So congratulations to Satya Nadella, who gets to run one of the very few Fortune Global 500 sized multinationals which enjoys near-monopoly status in most of its core businesses - Windows and the Office Suite. Microsoft is also strong in videogaming consoles and cloud computing. Microsoft is a player in mobile on the software side and just bought the second largest handset manufacturer in the world in its acquisition of the handset division of Nokia. Microsoft is filthy rich with enormous profits only put to shame by those other PC industry pioneers with the logo stolen from the record company that the Beatles started.
What do I think? I really liked the tone in the memo he released to all Microsoft staff at this link on the official Microsoft site. Very up-beat and optimistic visionary tone. Lets work together, cum-ba-yah. If I was an MS employee I would like this to be the first communication from the new boss, especially after the reputation Ballmer had had for his fierce temper tantrums etc.
THE MOBILE DREAM
So first my professional judgement as the most published author (12 books and counting) in my industry - mobile - and measured by Forbes in 2012 as the most influential expert of my industry. I was the most accurate forecaster for how Nokia would fare in the past few years as its new CEO Stephen Elop attempted a conversion of Nokia's massive and loyal customer base to convert to Windows Phone. The race was not even close. While no forecaster can be perfectly correct (if that happens its an accident) I was so good on both Nokia smartphone and Microsoft Windows Phone forecasts that the next most accurate forecaster was nearly twice as much off as I was. I was almost twice as accurate than the next most accurate forecaster specifically on Nokia smartphone and Windows Phone performances. Bear that in mind on my 'judgement' about Microsoft and its Nokia acquisition.
You may have read recently some optimistic reports that Windows Phone was growing in the past year. That is true. Its about as relevant as if you asked me to talk about the big oceans and I answered talking about the Great Lakes. Lets talk about the reality.
Nokia's market share in 2010 was a massive 35% in smartphones, more than twice that of its nearest rivals, Blackberry and iPhone. That was running 'obsolete' Symbian. Then came Elop who decided to wreck the market by creating his Elop Effect (he badmouthed his own products through his Burning Platforms memo - an idiotic mistake that replicated the Ratner Effect - Elop was reprimanded by Nokia's then-Chairman Jorma Ollila for this; and that Ratner Effect was combined by an Osborne Effect when the CEO announced the new Windows platform far too early, instantly collapsing all current smartphone sales on Symbian. I have coined the term Elop Effect when you do both a Ratner and an Osborne.) Nokia's market share set a world record fall in the handset industry by falling by more than half in just 12 months to reach 16%. Yes, a world record. This was worse than Palm or Motorola or Blackberry or Siemens or any other sudden fall in the history of handsets.
Then for 2012 we saw the global launch of the promised new Lumia smartphones running the wonderful new Microsoft Windows Phone operating system that was supposedly better than Symbian. Surely the new Lumia smartphones would sell as well - indeed should sell better - than those obsolete Symbian smartphones? Nokia could not sustain a 1-to-1 conversion from Symbian to Windows Phone. Nokia's market share kept sinking reaching 5% when the final numbers were out at the end of the year. Yes you read that correctly. This was a collapse losing two thirds of what you had at the start of the year - Elop actually broke his own world record for failure in the handset industry. Oh, I forgot to tell you, all the Lumia smarpthones were now being sold at a loss. At its worst peak in Q3 of 2012 the Nokia smartphone unit reported a 49% loss per unit sold!
Then there was the new savior, the Windows Phone version 8 that arrived to the end of the year. Lets see how that fared. Nokia's market share for year 2013 when the Lumia range was migrated to this new Windows Phone 8 system achieved a global market share of how much better than the older Windows 7.x versions? Not better. Worse. Nokia's smartphone market share fell still more in 2013 reaching 3%. It is true yes, that compared to Windows Phone sales one year ago, Nokia did grow the Windiws Phone sales. That was while the smartphone industry grew by 46% according to fresh numbers by Canalys. And what was the cost of this 'success'. Nokia CEO massacred 35% market share on Symbian to deliver 3% on Windows Phone! No wonder they didn't name Elop the new CEO. Even after the first Lumia was launched, just in the last two years, Nokia exchanged 16% of Symbian-based market share for 3% of Windows Phone based market share. All this while posting losses in every single quarter that the Lumia series was ever sold, even after Elop had departed. This is total utter complete market disaster. Not my words. Nokia's past CEO and Chairman when Elop was hired, who chaired the Board that accepted Elop's recommendation to shift to Windows. Ollila admitted to the largest newspaper of Finland, Helsingin Sanomat that yes, Nokia's Windows Phone gamble turned out to be a total flop. A 'big mistake' was how tne newspaper reporter phrased it to which Ollila agreed.
