Stephen Elop has been Nokia's (NOK) CEO for 2.5 years. Prior to that, he led Microsoft's (MSFT) strategic implementations with the Finland-based Corporation. This adds another two years of "substantial exposure to the inner workings of Nokia" according to a post written on the company blog, Conversations by Nokia. "This will enable him to hit the ground running when he joins on September 21." the same post continued.
By his own admission, Mr. Elop works extremely hard during the week so he can spend time with his family on the weekends. He has five children, including one by adoption. I admire him and I am sure many others do as well.
If everything was perfect on the shareholder side, this would be an article of praise. I would certainly prefer this scenario. But as the title suggests, it is a list that I believe Nokia must act upon with its greatest urgency yet. While Q4 2012 showed a glimmer of hope, competitors are not standing still.
Share price: not another review
I will spare you a review of how much the share price has come down since 2011. However, in case you are brand new to following Nokia, it has come down by quite a bit; in fact, many thought of, and others were cheering for, bankruptcy in the summer of 2012. The share price backed away from the precipice to about U.S. $4.50 per ADR just prior to the announcement of results for Q4 2012, then dipped a dollar since that time.
Guidance for Q1 2013 is -2% plus or minus 4% providing a wide range of -6% to 2%. I have read that J.P. Morgan Chase & Co expects an EPS of -5 cents U.S. (-4 euro cents) with mobile shipments at 68 million, of which 5 million will be Lumias.
If this is accurate, that would mean an increase of only 600,000 Lumias since Q4. Taken alone, it seems positive considering Q4 is typically the best quarter of the year for tech sales. However Nokia's share price will have to lunge deeply into green territory before many shareholders can erase from their memory the very unfortunate issue they endured of not having sufficient stock to sell immediately after release. Let me be clear: Nokia did not run out after selling 10s of millions of Lumias. They could barely stock certain stores with a handful of units and shareholders were kept in the dark as to what components were in short supply out of respect for the companies involved.
The very expensive acquisition of Navteq and merger with Siemens to form NSN were made before Elop's arrival. Since his arrival, he has tried to turn lemons into lemonade. It has been improving, however, so far, the lemonade is still too tart.
Navteq and HERE
Nokia was apparently feeling quite flush in October 2007 when it acquired Navteq for U.S. $8 billion. Why not? It was on its way to making its highest operating profit ever, a mind boggling U.S. $10.5 billion (converted from 8 billion 2007 euros). It was the same month the Dow hit an historic high. I understand that Navteq's maps have made Nokia's smartphones a more desirable product. Nevertheless, it is an understatement to say that this investment has not paid for itself in the last 5.5 years.
Elop speaks of potential of the new HERE brand transforming the mobile ad space, but we have not had any demonstration that this could be a reality. Nokia City Lens has potential but potential does not pay the bills. You would think that being used in four out of every five vehicles' onboard navigation would be profitable. Location & Commerce operating profit in the last four years has been -301 million euros, -1.5 billion euros, -225 million euros and -344 million euros for 2012 and 2011, 2010 and 2009 respectively. Converting these amounts to U.S. dollars only paints an uglier picture.
Nokia Siemens Networks has not been the shareholder's best friend either. It did turn out a profit of 251 million euros in Q4 2012 (575 million euros non-IFRS) but that was a rare occasion. Either NSN has been winning many contracts in different parts of the world in recent months, or it's just a handful of contracts run through a very good PR campaign. 4G LTE is a relatively new technology and it's attractive to carriers that can afford to implement it, as it reduces bandwidth bottlenecks and provides more specific user data that can be monetized. As it turns out, Nokia has many patents in this field, and its NSN division has shifted its focus in this direction. NSN has shown U.S. a glimpse that it can be profitable but it can be a big monkey to have on your back as the numbers below demonstrate.
Operating profits in the last four years have been -799 million euros, -300 million euros, -686 million euros and -1.6 billion euros for 2012, 2011, 2010 and 2009 respectively. I will spare you the conversion to U.S. dollars. Suffice it to say it is no wonder both partners, Nokia and Siemens, have been trying to offload this gigantic financial and human resource component for years.
Walk the Walk
Now that you've had a glimpse of Nokia's very recent and hurtful past - those operating losses do not lie - let's see what Nokia's future could be if Stephen Elop truly succeeds in establishing a challenger mindset using his own words quoted by several journalists in past months.
"When I think about what happened over the last so many years to Nokia, let me answer it this way: when I talked to employees and talk about the attitudes and behaviours that are important to be successful in the future I talk very much about maintaining a challenger mindset. We have to operate as the challenger, not as the big strong one as in the past, but as the challenger mindset. And I talk about three specific behaviours or attitudes that are important in that mindset."
