This is the blog of what happens when Two Plus Two is Less Than Two. Not less than four, that was not a typo, I really meant less
than two! Or in other words: why do we know now, that Microsoft's Nokia gambit has failed beyond recovery.
This blog is not about Nokia's record-setting failure in smartphones. I have written enough about why I evaluate Nokia CEO Stephen Elop as the worst CEO of all time. If you want the first 19 reasons, they are here. The 20th reason is here, and the 21st reason is here. I am not alone in calling Elop incompetent and one of the worst managers alive, or even possibly the worst CEO of all time. This blog is not about the Nokia point-of-view. This is now the calculation from Microsoft's angle. How did it turn out for them. The Nokia partnership was the most certain slam-dunk gambit that could not fail, no matter how badly it might be botched, this was so pure gravy for Microsoft, they would always end up roses in the end. The scheme that could not fail. Like Baldrich would say on The Black Adder, I have a cunning plan...
When high-priced management consultants and mergers and acquisitions experts talk about corporate takeovers, partnerships and mergers, they talk of 'synergies'. They hope to achieve that optimal condition, where two companies are so good together, their combined performance is more than their two separate parts were independently. So they hope to find a mathematical formula where 2 plus 2 equals more than 4. The parts, when merged will achieve more than they did independently. That is often the hope, in reality it rarely succeeds, but it can be done (far more often in measurements of financial performance than other metrics, and achieved through cuts of overlapping functions, but nonetheless).
So that is the optimal. The next best thing is to hope that the two entities, when added together, produce more than either individually, so 2 plus 2 equals less than 4 (but more than 2). This is still an improvement from either individual player's position but then such things as management politics come to play, who got to be CEO of this venture etc.
That is still usually seen as a good merger or partnership. The bad situation is if the resulting partnership achieves no gain. So 2 plus 2 equals 2. The combined effort is no better than either one was able independently. Now the effort took a lot of administration and management effort for no actual gain (but at least there was no loss).
And the worst situation is when 2 plus 2 equals less than 2.
This is a catastrophy. The merger or partnership was so poisonous to its
partners, they would have been better off without attempting it. This is
unfortunately often the case. Ok, lets take a look at Microsoft and Nokia, from
Microsoft's point of view.
These are the market shares of Nokia's ecosystems (Symbian
and Maemo) partners in blue, and Microsoft's ecosystems in red (Windows Mobile
and Windows Phone) when the partnership was announced, ie the last quarter just
reported, Q4 of 2010. Nokia had 29% of the market, and its Symbian partnership,
mostly with Japanese and Korean handset makers had 35% market share. Microsoft's
Windows ecosystem had 4%. Now the math in Steve Ballmer's head looked at that
picture and saw the potential of a juggernaut with 39% market share, after
these two parts were merged and allowed some time to reach their full
potential, right? At the time this would be the 'first ecosystem' by a wide
margin over Android the second.
And yes, there were the Nokia partners, but even if we allow for Nokia's partners all to run way (to Android) and just take Nokia's own Symbian (and Maemo) smartphones and all Windows based smartphones, their market share would be 33% Remember, at the time Nokia was bigger than its two nearest rivals, combined (today Nokia is one fifth the size of Samsung and one third the size of Apple's iPhone, when counting Nokia branded smartphones). In the previous 12 months, the total unit sales of Windows based smartphones had actually declined, while Symbian had grown strongly by 42%. You can see why Ballmer was so eager to jump into bed with Nokia. Even if this migration by Nokia to Windows were to be executed 'poorly' and we'd say that Nokia lost half of its customer base and they lost all Symbian partners, the end result would still bring 14% market share gain to Microsoft. Added to its current 4% that would give a wonderful 18% market share, a huge jump for Microsoft, and far exceeding Windows peak share it had ever had globally of 12% a bit before the iPhone had launched. At 18% Windows would be all-but-guaranteed to be at least the third biggest ecosystem and if all went perfectly with Blackberry and Apple cannibalizing each other and Android growing fast, Windows might, just might with 18% be even the second largest smartphone OS. In any case here is where the myth of the 'Third Ecosystem' came from. The vision that even if Nokia utterly botched its transition from 'the obsolete' Symbian to 'the superior' Windows Phone, from 'obsolete style' Symbian phones to new 'iPhon-a-clone' style Windows Phone touch screen smartphones - even if this was totally messed up, Nokia would have to get at least half of its current market to this new powerful ecosystem.