In 2012 when all smartphones sold by Nokia ran only Windows Phone, and most of those were already on Windows Phone version 8. And the ex-Microsoft dude Stephen Elop was in charge. And he had installed hs own Microsoftian buddies to run Nokia's sales etc. That Nokia achieved 3% market share in the industry Nokia invented, and utterly dominated still only three years prior. The only way Windows Phone grew from 2012 was at the expense of the massacre of Nokia's huge customer loyalty worldwide. Yes, before Elop damaged Nokia, it was the most beloved handset brand in all countries except the USA, Japan and South Korea - three markets with many domestic handset brands AND strong local carriers that protect their domestic market. In the rest of the world where 90% of us humans live, where there mostly were no domestic rivals and Nokia competed on even terms, Nokia held over 50% market share in smartphones on every continent! Dont' be misguided by US-market anomalies when you analyze the mobile industry.
Out of customers not scared off by the Elop Effect during 2011, of the remaining 16% market share, Nokia managed to scare off 13% of that or more than four out of every five attempts to convert to Windows Phone. And remember, those were not iPhone users. They were users on Symbian, the 'obsolete' smartphone platform. Yet somehow Windows was so poisonous that four out of five loyal Nokia customers would rather switch brands than take a Nokia using Windows! That is your 'success'. Or more precisely, the Windows based smartphones had 4% market share in year 2010, just before the Nokia partnership was announced. Now after Nokia sacrificed 32% of its market to the altar of Redmond, where is Microsoft? At 3.5% market share. The Nokia partnership resulted in a net LOSS of one half of one market share point. THAT is not success in any book.
The market has spoken loud and clear. We do not need to revisit tens of thousands of words about the how and why and when (you can read all about that in my shortly to be released 13th book). The facts are obvious. And here is my point. MIcrosoft's new CEO wrote eloquently about mobile in that nice first memo. He even welcomed the Nokia employees shortly joiing Microsoft. There is great hope at Microsoft that they can use the Nokia handset division to propel Microsoft into something akin to Apple who sells its highly profitable iPhones and owns its iOS ecosystem. There is a lot of reason for the new CEO to be optimistic that Microsoft's Nokia will be a success. It will not. Trust me because I was by far the most accurate forecaster of both Nokia smartphones and Windows based smartphones of the recent past. Why will this not work?
CARRIERS, WHAT ARE CARRIERS?
The mobile industry differs from the PC industry and almost every other tech industry in one vital way. The carriers/operators are gatekeepers to their domestic markets that no handset maker can successfully circmvent. Google tried this with the original Nexus and failed. Apple tried for years until it relented to agree to terms with the biggest carrier in the world, China Mobile (about the size of seven AT&Ts). Microsoft ifself felt the wrath of the carrier community after it spent billions buying the Danger handset manufacturer and then releasing its own Kin phones. The Kin series was killed in only 6 weeks from launch (that too is a world record failure in mobile). Why killed. Because the carriers suddenly withdrew the promised support. Yes. Microsoft itself has felt the devastation of how the carriers rule.
