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« Ballmer Aftermath Part 1 - Future of Microsoft, especially in mobile | Main | Ballmer Aftermath Part 3 - Ballmer replacement and specifically Elop? (Spoiler alert: Elop won't become MS CEO) »

August 26, 2013

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Paul Ionescu

Now Nokia is tied to Microsoft by 5-year contract. 2.5 years have passed so other 2.5 are left!
The question is: "Will Microsoft/Gates let Nokia alive in case that Windows Phone OS comes on the last spot on the Microsoft's priorities list? Would be Microsoft/Gates tempted to acquire the patent portfolio of Nokia just because is so easy and cheap?

MarcoAustria

@Tomi: wrong name ...
"But now Steve Jobs stepped in and ended this nonsense."
==> "But now Bill Gates stepped in and ended this nonsense."

foo

@Tomi

> By February 2011, Nokia's last Symbian factories had ended their Symbian production. Maemo and Meltemi had been terminated,
> their last smartphones long since made and sold. Meltemi the project had been terminated. Nokia was now 100% a Microsoft-house.

These three sentence summarize what happened.

Elop was hired to Nokia, killed all the projects that were somehow related to Linux (Microsoft's "archenemy").

He killed Meego and Meltemi. He closed the doors to Android.

In all his appearances he talked not as Nokia's CEO, but rather as Windows Phone's ambassador. He repeatedly disparaged Android and invited competitors to join the "ecosystem".

(Years later he would come to say that he didn't adopt Android because he "knew" that Samsung would dominate that market. Bullshit. First, because Nokia was bigger and had better hardware than Samsung; and second because he *invited* Samsung to join the Windows Phone bandwagon.)

***

Some people seem to believe that Elop and Ballmer had a plan, to sell Nokia to Microsoft.

I don't think so. I think the plan was much worse -- and criminal -- than that.

I say that because Elop effectively "sold" Nokia to Microsoft... without actually selling it.

Nokia was an independent company before the partnership, and right after that became completely dependent on Microsoft.

We could very well say that Nokia became a Microsoft subsidiary without having to be bought.

From Microsoft's perspective it was great: if Nokia kept 30% market share it would be selling more than 300 million phones per year. Microsoft would eventually start to receive royalties -- let's say $10 per phone. That would translate into $3 billion dollars per year. Much more than the $1B/year they put in!!! Even if Nokia's market share dropped to 10% market share -- a tragedy for Nokia -- it would break even for Microsoft, which only paid $1 billion per year, and would receive the same amount after some time.

***

Now, what happens to the companies that become dependent on Microsoft?

Look no further than the PC market -- Microsoft squeezes as much of the profits as it can, leaving just enough so the companies can survive and bring more money to Redmond.

Windows licenses are prohibitive, but PC manufacturers have to pay it.

(Microsoft comes to the absurd of creating several "versions" of Windows, so they can extort more money from the different price points.)

***

Elop's plan was to put Nokia in *that* position. The company would just move commoditized boxes (even more if other manufacturers joined the ecosystem) that would be extremely profitable to Microsoft.

The problem was execution.

Elop was so thirsty to help Microsoft succeed that he made a succession of errors that killed the company.

Now Nokia has less than 3% of market share, and became almost useless to Microsoft. (I say "almost" because Windows Phone now completely depends on Nokia -- but this only happened because Elop didn't succeed in attracting other manufacturers to the "ecosystem". If Samsung, HTC and others were heavily invested into platform Nokia could be scraped.)

davide

Dear Tomi,
I often find myself agreeing with you on the reasons for Nokia's fall as of late.
Anyway, you might want to correct a statement you make at the beginning of this article.
"Nokia's N95 had a 12 megapixel camera in 2007 vs the iPhones's 2mp."
The N95, released in 2007, had a 5 megapixel camera; the N8 had a 12 megapixel camera, but was released in 2010. Just to be sure proofs don't get spoiled by wrong numbers.
Cheers.

foo

@Tomi

> Windows Phone is dead. It means Lumia is dead. It means Elop is gone. His whole gamble was 'lets go fully to Windows,
> I will burn all boats, I will set all platforms on fire, trust me, I will sell Nokia to Microsoft.' That has now failed. Nokia has
> to replace this clown, with some sensible CEO who knows the mobile industry and will think of Nokia's best interests,
> not Microsoft's best interests.