"The first is accountability. Everyone in the company needs to know what their role is, what they're responsible for, what results they need to deliver and they've got to be focussed on making that happen. We've got to be a very accountable organisation."
"Second we have to move with absolute urgency. This market is only accelerating. A device life cycle some years ago might have been two years; now it's six to nine months. You have to be moving faster and faster."
"And the third and arguably the most important, the word I use is empathy. Empathy means: are you listening and hearing? Are you feeling what a consumer really needs? Their needs may be changing. You may be able to show them something that's different than they expected and then get the feedback from that. Or said negatively, are you just doing what you think is right at the expense of the consumer or new trends? And so a company that holds themselves accountable moves with urgency and listens to the consumers and operators, and everybody else in the industry to do the right thing. Those are the companies that I think will be more successful in this marketplace." Source: Nokia CEO Stephen Elop interview transcript, The Age, February 5, 2013.
The Challenger Checklist
In today's connected world a public figure cannot hide away from his words. I challenge Mr. Elop to look back on his 2.5 years at the helm of Nokia in the following setting: he and his brain trust need to get away from the public and go on a three-day weekend retreat where they can only be reached for a real emergency.
With no access to television and Internet, as well as all SIM cards removed from smartphones except for the "nanny" of the group, they need to relax together and be prohibited to talk about work for the first 24 hours. They need to play together, eat wonderful food and indulge in very good wines or other forms of alcohol. When everyone has sufficiently indulged, and only then, can people give their honest feedback on the past 2.5 years without fear of reprisal. They need to let it all out.
The next mid-morning, the job at hand would be to come up with Nokia's Challenger Checklist for the rest of 2013. This is what it could look like:
□ Come clean about tablets: shareholders and prospective consumers have a right to know if Nokia has any intention of producing one. This is not a Trade Secret. Hundreds of millions of tablets have been sold since 2010. Today they can be purchased for less than $50 at the bottom. The train is leaving the station and Nokia needs to be on it, before it becomes necessary for another burning platform memo. After three years of waiting for Nokia, our family gave up last week and purchased its first tablet and gel cover. Once we're accustomed and invested into the Android ecosystem, I don't foresee a reason to change. I think the CEO of a company that is doing very well, is flush with money, can afford to be coy with shareholders. Otherwise, no. And, if by chance that it's really true that Nokia has not decided on tablets, then the situation is direr than previously thought. A tablet needs to be released as soon as possible, at least in smaller, pilot project numbers, in time for Christmas shopping season 2013.
□ Give people what they want: it's time to act on the empathy quoted earlier. While the iPhone is still an excellent and desirable smartphone, the focus of many consumers has shifted to the Samsung Galaxy series. Why? There is likely more than one reason, but it's obvious many prefer a larger screen. It's easier and more pleasant to read. Bigger is really better in this case and Samsung understood that right from the get go with the Galaxy Series beginning at 4 inches in 2010. Each subsequent model was larger and the trend continues to this day with the latest GS4 at 5 inches. Samsung will even release two Mega smartphones in europe in May: one at 5.8 inches and the other at 6.3 inches. Samsung may sell more of those smartphones phones in one quarter than Nokia will in one year. Going even from 3.8 inches to 4.0 inches makes it considerably easier to read, a fact Nokia took too long to realize and adopt. The Lumia WP7.x series had three models with a 3.8 screen, one at 4 inches and one at 4.3 inches. Out of the six WP8 Lumias released, including the 920T, only one has a 3.8 screen; the rest are 4.0, 4.3 and 4.5 inches. The rumored 928 is expected to have a 4.5 screen.
□ Create a Nokia army of promoters: most if not all of you have read positive reviews of Lumias on the web. It's an attractive product. It's fast and useful. Most who have tried it liked it but still sales are not breaking records, partly because of component shortages which I will get to below, but also because of a lack of marketing. It's commendable that Nokia has a popular blog but all the Marys and Joes of this world do not spend a lot of time researching their choice of phone before making a purchase. They rely on word of mouth from friends, co-workers and family, as well as sales clerks. Nokia needs to find simple ways of promoting their products directly to the public, bypassing television and the internet now that everyone has become an expert at avoiding ads. An example would be selecting a number of cities and hiring promotional experts in those locations to hold events where Lumias can be promoted and won as prizes. These Lumia prize winners will become soldiers in Nokia's army of natural promoters if they are in contact with a lot of people on a daily basis. Students in high schools and universities, workers in theatres, stadiums, fast food outlets, and the list can go on. If Nokia is to be a challenger it must challenge. These promotional experts could drive around in attractive, multi-media vehicles with full Nokia Lumia wraps.