That was the belief and expectation. Some then-current Windows partners (HTC, Samsung, SonyEricsson, LG etc) might initially become upset by Nokia joining, but the moment they saw how big and powerful Windows Phone OS would become, they would soon go where the money, ie the market was, and stay with Microsoft. That was the expectation, the hope.
Gartner, in fact, one of the big 4 analyst houses of the handset industry, issued its forecast for this partnership and projected that 18% as their expecation of what the partnership would do in 2012. So this is no bizarre Tomi reinvention of history or attempt to somehow paint Microsoft and Nokia in a bad light. This was a fair view to the partnership by the expectations they had in Redmond.
Then remember, this is not 2 plus 2 equals 4, nowhere near it. This is definitely 2 plus 2 equals less than 4. And Ballmer and Elop put their spin machines into overdrive to hype this partenership, and sure enough, plenty of willing 'experts' came out with forecasts promising the partnership would do far above 20% market share and the myth of the Thrid Ecosystem was launched into the minds of the analysts, investors, operators/carriers and very importantly, application developers.
Now why do I say 'cannot fail'. Remember, Microsoft's actual unit sales of its smartphones were falling in 2010. No matter how little Nokia would bring to the table after the transition, because Nokia was so huge, it would be a massive jump for Microsoft. And lets remember, Nokia was the bestselling smartphone at the time, on five of the six inhabited continents, where 92% of the planet's population lives. Where most smartphones were sold. Nokia so much owned the world's largest smartphone market - China (far bigger than the USA) that Nokia had 77% market share in smartphones just there. And it wasn't even Nokia's best market by market share.
So lets take the beyond any reasonable expectation utter catastrophy scenario. If Nokia somehow lost four out of every five customers it had, lost 80% of its market share in this transition - mind you, Microsoft wholeheartedly believed that Symbian was obsolete and without a future, and that Windows Phone would revitalize those Nokia sales - but if Nokia somehow lost 4 out of 5 customers it had in the transition to the better Windows Phone smartphones of modern design, then Nokia would still walk in with 6% market share, and added to Windows 4%, they would command 10% of the market. That would not be 'the Third Ecosystem' but counting Android as biggest, iPhone and Blackberry in the second and third places (at this time RIM was bigger than Apple), if you had 10%, you would be fourth biggest. And Microsoft would take that happily. They had a history of long platform wars, with Windows, with Xbox etc, so if they could jump from 4% (and falling) to 10% with Nokia, that would be aweome for Microsoft, even though in reality, from Nokia's point of view, this would be catastrophic brand failure. And nobody that they talked to suggested this was even plausible (by nobody I mean experts in the US market where 'all the real experts' were as believed by Microsoft ie the PC/web tech industry as opposed to the mobile industry centered in Europe and Asia)
Regular readers of this blog know this part of what happened
next. That many true mobile experts jumped on this partership immediately as a
doomed venture, that it would result in a total market collapse due to the
Osborne Effect and simultaneous Ratner Effect (that I have dubbed since as the
Elop Effect, the costliest management error of all time). So it was not just me
on this blog that yelled that their combined market share would fall to single
digits, so too was for example Horace Dediu at Asymco blog. But Ballmer and
Elop weren't listening to any 'old-fashioned' and 'obsolete' European experts
who knew only of the old push-button era of mobile, they 'knew' that the real
future of smartphones was driven by California. When Nokia top internal
managers were giving Elop their views on this super-risky strategy, he appeared
to listen very carefully and thoughtfully, while in his mind he was putting
those people on his 'must fire next' list. Very soon the top managers learned
that Elop was not willing to listen to facts, he had already made up his mind.
Talking to him was as useful as talking to a wall.
Ballmer had two aces in his sleeve. First, he had 'his boy' Elop in charge. This was one partnership that would not be wrecked by an uncommitted or faltering CEO. This would not miss any true Windows strengths, and would not waste any effort pursuing any futile Nokia pet projects from MeeGo and N9 to Nokia Money to Qt to Ovi. That it was ex-Microsoft guy, Stephen Elop driving this thing from Nokia's side, was a guarantee, it would always go exactly the way Ballmer had planned and wanted. Every last detail of it. To the point, that Elop maintains a second home right near the Microsoft HQ where Elop's wife and children live and Elop commutes by jet for weekends at home as often as he can (with plenty of convenient face time with Ballmer as needed, far away from prying eyes of suspicious Nokia collagues).