Let me insist in one point:

Selling Nokia to Microsoft was never part of the plan.

The plan was to "sell" Nokia without selling it.

Why I say that?

Two reasons:

1) Microsoft (and Elop) wanted to mimic the PC market where several manufacturers (Nokia, Samsung, et al) produce commoditized hardware and Microsoft have obscene profits with software. IF Microsoft effectively bought Nokia, other manufacturers would be reticent on joining the ecosystem. SO Microsoft had to "buy" Nokia without buying it. Microsoft had to buy Nokia's independence, and Elop sold it.

2) Microsoft would put $1/bilion per year in the partnership, for 5 years. IF the plan was reasonably successful and Nokia kept 20% market share, it would mean 200 million devices by now. I don't know how much Microsoft receives for each device sold, but I guess it is at least $10/device. In other words: Microsoft would receive at least $2 billion per year.

So, mark my words:

The plan was to sell Nokia without selling it. The only way to do it was to sell Nokia's independence, and Elop did it in the exact moment he announced Nokia would go 100% Windows Phone.

Tomi T Ahonen

Thanks MarcoAustria and davide

Corrections made! Cheers :-)

Tomi Ahonen :-)

foo

> Yes, it all makes sense now. That was the plan. This is why, as the disasterous results followed one after another,
> and as Elop made blunder after blunder, and killed off any chances of a Nokia recovery, the Board wasn't firing him.
> Because we now know, Nokia had been in serious talks to be sold to Microsoft.

I agree that Microsoft eventually entertained the idea of buying Nokia -- but that was not the original plan.

The original plan was to make the partnership succeed, giving Microsoft at least 20% of market share and $2 billion / year. Other manufacturers would join in, and Microsoft could easily make $3 or $4 billion/year without having to buy Nokia.

But the plan went so awfully wrong that, in a ironic twist, Nokia became responsible for 80% of the sales of Windows Phones, and Microsoft's Windows Phone division became as dependent of Nokia as Nokia became dependent of Microsoft. (Obviously if the plan was reasonably successful Microsoft wouldn't depend on Nokia -- they would leverage the PC market to dictate their terms to smartphone manufacturers.)

Microsoft wanted to be a software company extorting commoditized hardware makers. It took 3 years to realize that they would have to become a "services and devices" company, but when that happened Nokia was beyond salvation.

Tester

@foo:

Either way, whether it was the intent or not, the results are the same.

The one thing to operate on right now is only what Bill Gates said in February. And in typical corporate style, read between the lines. In other words: Anything that gets mentioned negatively is on the chopping block. It was outright clear that the decision to get rid of Ballmer was already set - and so is most likely the decision to terminate Windows Phone.

The only question remaining now is, when?
It needs to be done in a fashion that doesn't hurt Microsoft. I said this before but let me repeat: A lot depends on the contract Microsoft has with Nokia and other WP manufacturers. I guess all but Nokia are irrelevant and just shrug it away if WP is ended. But if it *IS* eventually terminated I guess they'll at least need to keep quiet for a few months unless they'd like to be sued for damages by Nokia (of course a non-Elop-Nokia at that time...)

Anyway, the smart thing for Nokia would be to announce something on Android that does not compete with their smartphone business. Here's where for me the RT tablet announcement sounds strange. If they had announced an Android tablet they might have been able to use that to explain that away their working with Android using it as a front to develop Android phones without causing suspicion. But as it stands I really don't know what to expect. Apparently Elop still hasn't learned.

RottenApple

I don't believe in a takeover conspiracy either.

I think at the start it was just a normal business deal no matter how misguided: Microsoft agreed to pay Nokia money to transition their high end smartphones to their OS. Ok, it failed, and it certainly explains why MeeGo was killed outright.

I think that selling Nokia only came up some time in 2012 as Nokia was deep in the red. And that'd perfectly explain the destruction of Meltemi: The precondition of starting talks was to get rid of this platform. So Elop killed it.

And from that point onward everything makes sense. Elop and Ballmer negotiated a takeover but obviously, before it came to fruition things went sour. The trigger was possibly the complete and utter failure to place Windows RT in the market. Now Microsoft was sitting not on one, but two complete duds - and the reception to Windows 8 was also far, far below expectations.