Nokia testified to the NY Stock Exchange and the Securities Exchange Commission in filing its Form 20-F in 2011 that the carrier relations of Nokia were the world's strongest, but that if they were damaged, all other Nokia competitie advantages such as its scale, logistics and brand would be damaged too. The carrier relations underpinned Nokia's dominant position. Elop himself said that the biggest lesson he learned out of the Lumia launch failure was how strong the carrier commnity was and he hadn't correctly dealt with them. When the three ratings agencies Moody's, S&P and Fitch each downgraded Nokia numerous times from near perfect to junk status - at every downgrade they mentioned the poisoned carrrier relations or sales channel problems as a cause. Usually the first mentioned cause. Often the ONLY cause why Nokia suffered another downgrade! Nothing was more important to Nokia's dominant position than the massive lead it had built in its carrier relations. Relations that were destroyed under three years of Elop's rule. Relations that had taken decades to build. Relations that have now been snapped up mostly by Samsung by the way so they won't be coming back either.
Nokia's fall was not because handsets were not good enough. Certainly Windows Phone by version 8 was better than the outgoing Symbian. Nokia did not fall because the marketing was bad or the prices too high - come on, every single Lumia was sold at a loss. At its worst, a loss of 49% per handset! Microsoft threw a quarter of a Billion dollars into the Lumia marketng every single quarter to help boost the handset success. Yet dismal failure.
LETS PLAY BAD COP - BAD COP
And here is the kicker. Carriers had loved Nokia (except US carriers - even neighboring Canadian and Mexican carriers loved Nokia but not the US carriers). But carriers had distrusted and disliked Microsoft. That dislike turned into hatered when Microsoft bought Skype. Not because Skype appeared on Windows Phone smartphone - Skype was available on Android smartphones but not on early Windows based smartphones. No. Carriers hated it that Microsoft the rich tech giant could now bankroll the single biggest existential threat to their business. Skype threatens voice calls. Skype threatens messages. Skype threatenes videocalls. While carriers dislike all OTT providers from Whatsapp to Blackberry Messenger, only Skype attracts pure hatered. Again not my words. Stephen Elop told the Nokia annual shareholder meeting in 2012 that carriers were boycotting all brands of Windows smartphones and it was because of Skype.
The boycotts have neen independently verified in secret in-store surveys by journalists from San Francisco to New York to Boston to London to Paris to Helsinki to Beijing and Hong Kong. Its a fact that after Microsoft bought Skype the total carrier commnuity put all Windows based smartphones into boycott. LG and Sony quit the Windows ecosytem completely. HTC and Samsung reduced their involveemnt to a token handset or two. Huawei and ZTE abandoned Windows Phone launches. In all cases that there was a statement why, it was because the carriers said they don't want the Windows based smartphones. They wanted the same manufacturers to give them Android handsets instead. Ex Microsoft executive who was in charge of the Windows smartphone unit at MIcrosoft, Charlie Kindle said that Microsoft's carrier relations were bad before the Skype purchase and then Microsoft made matters even worse essentially giving the middle finger to the carrrier community.
Understand the market now. Nokia were the 'good cop' of the pairing with Microsof the 'bad cop'. That can only work if there is one bad and one good. It cannot work with only the bad cop. Now that Nokia is removed from the equation - with all this history - can Microsoft ever succeed in mobile handsets? No. Literally never. They may stumble on for many years throwing good money after bad attempting to generate modest sales out of the 'Nokia' unit in the low single digits of market share. But the carrier community has spoken, loud and clear, that even with Nokia as the partner they will punish Microsoft. Now with Nokia no longer in the mix, the performance of the handset unit under MIcrosoft's sole management will be worse. Don't believe me? The Christmas quarter from October to December is traditionally Nokia's best quarter of the year in smartphone sales. Nokia traditionally grows 25% from just the quarter before. Most analysts were expecting Nokia to report well beyond 10 million sales in that ballpark. Nokia actual sales fell from 8.8 million to 8.2 million. This while the industry grew 15% from Q3 according to Canalys. And why the sudden totally unanticipated crash now? Bad Nokia phones? No, the brand new Lumia 1020 was shipping with the monster 41 megapixel camera and the new phablets too with screens of gargantuan size. Sprint was added to Nokia's USA sales etc. But sales? Fell. What else happened? Nokia announced the sale of the handset unit to Microsoft. Who is punishing Nokia/Microsoft now? Its the carreirs, stupid!
