure" (??? !!! ??? - is this not the same guy who cannot commit Nokia future to investors beyond 3 months?). Elop says much has changed at Nokia since he wrote the memo (duh! For the WORSE). He has already fired more than 30,000 Nokia employees and is unwilling to commit to no further cuts (yet is somehow certain of Nokia's future being 'secure' ?). And at the end of the interview we see the most damning statement by a CEO in utter denial of the market share collapse happening around him - Elop said he "would not lose sleep over the pace of growth of Samsung" !!!
In very short summary. A year ago Elop felt Nokia was on a burning platform when Nokia's smarpthone unit was growing 48% per year, was twice the size of its nearest rival, generated a third of Nokia's revenues, nearly half of Nokia's profits and was leading the industry average in migrating Nokia's customers from dumbhpones to smartphones. Nokia's ecosystem was the widest, strongest, biggest, most lucrative on the planet, either leading or second in rank by every measure imaginable, in most cases several times larger than its nearest rival. The total Nokia corporation generated a profit and Nokia's smartphone unit powered the growth of profits. Nokia's share price had grown 11% in the first five months of Elop's leadership. This is Elop's image of a catastrophic picture for Nokia that demands jumping off a burning platform.
Today Elop finds Nokia fallen to third in smartphones, declining sales 27% when the industry grew 60% and Nokia's biggest rival towers at twice the size of Nokia. Nokia's smartphone unit generates under a quarter of Nokia's revenues and generates a 4 Billion dollar loss to the corporation. Nokia has reversed the migration from dumbhpones to smartphones, now Nokia customers are abandoning the Nokia brand when they go from dumbphones to smartphones. Nokia's ecosystem is devastated and bleeding and many parts of it are sold. The whole Nokia corporation is generating a loss and the loss is powered by ..that smartphone unit that the burning platforms memo mostly focused upon. The Nokia share price has lost 55% of its value in the past 12 months of Elop's leadership. And Samsung has passed Nokia selling twice as many smartphones as Nokia, and is poised to pass Nokia for global leadership in all mobile phones this year - doing that profitably - and Elop sleeps soundly not worrying about Samsung. This is apparently no longer a time to worry about Burning Platforms. Now Nokia is safe in the alternate universe that is Stephen Elop's mind. Please Nokia Board - Fire this lunatic now!
I welcome comments on this blog. Please note, I have a rule, your comment must reflect the fact, that you read the actual blog article. I know its a long article, but do not post comments if you didn't read it all. If anyone says 'Tomi is delusional because he wants to go back to Symbian' - I never said that, and your comment will be deleted without mercy. Same is true if you claim Tomi thinks Nokia was fine before Elop, or if you suggest I didnt' see there were good points in the memo. You have to read the full blog here, if my response to you would include the line 'if you had read the blog article' - such comments will simply be deleted, regardless of what other valuable points you may have made in your comment. Be warned.
And obviously, in this case, I will limit all discussion to the memo. You must talk about the memo, its effects and facts. We will not debate once again details about Android or Windows Phone or the iPhone. There are plenty of blog articles here about those matters. This discussoin will be limited to the Burning Platforms memo, and its effects to Nokia. But I do welcome your thoughts. Was this the most damaging memo ever written?