This looks like the perfect point in time for the owner(s) to step in and call 'stop'. And February sounds about the right time for that.
So what to do with the products now?

First, let's fix Windows 8. But let's do it in a way that doesn't make us look like idiots. Pump out a partial fix with Win 8.1 and then do it right the next round
Second, let RT silently die and wither away. It barely generated a blip on the meter.
Third, get rid of the costly baggage, i.e Windows Phone. But this is clearly something that needs to be orchestrated very, very carefully. So first, make a public statement carefully hinting at the plans, then follow through with the easy thing (get Ballmer out) and then, finally pull the plug. Tester is probably right that, if they got a contract with Nokia, it has to be carefully coordinated. So I don't expect anything to happen on this front in the next 6 months but I guess any rumors coming out of Nokia will tell us a bit about what's planed here. So far it seems that Nokia is still oblivious, though.

foo

@Tester

> Either way, whether it was the intent or not, the results are the same.

There is one important difference.

If Elop and the board planned to sell Nokia, that *could* be acceptable business.

But that's what not happened. Microsoft bought Nokia... without having to buy it.

Is there something more profitable than buying something without having to pay the price for it?

Worse: Microsoft wasn't in position to negotiate such a good deal. Microsoft needed Nokia; Nokia could use Android to negotiate a better deal, where it wouldn't become a Microsoft slave.

> But if it *IS* eventually terminated I guess they'll at least need to keep quiet for a few months
> unless they'd like to be sued for damages by Nokia (of course a non-Elop-Nokia at that time...)

The contract was so biased in favor of Microsoft that I don't doubt that it would be cheaper to end this adventure than keep it until the end.

But I don't think Microsoft will end Windows Phone yet, as they need a mobile strategy; what they'll probably do is to morph Windows Phone into something different.

Moore's Law will probably allow smartphones to run Windows 8 in a few years; they just need to keep Windows Phone long enough so they have time to build full computers in smartphone shape.

But, again, we are talking about reasonable strategy for Microsoft, terrible for Nokia (which by then will probably have to compete with a "services and devices" company).

zlutor

@Tomi: could Sailfish OS be an option beside Android?

I think Meego is not viable any more, i think, competence does not exist in the company any more...

Tester

@foo:

>> Is there something more profitable than buying something without having to pay the price for it?

That depends how you define 'price'. The whole thing has been an utter mess for Microsoft. They may not have paid with money but with part of the company's future - and that's far, far more costly than a certain amount of cash.

And that doesn't even consider the money-grave WP has been.

foo

@Tester

> That depends how you define 'price'. The whole thing has been an utter mess for Microsoft

We must analyse the partnership according to the information (and expectations) of the time.

The plan was simple: Nokia would give Microsoft 20-30% of market share, and Microsoft would give Nokia... well.. the right to use Windows Phone.

Of course, Microsoft would also pay $1B/year... but that was an incredibly low price to get the exclusivity from Nokia.

As I said, I don't know how much Nokia would end up paying in terms of royalties... but guessing it was around $10 / unit sold, that would mean $10 * 300,000 = $3 billion / year to Microsoft.

So -- Microsoft would pay $1B/year for a $3B/year business.

Even if the plan went wrong and Nokia dropped to 10% of market share, that would be $1B/year to Redmond, from a single customer. If the whole "ecosystem" worked out, Microsoft might get $1B from other manufacturers. At least it would break even.

What they didn't expect -- nobody could expect at the time -- is that Nokia would crash to 3% of market share.

The reason for such collapse was that Elop was too eager to promote Windows Phone, announcing the migration before Nokia had any products to show, inviting competitors to join the "ecosystem", killing the alternatives, etc.

foo

@RottenApple

> I think that selling Nokia only came up some time in 2012 as Nokia was deep in the red. And that'd perfectly explain
> the destruction of Meltemi: The precondition of starting talks was to get rid of this platform. So Elop killed it.
>
> And from that point onward everything makes sense. Elop and Ballmer negotiated a takeover but obviously, before it
> came to fruition things went sour.

I completely agree with you.

Microsoft wouldn't buy Nokia since they got the exclusivity contract.

Once they assured the exclusive contract with Nokia, they could pursue other manufacturers (Samsung, HTC, et al) -- and that's what they did.