The other ace was money. Microsoft would throw massive amounts of dollars at this comeback. Starting with one billion dollars per year in marketing support payments direct to Nokia (but without paying them, as these were offset by the royalty payments Nokia was due to Microsoft of essentially the same size; these would cancel each other out. But in other words, Microsoft decided to forego up to 1 Billion dollars of Nokia-owed licencing fees per year in the transition period to Windows. For a company that makes its profit on software licencing, this is real money.) And with Elop in charge over at Nokia, he could be sure Nokia would not be pinching pennies either. Nokia was sitting on ten billion dollars of cash in its vaults (and Nokia was very profitable at the time). Ballmer knew that money went a long way in buying market share, he had seen it done with Zune and Xbox in the past, and how those deep pockets had won Microsoft earlier the Windows wars vs the Macintosh by Apple.
I am 100% certain, that when Ballmer looked at the pie graph when agreeing to the partnership, and he pondered the two market shares, he calculated that his boy Elop would bring in the share in the 20's not in the 'teens' or single digits. If all went perfectly, they might even break into the 30s in market share. This was the gamble that Microsoft could not lose. This was the ultimate 'sure thing' in the tech industry. Whatever risk there was, only fell on Nokia. Microsoft could not lose.
TWO PLUS TWO
So here is today's picture. We are literally 18 months from the launch of the partnership. And here is the market share. Same colors, same companies.
The circle on the left reflects the situation in Q4 of 2010, the circle on the right, the situation now in Q2 of 2012. What the hell happened here? This was not supposed to be possible. 2 plus 2 equals less than 2. Quite literally, Microsoft's own market share - the red part - is now SMALLER than it was before this partnership started. This after 9 months from the first Nokia phones running Windows. This while Nokia has already migrated 40% of its total smartphone production to Windows. Out of the 25% of market share that Nokia has so far attempted to convert to Windows Phone, Nokia was not able to convert all, nor most, or half; or even the catastrophic one quarter. No, Nokia has lost 7 out of every 8 customers it tried to convert from 'obsolete' and 'undesirable' and 'outdated' Symbian before this partnership to the new and better user-friendly Windows Phone today. Nokia traded 25 market share points in Symbian in Q4 of 2010 for under 3% market share on Windows Phone today. Yes. This 'partnership' has been able to convert only one out of every 8 loyal Nokia owners. Seven out of those eight went to the competition, primarily to Google's Android, Apple's iPhone and Samsung's bada.
So now when we see stats like the consumer survey that 4 out of 10 new Lumia owners in the market where that handset was designed for - in the USA - hate it so much that they rate Lumia worth a 1 on a scale of 5 to 1 where 5 is best and 1 is worst - this is a nightmare that was not supposed to be able to happen. What did happen? Its not like Ballmer has seen radical new phones by Blackberry with mind-reading or iPhones with teleportation or Samsung Galaxies with time travel. The Nokia phones did not have a catastrophic production disaster like exploding batteries or some kind or radiation poisoning. There were no factory floodings or earthquakes or volcanic ash stopping air shipments or pirates stealing ships or wars or strife or any outside disaster at all, affecting this cunning plan.
How could this happen? Whatever had happened, Ballmer is smart enough to calculate, that if the first 25 customers that Nokia had on Symbian, could only be converted to 3 on Windows, then the remaining 4 that Nokia now has left, won't yield even one more percent of market share. Literally only one half of one percent. Literally, now the writing is on the wall - after Q2 results, the math of 2 plus 2 in Microsoftian Nokia new math nightmare will result.. in 'less than 2'. This is the end of the Windows Phone Third Ecosystem dream.
Now, this blog does not in any way attempt to explain why the Windows migration was the ultimate flop, but it was not due to Microsoft failing to provide money or marketing effort. The Windows Phone OS was - within reason - a modern and competitive (albeit sadly in many ways incomplete) OS. The apps for it were built with great haste and the app store at least on the surface is fully stocked and competitive, at least to the degree of considering a third ecosystem. No, the failures were all in the Nokia side of the aisle. Problems of execution. Problems of management interference and meddling. Problems stemming directly from Stephen Elop's mismanagement of this transition.