So mark my words. Nokia smartphones under Microsoft ownership will never pass single digits. I mean never ever ever in this lifetime or the ones to follow. Never ever cross-my-heart-and-hope-to-die never. Initially this year Microsoft can report total handset market shares in the low teens as Nokia's dumbphones help it to 15% of hte total handset market. But Nokia's smartphone market share had fallen to 3% last year. That was achieved when Nokia was balancing the evil out of the Evil Empire. When Ballmer played bad cop and Elop played good cop when visiting carrier CEOs together attempting to sell the new Lumia solutions.
The only thing that could reverse the hatered carriers have towards Microsoft is, if Microsoft would soon sell off the Skype asset. I am sure Microsoft investors would revolt on that decision as its about the only strong play Microsoft has going into the internet wars now as Internet Explorer, Hotmail etc are losing market share. So that would be a bombshell of news but I would suggest that is a day they would be making snowballs in hell if that happened in the next year or so.
AND NOKIA'S HANDSET UNIT FATE AT MICROSOFT THEREFORE IS
Ok. I am on record with my dire prediction. Luckily Nadella has no idea who I am and has very little knowlege even of the mobile industry so he can't judge how valid my points are. The issue will further be obfuscated by the disgruntled Elop who hates it that he didn't get the CEO job and certainly won't want to take any credit for the downfall of Nokia's handset empire. He will not tell the truth to the new CEO and those old Nokians who would have been brave enough to tell the truth to power have long since been fired by Elop or resigned in protest or left for personal reasons etc.
The new CEO will probably give Elop a chance at the helm of the Nokia he brings to Microsoft. It will continue to be a disaster and the new CEO very likely sees the history and will fire Elop - no do the Microsoftian amputation by giving Elop a non-job with no staff like say SVP of Mobile Strategy - and then post Elop into some far-away office like Ouagadougou or Antananarivo. But the CEO will give the Nokia unit another boss no doubt a very capable one who will spend another year or two in hell trying to turn the doomed operation around. How much beyond 2016 can Microsoft linger in useless state as a nobody of mobile will primarily depend on how long the profits from desktop Windows and Office Suite sustain the luxuries of loss-making divisions. I think Microsoft will play it like Xbox for many many years but by the end of the decade the writing will be on the wall. All the smart Nokia transfers will quietly migrate to 'any department other than handsets' at Microsoft...
Thats my prognosis on the happy memo talking so nicely about the importance of mobile to Microsoft. I do want to say that I expect Microsoft to continue making obscene profits in its other businesses so please don't read into the above that Microsoft is in trouble in the short run. Only its mobile dream is a nightmare that will never pan out.
CHANGE OR NOT TO CHANGE
(I honestly didn't want to write that part today, this second part is what promted me to end my night at my PC to author this blog)
Here is the real test of Satya Nadella. Microsoft is a bully. It has earned its nickname of being the Evil Empire. It has crushed rivals with illegal means and then armed itself with armies of attorneys so in the end it only paid some penalties that were pocket change out of its deep pockets. Microsoft has definitely been the nastiest player all over the years in tech. This was not just Ballmer, it was the total corporate culture and history. It was against its VARs, it was with its partners (Sendo, anyone?) and now the Nokia crash is also attributed to Microsoftian 'Trojan Horse' behavior by Elop especially after word leaked of his 25 million dollar bonus for wrecking the handset business. The Financial Times calculated that for every 1 Billion dollars that Elop wiped out of Nokia's shareholder value, his bonus clause paid him another 1.5 million dollars. A nice job if you can get it. The FT compared the audacity of Elop's heist to Bernie Madoff. (Incidentially I have explained why Elop could not have been inserted as a Trojan Horse but he may still have been acting in Microsoft's best interest out of misguided loyalties - and should be investigated by the securities industry watchdogs)
Ok so yes, MIcrosoft has earned its reputation as the biggest bully in the tech industry. You know what? That tactic only works if you are a monopoly (or a dictator). In any fair market conditions (or real democracies) the bully is soon ousted and never gets to that kind of behavior at the Fortune 500 sized giant corporation level. Only in monopolistic situations. Microsoft is quite different in the videogaming consoles market and in cloud computing where it doesn't hold monopolistic market power.
