Nokia’s new phone was meant to herald the company’s revival

Instead it’s been a reminder of how brutally hard it is to engineer a turnaround

A fuzzy reception
Kevork Djansezian/Getty Images

It was one year ago that Finland’s Nokia Oyj joined forces with Microsoft Corp. in a last-ditch effort to secure a foothold in the booming smartphone industry. With its once-dominant global market share in free fall and losses piling up, Nokia faced a grim future as customers increasingly took a pass on its high-end devices and opted instead for Apple Inc.’s iPhone or those running Google’s Android software—a situation not unlike the one beleaguered BlackBerry maker Research In Motion Ltd. faces today. Just prior to revealing a bold plan to replace Nokia’s new smartphone operating system with Microsoft’s, CEO Stephen Elop wrote a memo to employees that compared Nokia’s precarious situation to a man standing on a burning oil platform in the North Sea. There were two options, said Elop: stay the course or jump into the unknown. Nokia jumped.

It didn’t take long for the massive shift in strategy to show signs of promise. Prior to going on sale in North America this month, there was an unmistakable buzz around Nokia’s new Lumia 900 touchscreen, which runs the new Windows Phone OS and can operate on fourth-generation, or LTE, wireless networks. The phone won “best of” accolades at this year’s Consumer Electronics Show and was touted from a marketing standpoint as AT&T’s biggest-ever device launch—including its 2007 launch of the iPhone.

But then reality sank in. The company recently warned investors that it will post losses for the next two quarters, sending its stock plunging to around $4, a level not seen since 1998. Then came reports that the Lumia 900 was marred by an embarrassing software glitch, and that several big European carriers didn’t think it was worthy enough to compete with the iPhone or Samsung’s Galaxy phones. Some have even questioned whether Elop bet on the wrong horse by hitching Nokia’s fortunes to Microsoft’s.

It all underscores just how difficult it can be to engineer a quick turnaround when up against giants like Apple and Google, suggesting that RIM may have a similarly tough time when its new BlackBerry “superphones” hit the market later this year. Having a buzz-worthy phone is one thing, but convincing people to buy it quite another.

Elop’s decision to tie Nokia’s future to Microsoft was a gamble from the beginning. Microsoft is not a big player in mobile, despite numerous attempts. But Elop, a former Microsoft executive (and a Canadian), saw a rare opportunity to tap into a vast empire of popular products, ranging from Xbox to Office, that could be used to woo subscribers away from rivals if packaged in the right devices. “This has gone from a battle of devices to a war of ecosystems,” says Chris Weber, the president of Nokia’s North American business.

Nokia’s first hurdle was to get its Microsoft-powered devices on people’s radar after years of having its smartphones all but ignored on this side of the Atlantic. It did this thanks to the Lumia 900’s big 4.3-inch touch display—bigger than the iPhone’s—and attractive polycarbonate enclosure. There was also much drooling over Microsoft’s speedy Windows Phone OS, which, unlike Apple’s iOS, Android or the BlackBerry OS, dispenses with the familiar home screen grid of icons and replaces them with big, animated tiles. “It’s pretty sweet,” says Ramon Llamas, a senior analyst for research firm IDC. “It’s not Apple, Android or BlackBerry. It’s unique and pretty fun.” And a $99 price tag (with a contract) didn’t hurt either.

But the coming-out party was quickly overshadowed by revelations that the Lumia 900 contained a software bug that could cause some customers to suddenly lose their high-speed data connections, rendering all those nifty apps useless. Nokia reacted quickly by offering a $100 credit to all buyers, essentially giving away many of the phones for free. A software update that fixes the bug has since been made available.

It was only a hiccup, but it couldn’t have come at a worse time. Nokia can ill afford to have a repeat of Palm Inc.’s disappointing 2009 launch of the Pre, another bet-the-farm iPhone challenger that similarly drew initial positive reviews, but then promptly fizzled with consumers. (Hewlett-Packard bought Palm the following year). The numbers show just how big a challenge Nokia faces. It managed to move just two million Lumia devices in the first quarter, a figure that can be partly explained by the fact that Nokia’s newest smartphones were only available in about 15 markets around the world. By contrast, Apple sold 37 million iPhones during the last three months of 2011 while Samsung sold 35 million smartphones, many of them running Android, during the same period.

As a result, Nokia is pulling out all the stops to build consumer awareness about its devices in North America. At a recent trade show, it challenged attendees to compare the speed of their iPhones and Android devices against the Lumia 900. It has also released a series of snarky Web ads that purport to show Apple executives ignoring or glossing over what it argues are iPhone deficiencies. Filmed in a grainy, hidden-camera style, one ad shows an executive dismissing concerns about poor reception when the device is gripped the wrong way (a reference to the “antenna-gate” fiasco that surrounded the 2010 launch of the iPhone 4). Saturday Night Live actor Chris Parnell is also featured in other teaser ads.

The fact that Nokia is resorting to risky attacks on Apple, now the world’s most valuable company, if not one of the most beloved, underscores just how high the stakes have become for the Finnish cellphone giant. Nokia may still hold the title of the world’s largest handset maker, but many of those devices are low-end phones sold in developing countries—places where customers are expected to eventually make the switch to smartphones. The company’s once dominant market share of 40 per cent has been whittled down to just under 24 per cent over the past five years.

Yet, despite the stiff headwinds, some observers believe Nokia still has a fighting chance. Jamie Townsend, an analyst with TownHall Investment Research, recently raised his rating on Nokia’s shares to “buy” from “avoid,” and outlined a scenario that envisioned steady market share gains going forward, with Nokia poised to grab as much as 4.6 per cent of the U.S. smartphone market by 2013. That’s compared to less than one per cent in 2011, when most of the phones ran on Nokia’s older Symbian platform, which is now being phased out. “I’m not saying that we’ll all be using Nokia Windows phones, but in two major markets—North America and Europe—I think we’re going to see some relative improvements,” Townsend says. By contrast, Apple now boasts 30 per cent of the U.S. market, according to tracking firm ComScore, while Android clocks in with 50 per cent. Industry pioneer RIM, meanwhile, is now a distant third, with just 13 per cent of the U.S. market, down from 42 per cent in 2010.

Townsend is also among several observers who believe that, given Apple and Google’s increasing dominance, a strong case can be made for a strategic partnership between Nokia, Microsoft and RIM. “[Nokia and Microsoft] have what people think is a consumer brand, but they need some help getting into the enterprise segment,” says Townsend, referring to the BlackBerry’s roots as a business tool. It’s not as far-fetched as it sounds. RIM’s new CEO Thorsten Heins has made it clear that everything is now on the table, as evidenced by a recent decision to allow devices made by rivals onto RIM’s secure corporate networks. Meantime, the Wall Street Journal recently reported that Nokia and Microsoft explored the possibility of buying RIM last year (Nokia’s Weber declined to comment on the rumours) and Bloomberg cited sources last week who said RIM was in the process of hiring a financial adviser to help weigh its strategic options.

For now, Nokia executives have painted a target on RIM’s back. “There’s an opportunity right now in the marketplace for an exciting, vibrant interface to really start winning over the minds and hearts of consumers,” says Richard White, the general manager of Nokia Canada. “The goal is to make Windows Phone the third meaningful operating system in the market.” Now they just need to sell some phones.