Pundits this week are describing Nokia's fall from grace as one of the greatest corporate car-crashes of all time. But here's an unfashionable view. Nokia's problem is not Stephen Elop, or his strategy. Its problem is it didn't have Stephen Elop, or his strategy, in place two years ago.
And while we are certainly watching a dramatic destruction of shareholder value – this will be a terrible year for Nokia – it's worth remembering that three bad quarters are not necessarily fatal to a company. I'll admit, this is not a popular opinion this week.
Five years ago, Nokia was a market maker and a global consumer brand, comparable perhaps only to Sony for its influence and reach. This week shares are back at 1998 levels. Elop was forced to rip up the revenue and margins forecasts he made for the entire year in February, announcing Nokia's "big switch" away from developing its own Meego and Symbian platforms, to paying royalties to use Windows Phone. Sales would be significantly lower, and margins weaker, than the company had predicted back then. Nokia said it wouldn't make any more forecasts for the year, which is very unusual. In other words, it was already over the cliff edge, but didn't know when it would hit the ground.
Headline writers blamed the switch to Windows – creating an "Osborne effect". This popular catchphrase describes the falling sales of existing products caused by pre-announcing successors that are not yet available – and it's actually a myth – pre-announcement didn't kill the original Osborne Computer.
But, still, it's pretty bad, and not going to get a lot better. At least eight analyst firms cut their ratings for the stock, with Bernstein Research cutting the price target to $4.
Bernstein's estimate puts the enterprise value of the company – the market value minus the cash pile – at €11bn, and that includes the networks division and Navteq. It led one pundit to speculate that Nokia was now worth less than Skype. The Windows effect at work?
Now just because two things happen together, does not imply a causation. If you look at Nokia's explanation, you'll see that's only part of the story. The message is opaque, but we can read between the lines.
Nokia said that "competitive dynamics ... across multiple price categories", were to blame – which simply means the competition makes cheaper, more attractive phones across the board. This is exactly what Elop warned of in his "Burning Platforms" message. In addition to Android and the iPhone, Nokia faced a new threat of very cheap phones in Asia from companies you've never heard of – Micromax, Carbon, Lava – which can take advantage of a new generation of packaged hardware. Elop identified MediaTek as one of these companies. A few years ago, it wasn't possible for a new entrant to grab an off-the-shelf reference design. Now it is.
This was one of the three factors in his "Burning Platforms" internal blog post. The third was the competition from featurephones in Europe. In Europe, the competition – such as Samsung – make better, cheaper featurephones, thanks to their faster release cycles, better design, and better use of innovation.
"They are fast, they are cheap, and they are challenging us," wrote Elop.
None of these problems can be pinned on the CEO, whose competitive analysis really can't be bettered. Nokia's problem is that it only started looking for a new CEO in April 2010, and Elop has only been in the job for nine months. He quickly identified that neither of Nokia's high-end platforms were competitive and could not have moved any faster to ditch them for an alternative that is competitive.
Elop was caught between a rock and a hard place. The fact is that the product pipeline Elop had been bequeathed was so lacklustre, and so inadequate, that Nokia's valuation would be exactly where it is today – or probably even lower – if he hadn't announced the Windows Switch when he did. Imagine four more months of 24-hour news reporting on delays to Symbian and Meego.