So what happens next. The big war for the IT industry was already lost two years ago when more computing devices were sold running Android than Windows. The installed base tips over this year when more total computing devices in use (mainframes, servers, PCs, netbooks, tablets, PDAs and smartphones) on Android will be bigger than those on Windows. So Microsoft has already lost the war while it still keeps on trucking in the lucrative desktop Windows and Office software world that will continue to be big for many years still to come. The future via smartphones is lost (see above) and last year was the first year that traditional PC sales - desktops and laptops - fell.
The gaming consoles have reached their peak as well. So where is Microsoft's futurei if not smartphones? The cloud maybe but in that world the giant is Amazon and there are several strong players. Microsoft's whole history was built on a monopoly or monopolistic market even from the very start when IBM gave MS the DOS license for the operating system on the first IBM PC. MIcrosoft has learned every nasty trick of intimdiation and nasty contract clauses and hostile attorneys to breaking contracts to breaking laws - and it gets away with it - in those markets where it is monopolistic. It isn't behaving like that on the cloud services I am told (I am not an expert on that side of Microsoft).
So my advice and 'test' of Satya Nadella is the Evil test. If he wants to transform Microsoft and bring it as a healthy vibrant major tech company in the 2020s decade 6 years from now, the only way that is possible is if Microsoft is transformed totally into the gentle giant and friend to all. Not the closed garden - my way or the highway - thinking that is Windows and its 'ecosystem'. It is the open source type of thinking best epitomied by Linux (yeah Finnish dude Linus Torvalds can be thanked for that haha) that was also very close to the core of Nokia's culture up to when Elop the cancer arrived in 2010. Android is Linux based by the way (as was Nokia's replacement platform to supercede Symbian, the highly praised but short-lived MeeGo - its succesor, Sailfish by Jolla can run Android apps natively! Imagine that, Nokia could have the full benefit of the 700,000 apps of Android while keeping its own - Linux based open souce operating system today if Elop hadnt' murdered MeeGo in pursuit of his 25 million dollar bonus)
The rot inside Microsoft is deep. I don't mean every person at Microsoft is evil. But the corporate culture is one that takes the nasty option almost whenever it presents itself. I always say 'lawyer up' when you have any dealings with Microsoft as it so often ends in tears (did I mention Sendo, MIcrosofts very first step into mobile destroyed that smartphone pioneer in a prolonged lawsuit that in the end had Microsoft paying Sendo but by then Sendo was destroyed).
HOW SOFT? MICROSOFT AS A LOVELY PUSSYCAT
The memo is a nice first step. Nadella is a young CEO closer in tune to the modern IT tech thinking of sharing - haha Communities Dominate eh, like this blog and the book we wrote with Alan Moore a decade ago. But yes. The young CEO perhaps can guide MIcrosoft into a new era, for the tiger to shed its stripes and the Evil Empire to transform into a lovely pussycat. I am not holding my breath. I think that is far too much to ask of the new CEO while Microsoft still seems so healthy today... It will take a near-death experience perhaps to motivate the then-new CEO to that desperation move. One that starts incidentially by a massive mea culpa by the CEO apologizing for all past mistakes like all lawsuits settled out of court or fines paid to the EU and US regulators 'with Microsoft admitting no fault' haha... that to me is the only way, and yes, It will obviously not happen. So expect Nadella to supervise a continuous slow death spiral from now to maybe 2025 or 2030 but I know a dead parrot when I see one, and I'm looking at one right now. Its stone dead. The parrot is definitely deceased. He's passed on. This parrot is no more. He has ceased to be. He's expired and gone to meet its maker. He's a stiff. Bereft of life he rests in peace. This is an ex-Parrot!
but good luck Satya I hope you prove me wrong. The industries (digital and mobile, increasingly converging) really could use a strong Microsoft for another 20 years and if you can somehow revive the Nokia handset business back to growth, I'm sending you a bottle of James Bond's favorite whisky, a nice 25 year old single malt of Macallan. Good luck!