Nokia's Windows Phone "bear hug" is choking the Mighty Finn

Question: What European technology company, once undisputed champion in its category, is haemorrhaging cash, customers and senior staff at a terrifying rate?

The answer, of course, is Nokia. The phone giant's reversal of fortunes in the smart phone and mobile arena is the sort of story Finnish parents will be telling their kids to scare them into doing their homework. Work really hard or Ballmer will get you.

Nokia's troubles began when Apple and Google turned their disruptive ray guns onto the mobile market. Nokia had to change and fast. But despite ditching the fiddly Symbian OS, hiring its first non-Finnish CEO, adopting the so-easy-its-peasy Windows Phone OS and firing forth a bevy of high-gloss touchscreen phones that aren't half bad, the once Mighty Finn is losing more cash and customers than ever before.

Profits slide

In its latest quarterly results, Nokia reported a whopping loss of €1.3bn and a €3bn drop in revenue on the same quarter a year ago. In smart phones Nokia now languishes behind iOS and Android.

"Nokia's transition in its Smart Devices from Symbian-based phones to the Windows-based Lumia devices is proving more challenging than expected given that sales of Symbian-based devices are falling off very quickly while Lumia sales are only ramping up slowly," credit ratings agency Moody's noted in a statement after downgrading Nokia's debt.

Fitch, another credit ratings agency, followed with its own Nokia downgrade -- a snafu indeed for the tech giant, making it harder for Nokia to borrow money and giving its investors another reason to push the panic button.

"As an arm chair quarterback, it is clear to me that [Nokia CEO Stephen] Elop is struggling. The results speak for themselves," says former Nokia exec Lee Williams, talking to me in an exclusive interview. Williams was Nokia's SVP of Series 60 software in 2006 to 2009, before becoming Executive Director of the Symbian Foundation -- until Nokia took Symbian back in house in 2010. Williams is now a partner at Sourcebits, a San Francisco-based mobile software consultancy firm.

"Those credit ratings are a huge deal for them," he says. "If they can't borrow and move money -- wow! There's very little for them to do. Because they're the world's largest distributed manufacturer highly dependent on that movement and those credit ratings, and cash and bank."

'Elop has no overarching vision for Nokia'

Williams says Nokia's CEO appears very much the man without a plan. "Elop hasn't delivered a roadmap. He's been there for two to three years and there's really no roadmap," says Williams. "There's no overarching vision for this company. That to me is akin to stepping completely out of the leadership role and running behind the bus now... Before Elop, Nokia would never give up that leadership position and role in the marketplace, would always talk about the future."

"The reason you have CEOs is because they're delusional and they have to constantly balance the desire of a board, and an investment community and the world vs the reality of customers and so forth but that delusion gives you vision and direction and hope and grandiose statements and so forth," adds Williams.

"Elop is operating like a CFO [chief financial officer] -- CFOs are very practical, always looking at costs, always internally focused... I don't think he's really projecting anything forward or sitting around with his team imaging what the future looks like. I think it's 's**t how do I get rid of a third of this overhead in R&D?'."

So where did it all go wrong for Nokia 2.0? You can't accuse the company of being stuck in its ways anymore -- a steady stream of long-serving but now departing senior execs is a definite sign things aren't what they used to be in Espoo. But Williams argues Nokia's problem is now too much change: it has overcompensated for the failures of the past by throwing out the baby with the bathwater.

"I did not see a good reason to change course so frantically," he tells me. "I don't think Nokia was going in the wrong direction with some of the things it was doing -- it was simply executing poorly before Elop got there and they weren't giving it enough time.

"The problem has not been a lack of willingness to optimize or to change. Real or meaningful change is another matter entirely. You cannot deliver innovation and the goods, as in unique product features, by walking down the hallway every few months and changing titles on the nameplates in front of offices.

"It is more fundamental than that, you have to shake complacency loose, take real risks, fail fast, and you need to know when something isn't working, or how long it is going to take to get something right. Management in any company should be judged for their abilities in this way."

'He sold the deal as Windows Phone or nothing -- it wasn't'

All those departing senior execs are a clear sign of trouble at the top. Williams characterises it as a talent exodus -- another indication Nokia is being run by a cost cutter, not a visionary leader.

"He lost his talent and he's bringing junior people out of Microsoft into key roles and positions, especially in sales," says Williams. "Inventory in a company for anybody but the CFO is talent. For the CFO it's not talent, it's assets, IP, offices -- so again Elop's acting like a CFO."