The original plan failed, and Nokia became the only manufacturer really invested into the platform. Thus, Microsoft started to consider Plan B: buying Nokia.

But things started to go so wrong, that Microsoft turned to Plan C: become a "services and devices" company. What does that mean? They will start to compete with their former "partners", producing their own devices.

And since Windows 8 and Windows Phone are such failures, I guess it will take a couple of years to put the new plan together.

Microsoft can survive this transition thanks to their several cash cows (Windows 7, Office, etc).

What will happen to Nokia?

Hansu

This long text brings up a couple of points that I haven't got an answer for. 1. If Nokia was doing so much money had crystal clear strategy for Symbian to Meego and Meltemi was Elop brought in and OPK fired abrubtly like that. 2 If Microsoft wanted to buy Nokia why didn't they do it in the summer of 2012 when the company was in deep deep shit and stock price was around 1,40€ now it's over doubled. 3 Elop dumped Nokia's share price? in 2000 during Ollila it peaked around 75€ when Elop took over it was around 6€ now if a company is doing so great why did the share price collapse. 4. why did the board accept all these decision like killing off Meego and others. As for those great hardware features lie HDMI and TV out nobody else makes them and qwerty phones well as we have seen Blackberry is killing the market as the recent figures show. 4 what else go Android and compete agains Samsung look at HTC they were the original king of android and where are they now nowhere. PS Ballmer isn't gone yet he is going to continue for another 10-12 months. As mor MSFT share price it has settled to basically where it allways has been for the last 10 years around 30+ USD

Tester

@foo:

If the deal had worked out it would have benefitted both Microsoft and Nokia. Microsoft would have made tons of money based on licenses and Nokia would have stayed at the top, maybe at #2 on the profit ranking. The deal itself was nothing evil, even if it was stupid on behalf of Elop to jump in without a safety line. On the other hand, maybe at that time he kept Meltemi as said safety line. The mere fact that its development continued tells us that it was outside the Microsoft deal and only became an issue much, much later.

@Hansu:

>> 1. If Nokia was doing so much money had crystal clear strategy for Symbian to Meego and Meltemi was Elop brought in and OPK fired abrubtly like that.

Because it wasn't the strategy that was flawed but the execution of the strategy. The strategy was fine and if executed well, would have kept Nokia at the top. But it was executed at a snail's pace with various obstacle pushed in the way by a bureaucratic management.

>> 2 If Microsoft wanted to buy Nokia why didn't they do it in the summer of 2012 when the company was in deep deep shit and stock price was around 1,40€ now it's over doubled.

Because it takes time to hammer out such deals. If we assume that takeover talks started shortly before axing Meltemi, there simply wasn't enough time to get it done.

>> 3 Elop dumped Nokia's share price? in 2000 during Ollila it peaked around 75€ when Elop took over it was around 6€ now if a company is doing so great why did the share price collapse.

Nobody ever said that the company was doing so great. They did indeed miss the smartphone resolution and it took too long to act. But their trouble in late 2010 wasn't serious enough to push the panic button yet. At that point they were merely late. Of course the stock price drops if your management shows signs of incompetence - and that was clearly the case.

>> 4. why did the board accept all these decision like killing off Meego and others. As for those great hardware features lie HDMI and TV out nobody else makes them and qwerty phones well as we have seen Blackberry is killing the market as the recent figures show.

Remember, these are non-tech people. Feed them some misinformation to steer them in your direction and they'll hastily follow if you give them projections as lofty as what Elop seemed to have projected for a WP transition. Better don't think about these projections being utterly bogus.

>>4 what else go Android and compete agains Samsung look at HTC they were the original king of android and where are they now nowhere.

Nokia is not Samsung, Nokia is not HTC, especially not in 2010. Back then Nokia was by far the largest mobile phone maker in the world with incredible market power. Compared to them Samsung was an upstart. Had Nokia been able to compete on even ground they would have crushed Samsung back then. Of course, if you got a genius CEO who doctored his projections in favor of Microsoft and... see my remark about influencing the board above.