□ Commit to spending every cent of Microsoft platform payments on platform development and marketing: creating the Nokia army of promoters takes money and U.S. $250 million per quarter should provide Nokia with the ability to create an impressive army. The rest of the money should go directly to new app developers only. At this stage of the game, not only does Nokia need to increase the number of hands on Lumias, it needs to bulge up the mass of apps. Not every app needs to be ground breaking and by prioritizing first time developers you will get kids thinking outside the box.
□ Good enough is good enough: Again, here Nokia must not impose its view of the smartphone to the world when competitors' models are outselling them by a very large margin. There is no point in making the best smartphone in the world, spending more than is needed to create and produce a durable smartphone that will be thrown away or recycled in one to three years. If a certain portion of buyers are prepared to pay for the best in the world, build one model with such qualities and price it accordingly. For the great majority of the world, good enough is good enough. If we are to judge the quality of smartphones produced by Apple (AAPL) and Samsung, it is safe to conclude that they believe in good enough and there is no reason for Nokia to think itself better. As the expression goes: it's better to be happy than to be right. This translates into the fact that it's better to have good smartphones and happy shareholders, than miserable shareholders and the best smartphones. Just ask Sony about its Betamax story.
□ Alternative Components and Options: When the company's Windows Phone 8 flagship device, the Lumia 920, was released in November 2012, it generated excitement online at first when stories of sellouts were appearing. Then the truth surfaced as it always does: Nokia could not meet demand, not because it was extreme, but because they had failed to secure an appropriate level of very specialized components. The CEO has chosen neither to inform shareholders about which components were in short supply, nor by which means the company would resolve and avoid such an issue in the future. Not releasing those details or a proposed workaround in a news release, or at the very least in the annual report - the shareholder's guide to the company - is a mistake on the same scale as announcing the death of Symbian without having replacement models ready to ship for another nine months. Alternatively, Nokia could have released a variant of the Lumia 920 with different, available components. As an example only, I submit that I, and many others, would have been willing to purchase a 920A without the super-sensitive screen, wireless charging capability, solid color bodies and with a different processor. As far as I am concerned, those points of differentiation are certainly not deal breakers. Even in Canada, it's not so cold that I cannot take my gloves off for 30 seconds to one minute to check if there is anything important that I should know. I cannot see myself using wireless charging as it cannot be used during that process, while I can use it while it is plugged in to the charger. An alternative model could allow users to pop-out the main battery and pop-in a spare, without shutting the phone down. As far as colors are concerned, if I want a different color I can buy a gel cover. There is no need to have a specialized, slow and expensive process to produce solid through and through colors. This last point also applies to the "Good enough is Good Enough" task of the checklist.
It is all well and good to tell journalists that Nokia needs to employ the Challenger mentality, but these words need to translate into actions that bring a return to shareholders, the group of people that should matter the most in a public company.
Being accountable is not just a once a year ribbing at the annual meeting, or taking a list of polite questions from analysts during quarterly teleconferences. Nokia needs to find ways to better communicate with all shareholders. The annual report would be a great place to start with greater transparency and details on how shareholders money is being spent. The reader needs to come away after reading this document feeling that he has a more detailed understanding of what the company is doing and how it is meeting its goals. This report cannot serve only to give generalities about revenues and expenses, a big picture view of the company's vision, and a comprehensive list of potential risks that make the investor feel the company is really paranoid and insecure about its own future.
With every passing day, people are buying the smartphones and tablets of competitors and that leaves Nokia's addressable market smaller and smaller, to use its own annual report expression. Nokia needs to act on the Challenger Checklist yet with extreme urgency before what little is left of the masses that can afford its highest margin products has moved on and invested in another ecosystem. Efforts in the emerging markets are laudable but native smartphone producers are eating Nokia's lunch, as you read these lines, and brand loyalty is not a given, otherwise Motorola (GOOG) and Nokia would still rule.
Nokia needs not only to listen to its users and shareholders, it needs to act on their suggestions. In 2013, it needs to publicly announce and produce at least one tablet. It needs to create smartphones that cost less to produce, that don't need to last an indestructible lifetime and that have larger screen sizes. It needs to commit to spending every cent of Microsoft's quarterly platform payments to create apps by new developers. It needs to spend the rest of those payments to market the phone in innovative ways that bypass television and internet advertising, directly to an army of users that will naturally promote the phones by word of mouth. Finally, it must have alternative plans for model options, components and suppliers as the companies of other popular brands will do everything in their mighty power to disrupt Nokia's supply chain by buying up capacity. Even the mighty Apple suffered component shortages in 2012 although it did not stop them from greatly outselling Nokia.
Mr. Elop, yet a greater sense of urgency must be felt and seen at Nokia. Losses in two consecutive years in an industry that is very healthy and growing, where competitors are accumulating mountains of profits, are unacceptable and cannot be repeated in 2013.