Williams believes Nokia would be in a far stronger position -- financially, strategically and otherwise -- if it had introduced just a handful of Windows Phone handsets into its portfolio without abandoning its own software development efforts on Symbian and MeeGo, the operating system that was used on the N9.

"It might have made sense to introduce a product or two into the portfolio based on Windows Phone. What I do not think they should have done is pretend it is a one horse race, and that one software system is all you need. They have executed in this fashion, and are paying for it," Williams argues.

"Symbian is shipping on around 20 million new units a quarter as of today. When I was at the company it was responsible for seven of 10 of Nokia's highest gross margin products. Think of those volumes. There were dozens of products that shipped in the tens of millions," he adds. "For some perspective, everyone is thinking Lumia and Windows Phone when they look at Nokia now, and from what I can tell they have yet to have a product with this configuration ship close to two million units."

'Symbian was Nokia's cash-cow -- Elop sacrificed it'

Even when Symbian was at its most fiddly and awful to use -- for us, the mobile user -- it was still helping to keep Nokia's bottom line beautiful. But when Elop announced an absolute switch to Windows Phone long before Nokia had any Lumia devices mobile users could buy, Williams says he effectively transformed the Symbian cash-cow into a dead duck.

"When I was at Nokia and we shipped a Symbian product and it was bad, in its worst incarnation we knew that if we just flipped the switch, we could move 2.5 to three million units -- overnight, no matter how bad the product," he tells me. "That was Nokia. That was Nokia's brand, we knew we could count on that.

"And now look at it -- they flipped the switch and oh, 200,000 [Windows Phone] units out of the gate. Huh? Only selling in the US, under AT&T's moniker. If you can't flip the switch like that, Nokia's dead and devalued."

Williams is not advocating a "bear hug" of Symbian and only Symbian -- but rather reckons Nokia should be putting its eggs into multiple OS baskets.

"If I were making product portfolio level decisions in Nokia right now I know I would not choose Symbian for every product," he says. "As an example, I put my support behind several Series 40, and MeeGo development initiatives, and loaned engineers out to those efforts, when I was the head of Symbian software in Nokia.

"One size does not fit all, and I think technology religion is dangerous in a good products company. You cannot marry yourself to any one technology or way of doing something."

Sadly for N9 fans, though, Williams believes the MeeGo ship has now sailed. "The team has left or been reassigned from what I hear, and the ecosystem and developer support is not there," he says.

'Android is not the answer'

Should Nokia have given Google's loveable Android a "bear hug" then, rather than running into the sweaty arms of Steve Ballmer? Not in Williams' view. "I did not, and still do not see any benefits to Nokia embracing Android," he tells me.

There are lots of problem with Android from Nokia's perspective, according to Williams -- not least the fact Google's own business aims are in conflict with Nokia's need to establish a distinctive software ecosystem of its own.

"Android is a less capable offering than a few options that still exist within Nokia," argues Williams. "It's certainly not what I would refer to as an open system. More than that, I think that Nokia has little opportunity to differentiate here in the near term, and the Android platform is so highly fragmented that returns on investment become difficult at best for an ecosystem participant.

"The 'in house' software and expertise Nokia had and in some cases still have, created differentiators, and features that needed better market presence, and they needed to realise the benefits of a true ecosystem of software and service providers. Android is not and I do not believe will be the answer to this situation for Nokia."

"Keep in mind, Google has invested in Android because they want the ad space and user value that comes with all of the internet connected displays in mobile. More than that, they needed to disrupt an industry full of barriers, and licensing taxes so they could have a large presence in mobile. They are not a consumer products company," he adds.

'Today's Lumia phones have stacks of shortcomings'

In any case, the pros and cons of Android are all but academic now -- Elop apparently burnt the Android bridge by committing Windows Phone hari kari. And, as it stands, Williams doesn't fancy Windows Phone's chances at digging Nokia out of the hole it's got itself into.

"The battery life and imaging capabilities of the current Lumia products support this conclusion," he says. "Great, now they have a Windows Phone product, and the differentiators are nonexistent, the battery life is orders of magnitude behind their other products, and the best imaging or camera features are not able to be fully realized leveraging the Windows Phone code.

"These products will have some success in the marketplace, but not at the scale or level needed. They can fix some of these things over time, and with substantial ecosystem support, but the marketplace is a harsh mistress, I don't think they have that kind of time."