>> PS Ballmer isn't gone yet he is going to continue for another 10-12 months. As mor MSFT share price it has settled to basically where it allways has been for the last 10 years around 30+ USD

Ballmer may not be gone yet, but essentially he's a lame duck. Still nominally in control but with no real power anymore. He got the axe but to keep the public face nice and pretty he 'resigns within the next year'. That sounds a lot better than 'they fired him' but that's what really happened.

zlutor

Nokia tablet is rumored (with WinRT) - pffff... :-(

http://mynokiablog.com/2013/08/26/nokia-sirius-10-1-1080p-tablet-slimmerlighter-than-current-ipad-quadcore-s800-lte-microsd-and-more/

What a piece of hw with a so undesired OS... :-(

Hansu

@ Tester if they had a clear strategy and it was the execution that was lacking didn't they simply hire a person who would complete the execution faster. As for the sale of Nokia a hostile take over could have been done by a third party in a jiffy no question and whoever would bought Nokia would have been able to sell it of for pennies and still make a healthy profit. Nokia is like Samsung both make phone in every price spectrum from 30usd dumbphone to top of the line smartphone they are the 2 biggest phone manufacturers still today in numbers Dumbphones+smartphones. As for Ballmer if they really wanted him gone he would be gone in a heartbeat there is no sentiment in big corporations if CEO has to leave he's outta there in a heartbeat. As for WP being dead not anytime soon knowing MS and giving them some credit were credit is due they are rolling out a update for WP soon an they are still supporting WP7 until next year if this was Google they would have rolled out the software made one update then made a new one and forgotten about the old one. Microsoft atleast supports their programs way longer than is neccessary no matter if it's a succes or failure

Movie Gooer

I think the movie about Nokia/Microsoft will sell more than the movie about Apple.

NoNameRequired

So they launch a Windows RT tablet, after the failure of everyone else to do the same, and it will be "similar priced to current iPad" and "the company won't try to undercut pricing initially"? They will even sell the keyboard accessory separately, just like the Surface. (source: The Verge)

It is like they have collected all the relevant experiences from the Windows RT failures of everyone else, and decided to repeat them all, just one year later.

Tester

@Hansu:

Don't be so naive. Big Business is not about honesty. It's not about talking openly about one's plans. It's not even about making sense. It's all smoke and mirrors - lies and deceptions - keeping a public image that doesn't match with the truth. It's about desperately trying to avoid a stock price crash. A company that appears to act out of panic may be considered weak and with how stock markets work that's a dangerous game to play.

Don't even try to use common sense to find some meaning in there. It will fail. Big business in that regard is no different from politics. Everybody got an agenda and using whatever tactics necessary to achieve one's goals.

The Nokia episode is just a particularly vile story from this shark tank where the strong ones mercilessly rip apart the weaklings.

About some specific points:

>> if they had a clear strategy and it was the execution that was lacking didn't they simply hire a person who would complete the execution faster.

That's what they wanted. They picked wrong. It just occasionally happens that someone finds the right means to cheat oneself into such a position by knowing what to say to get the job.

>> As for the sale of Nokia a hostile take over could have been done by a third party in a jiffy no question and whoever would bought Nokia would have been able to sell it of for pennies and still make a healthy profit.

Not really. Doing a hostile takeover is a very risky and costly thing. Remember, you got to buy the majority of stocks and once you start buying and your intentions become clear, the price won't stay low and you may not be able to get majority. It couldn't have worked out for Microsoft

>> Nokia is like Samsung both make phone in every price spectrum from 30usd dumbphone to top of the line smartphone they are the 2 biggest phone manufacturers still today in numbers

Right. But Nokia's share in the profitable zone is far lower than Samsung's. Back in 2010 this was different and had they been able to transfer this momentum to Android, things would look quite differently these days.

>> As for Ballmer if they really wanted him gone he would be gone in a heartbeat there is no sentiment in big corporations if CEO has to leave he's outta there in a heartbeat.

No, not really. Firing a CEO can be a costly action. You do not do that unless you find better options. Having Ballmer 'retire' just looks far more orderly and controlled.

>> As for WP being dead not anytime soon knowing MS and giving them some credit were credit is due they are rolling out a update for WP soon an they are still supporting WP7 until next year

Yes, because they are contractually obligated to do so. This has nothing to do with doing a good service. Someone could sue the hell out of them if they did not.

>> if this was Google they would have rolled out the software made one update then made a new one and forgotten about the old one.

Utter bullshit. The reason why Google can safely forget about the old versions is because Android remains compatible. WP7 hardware is incompatible with WP8 so it's a completely different scenario.