I have written several bound books worth of text here on this blog chronicling where all he went wrong - and of my early advice and criticism already more than half have either been admitted by Elop to have been mistakes or harmful (eg Burning Platforms memo) or he has recanted (eg claiming Nokia behind in tech vs for example Apple) or he has reversed a dumb position he took (naming/numbering fiasco and flipflop). The problem, in a nutshell, was that a PC guy with no understanding of how mobile industry works, came in with a pre-set mindset refusing to learn what it takes here to win. That kind of fool is destined to die trying. This result was inevitable with Elop in charge. The top management insiders knew almost immediately and Nokia has seen an alarming exodus of top management. We outsiders did not know until we saw the first Lumias, but by then, it was also clear to us, this Nokia Microsoft gamble with Windows Phone and Lumia was utterly doomed. (as I wrote on this blog such as this comphrehensive analysis of why the Lumia series was already doomed at its launch)
But this blog today has not relitigated the crimes of Elop. We have now examined the view from Redmond. This was
the 'cannot fail' game by Ballmer. He could not lose. And yet Elop delivered
failure out of this project. He snatched defeat from the jaws of victory. This
could have worked. Now it is doomed. The Nokia gambit to gain Windows a place
in the top 3 (or at worst, top 4) has failed. Now, the only road left is to try
to go Windows Phone 8, and start again from zero. Except today, Sony(Ericsson),
LG, Dell and Motorola are no longer in the partnership. Samsung has its own two
operating systems it will prefer over Windows - bada and Tizen. HTC is deeply
suspicious of Microsoft. Nokia is essentially the walking dead. What is left?
Meanwhile traditional PC makers are deeply suspicious of Microsoft now because of the tablets it will manufacture. The app developers feel once again burned, their investments were all for nothing, the promised wonder 3rd ecosystem counts today for the 6th ecosystem at best by installed base (barely besting its older cousin, Windows Mobile) and in terms of total installed base, amounts to 1% of all smartphones in use worldwide. Who in their right mind would bother to develop for that platform next, when now even this investment is Osborned and Microsoft again starts from zero. Meanwhile Android sells 6 out of every 10 smartphones, Apple 2 and Blackberry and Samsung's bada power most of the remainder.
In 2006 Microsoft was briefly the second largest smartphone OS at 12% market share. Microsoft was then one quarter the size of giant, Nokia's Symbian. Today six years later and countless billions of dollars wasted, most of Microsoft's partners have abadoned it, and Windows Phone sells 3% of the world's smartphones, while still Nokia's Symbian outsells it, but now only by a ratio of 4 to 3. And Q2 was the peak sales for Windows Phone, it is now again in free-fall due to the Osborning of the series. Even Nokia loyal carrier partners are bailing on Windows Phone like Germany's biggest carrier/operator T-Mobile who refuses now to even sell the Lumia 900.
The grand scheme, the 'cunning plan' of 2 plus 2 resulted in the end, less than 2. Microsoft decided Nokia is not worth the effort and now goes it alone. It will of course take Nokia's next Windows Phone 8 handsets 'with great joy' as any that may come from Samsung, HTC and perhaps others, but as Microsoft has already started production of its own tablets, it will do its own smartphones next. Ballmer won't even bother to deny it anymore. This Nokia partnership died. Perhaps it died earlier, we don't know, but for sure, when the internal numbers became clear that Q2 is this bad, Ballmer decided it was over. And coincidentially - that was when he announced the Osborning of the Lumia line, and the Microsoft tablet, and suddenly started to act very cold and distant towards his former BFF, Stephen Elop. The Ballmenator, he is a cold dude.
But I cannot fault Microsoft for getting into this "can't fail" deal. I cannot fault Microsoft for not pulling its weight in the partnership, and I cannot fault Ballmer now for looking at the blatant truth and tossing Nokia under the bus. That all was totally sensible from Microsoft's point of view. Lets not just now pretend that there is some rosy future to the Windows Phone 8 in mobile smartphones. It no doubt will sell well on the PC side, but as I said, it will happen as eary as 2014, that Android will pass Windows as the planet's most used computer OS, when counting PCs, tablets and smartphones, combined. Yes, Microsoft's reign comes to an end in less than two years from now. Windows 8 will no doubt be a big success but Windows Phone 8? Maybe hit a couple of percentage points if Microsoft is lucky. 1% if things go 'as usual' for Microsoft in mobile. And 1% is the level where even Palm quit this industry.. This Nokia gambit was Ballmer's last best hope and it was ruined, not by Ballmer, his grand plan was ruined by 'his boy' Stephen Elop, the Microsoft Muppet, the most incompetent CEO of all time.
So, thats the story today. If you happen to need more info about the handset industry, remember my TomiAhonen Phone Book, an easy ebook formated for your smartphone so you can carry all the industry stats and facts in your pocket. And if you are a strategy thinker type of exec, then you'll want to see my TomiAhonen Mobile Forecast 2012-2015, the best value of forecasts into the near future of this industry, by the most accurate forecaster in mobile.