Another problem for Nokia using Windows Phone is that its fortunes are now conjoined with Microsoft's. "When software is developed by another company, and under tight change control restrictions, you have less flexibility to adapt that software to your needs," says Williams. "Also, a third party company will be taking the software in new directions, directions that may not be aligned with your needs, but other customer's needs. So access, and influence become powerful considerations when evaluating software. These things are at the heart of why the decision to embrace Windows Phone at Nokia is a 'bet the company' type of proposition."

Can Windows Phone 8 save Nokia's bacon?

Does Williams believe Windows Phone 8 -- aka Apollo -- could be the rocket-fuel Nokia needs to power a massive turnaround in its fortunes?

"Windows Phone 8 is definitely a step in the right direction, and the improvements are key additions. That said, if I had a dime for every time someone pulled a page out of the Microsoft Marketing handbook, and said 'just wait' for the next iteration, well...I would be driving a new motorcycle and I have expensive tastes," he says. "It is not about what's coming half as much as it is about what is here today. Nokia has these things available in house, why wait?

"Software systems are no panacea and Symbian, MeeGo, and Series 40 all have their own issues and problems, but every time you hear a company rep say 'just wait', keep in mind that these features are sitting in a code line somewhere in the company today, and have been for some time."

"Also, everything 'Windows 8' has a big question mark on it right now, and it should be this way," Williams adds. "Microsoft is notoriously late on delivery, and is attempting to unify a plethora of product categories, merging the PC, Tablet, Entertainment Console, and Smartphone worlds is the right thing to do, and the underlying approach looks very sound, but we have yet to see what tradeoffs and timelines are needed to make it happen in the marketplace."

When it comes to another chunk of Microsoft IP which Nokia has embraced -- Elop, who served as President of the Microsoft Business Division from 2008 to 2010 -- Williams reckons Nokia's board and chairman Jorma Ollila had been hoping to inject "a little US cultural magic" into the company. As it turns out, Elop's "cultural magic" has not proved itself to be the fortune-fixing pixie dust they were really hoping for.

'Nokia is Finland, and Finland is Nokia'

"I know Jorma," says Williams. "He's Don Quixote. He will go chase the next windmill before he'll go sell the company. That's why he took them from tyres to phones in the first place. I think that's why he brought Elop in. What's happened since then... I'm not sure Jorma or others are doing an honest assessment of how the guy's performing."

In Williams' view, Nokia should stop trying to be something it's not -- American -- and remember what made it great in the first place: being Finnish, having "extreme" expertise in software and hardware.

"I don't know if Nokia's Finnish or Finland is Nokia but I can tell you this: I don't know if the answer is cutting back on any of that [Finnish expertise], I think it's learning," says Williams.

The lesson Nokia needs to learn is to prioritise and champion design over efficiency, he argues. Whereas at Apple a designer has the power to stop a product from shipping, at Nokia phones were being put on ice to glean a marginal saving on component costs. It's that hyperactive efficiency demon that Nokia needs to exorcise, says Williams, rather than junking its great software heritage by handing Microsoft the keys to the kingdom.

"The Finns created the Molotov cocktail -- that was an extremely efficient way to take a bunch of scraps and fight the Russians. They were out of tools, they were out of bullets so they invented Molotovs -- that is exactly what Nokia does, they're extremely good at optimisation," he says.

"Many times where we had a key product to launch [at Nokia], somebody would stand up and be empowered all the way to the CEO to say it, we're not shipping because we can get another nickel out of this display if we wait for this deal to close in 30 days with Samsung. And I'm just like: really? Wow."

How long does Elop have?

Williams reckons Nokia's board will give Elop another six months to a year before ushering in what he hopes will be the final, successful course correction -- this time taking Nokia back towards its own software heritage but this time with design placed at the very core of the company.

"I'm confident they'll be able to course correct and that they have the kind of assets and talent left to be able to do something here. I don't see them going out in a firesale," says Williams. "I think what will happen is they'll sell off some divisions, and/or will simply gut leadership quickly and change course a little bit, back in the direction of where they were going."

"I think they felt compelled to do a bad deal," he adds. "And I think Elop came in and sold it as a good one and it has a chance but what I don't think is it's working, so the question now is what do you do? It's okay to make a mistake, even at that scale -- the question is knowing when you did it, being bold enough to change and then move in a new direction -- so let's see what the next burning platform memo says, if it comes out at all. Right?"