>> Microsoft atleast supports their programs way longer than is neccessary no matter if it's a succes or failure

Again, remember what I said about contracts? This support is one of the inevitable necessities of doing their business.

Hansu

@tester The break up value of Nokia in 2012 was almost double the share price it would have been a textbook take over of a company that was dirt cheap but had alot of good assets to sell patents factories NSN etc it was like a brand new Ferrari with a scratch on it left in the middle of nowhere with the door open and keys in the ignition along with a spare key and complete service history book with a full tank of gas. So they had a competent guy inside Nokia who would have gotten things done Anssi Vanjoki why not him and Elop as I recall had pretty cushy job at Microsoft he had no particular reason to cheat his way in. As for support yes but then again WP7 apps work on WP8 as for contracts there's allways a loophole and yes it is a neccesitie but then again how is that a bad thing and Google go to wikipedia or somewhere else and see how many products and see how many discontinued products and services there are. And if they wanted Ballmer gone they could have searched for a new CEO behind the scenes or even do so that they would have had Bill Gates take back the position until a new CEO was found altough the latter would have been more unlikely. If Nokia had gone the Android their market share should and would have been alot bigger but who knows or the MeeGo route.

So Vatar

A new game:

I agree with many things written, however I feel we do not know enough to be sure what happened between MS and Nokia, but I am sure that Elop and Ballmer worked together.

Looking forward it will be a new game, and stopping WP is just one of several options. What will happen with WP will be highly influenced by MS Board's assessment, MS' strategy and the person hired as new MS CEO. We will not know the direction until we know who the new CEO will be, and we won't know if the direction will be successful until we see how the new CEO executes.

Tomy offered the "WP will be stopped" scenario. This is not unlikely, but also not certain as of yet.

A different scenario could be fixing WP as part of a strategic change at MS. MS could choose to change into a more nimble, more customer oriented corporation, competing on merits to customers instead on monopolistic lock-in and squeeze-the-customer.

I.e., WP could be opened up, providing a stable core where handsety manufacturers, developers and service providers are able to add functionality, change designs, enable non MS services, etc. MS could be able to earn (small) license fees, and otherwise offer value add services handset customers would pay for (or accept ads to keep certain services free).

Or MS' new CEO (with board approval) could still go ahead and purchase Nokia's smart phone unit and run a strategy like Apple, where only MS-Handsets (ex Nokia) will offer phones and tablets that run a flavor of Windows OS.

There are many more scenarios, especially considering that there might come another technical revolution that makes the classic handset obsolete, and replaces it with something like a Google Glass / iWatch combo, or implants that let the human stay connected featuring a new kind of interfaces. Or what have you.

What does this mean for Nokia?
If there is any reason left at Nokia they need to work hard on plan B and plan C. Looking at their disastrous position in the smart phone area, they need to bring devices to market running non WP-OS in addition to their Windows Phones. Realistically the only alternative they have considering the urgency is Android. So Android must be their first priority. IF they are successful selling Android and WP devices, then they can start to build their own SW competence again, hiring people or buying technology (i.e. Sailfish) to bring their own offerings to market. But this will take time and lots of money, both very scarce resources for Nokia right now.

In any case they need to change leadership (Board and CEO). Nokia's current leadership is branded with Windows Phone / Microsoft strategy and they cannot bring on a new strategy credibly. Also, after replacing Elop they need to focus on the right strategy AND swift execution. While Nokia had the right strategy until Elop came, execution is and has always been Nokia's weak spot.

I would be surprised if we don't hear about Elop's resignation soon. If we don't then it is a sign that Nokia as we used to know it will cease to exist. Nokia's only outlet will be a split and sale of the Smart Phone unit to Microsoft. Which leaves a viable Network equipment part, a non viable handset unit (feature phones only), and a smart devices division within Microsoft. And a few other assets that may or may not have value for certain acquirers (Mapping solutions, manufacturing assets, certain patents).

geektech

Just for curiosity, the Nokia N9 bit the Nokia Lumia 925 and the new flag ship Nokia lumia 1020 by daily hit, been a 2 years old phone it is quite surprise.

tk

Nokia has a future; and a very bright one; it just needs to turn it on - it's called Harmattan v2.0 on quadcore snapdragons.

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