Nokia (NOK) has made some big waves in the last week. First, with the big ”out of the fire and into the icy waters” memo from the new CEO, Stephen Elop. Second, by announcing a sweeping partnership with Microsoft (MSFT) which makes the new Microsoft mobile OS technology the center of the Nokia strategy.
The move is major and quite abrupt. Just two months ago, Nokia was touting their ”next generation UI” on top of their own Meego platform as a game changer over iPhone and Android. Of course, nobody believed them which probably made it easy to abandon this strategy.
Fans of Nokia are distressed and unhappy. Everyone else seems to think this won’t help either company much since they have both missed the revolution in mobile computing that has occurred in the last three years. Before the events of this last week, we had officially condemned Nokia to a slow but inevitable death in our note posted on August 14th that focused mostly on the need for Research in Motion (RIMM) and Nokia to wake up and embrace a platform like Android.
But what about now? It’s been a few years since we sounded the alarm and published ”Mobile Internet: Time to Pull the Trigger” in June of 2008 and highlighted the urgency to get portfolio exposure to mobile. At that time, Nokia wasn’t worth considering so we focused instead on Apple (AAPL), Google (GOOG) and Research in Motion. Nokia was a prominent member of the mobile Internet ecosystem but one that has only been in decline. My guess was that Microsoft would acquire Research in Motion to shore up the enterprise mobile market but that hasn’t come to pass, at least so far.
However, the letter from Stephen Elop looks like the right medicine to me. Until that letter appeared, Nokia was living in a fantasy world in which they were a leader. Recognizing the depth of the problem is a first step. But the letter is just rhetoric; until it’s backed up by decisions and actions that illustrate a departure from the past, it’s just so much eyewash.
Now we have the announcement of the big Nokia – Microsoft partnership. There will be piles of analysis coming on it but at a high level we know that the current version of the Windows mobile OS is actually not bad and works well with both Facebook and XBox. It’s not an iPhone killer but it’s also not DOA either. Smart, thoughtful people who have used both the iPhone and Android have spent time with it and while it still doesn’t fit most users, it’s not garbage. Way to go Microsoft!
Before looking at the major moving parts objectively, let me get it out of the way – the management teams of these two companies, particularly Steve Ballmer, have an abysmal record of understanding technology and the underlying markets, and putting strategies and programs in place that make sense. Our position on Ballmer was made clear last June with our note, ”Microsoft’s Future is Hopeless with Steve Ballmer.”
Let’s take a look at the strategic partnership with soft eyes and at least review the potential:
OS: Nokia needs to embrace a different OS. Months ago, we thought it should be Android but after witnessing the success of Samsung, HTC and Motorola it’s pretty clear Nokia would not have fared so well on Android. Microsoft is a very mixed bag of technologies and execution but in the consumer OS department they can hold their own. They are not a bad OS partner from a technical standpoint.
Apps: This could be a good story. Although the Nokia ”OVI Store” is a joke, some applications like OVI Maps are quite strong. Microsoft also has a large base of Windows applications, tools and distributed architecture that developers have spent decades developing for. Until Nokia, these developers had no path but Nokia is still large enough to represent an attractive alternative for them.
Cloud: Applications, content and use cases in the cloud are still in the early stages. Neither Apple nor Android has all the issues squared away as of yet. As an Android user I can say it works very well, but feels disjointed. Apple has a more integrated solution, but it’s closed. Microsoft Live actually has some good features that makes Microsoft Office work better in the cloud in many ways than Google Apps. We use both extensively.
Unfortunately, the success of all this integration depends mightily on execution. The usual management proclamations of ”overcoming challenges” and ”moving swiftly” to ”disrupt other mobile ecosystems” seem comical coming from these management teams. Is there any joy inside these companies about this strategy?
Are designers, developers, managers and engineers excited? It’s hard to imagine this working out if that’s not the case. Maybe next week at the Mobile World Congress some clues will emerge. The first set of disruptions is likely to occur among Nokia middle management and staff along with long-suffering but faithful users.
Friday morning, we did a quick Intrinsic Valuation analysis of Nokia and using what appear to be conservative assumptions, we arrive at an IV of $20.