Homeless in Vancouver: Finnish phone maker Nokia isn’t finished yet

Last week, Reuters reported that Nokia, once the leading supplier of cellphones to the human race—and since 2014, largely reduced to a division of Microsoft—would once again begin designing and licensing handsets under its own brand, when a new arrangement between the Finnish phone maker and its parent in Redmond, Washington, comes into effect in 2016.

According to Reuters, in a June 11 interview with Germany’s Manager Magazin, Nokia CEO Rajeev Suri was quoted as saying, “Microsoft makes mobile phones. We would simply design them and then make the brand name available to license.”

Well, for the moment Microsoft still makes phones and Nokia is still just the Finland-based arm of the Washington state parent company but for how long?

It’s unclear how a hardware company like Nokia fits with the new software-as-service vision of current Microsoft CEO Satya Nadella, who was picked, as much as anything else, because he didn’t share his predecessor’s vision.

It’s important to remember that Microsoft only bought the largest part of Nokia—Nokia Devices and Services, its mobile phone business—and that the takeover was the last gasp of the previous Microsoft CEO Steve Ballmer and his vision of transforming his company into a maker of both software and hardware (just like hated rival Apple).

One of Steve Jobs’ greatest achievements as Apple’s CEO had to be keeping Microsoft off of its game for 13 years, by getting in Ballmer’s head and under his skin, so that “Big Steve” became foolishly obsessed with beating Apple at its own game.

Ballmer’s one unarguable hardware success was the Xbox gaming console but otherwise, under his tenure and his vision, Microsoft lost money and focus trying to compete with Apple iProducts—trying unsuccessfully to match the iPod with the Zune music player, then failing to beat the iPad, first with the aborted Courier tablet and then the Surface RT and Pro.

Buying Nokia’s handset division was likewise all about beating the iPhone.

Satya Nadella took over from Steve Ballmer as Microsoft’s CEO on February 4, 2014, only two months before Microsoft completed its Nokia takeover on April 25, 2014—too late to turn back.

But the new man, isn’t swayed by old rivalries, he’s coolly re-orienting Microsoft back around its core competency of software.

Thank you and good-bye

That Nadella has turned his back on his predecessor’s vision may be seen in the way that he shook up Microsoft’s executive suite on June 17, 2015, and bounced Stephen Elop, the executive vice president of Microsoft’s Devices Group, right out of the company.

The Devices Group is where Nokia Devices and Services and Elop, the President and CEO of Nokia at the time of the takeover, ended up in the Microsoft hierarchy.

Canadian-born Stephen Elop was a high-profile Microsoft executive who jumped ship in 2010 to become the first non-Finnish CEO of Nokia. He was initially praised for bluntly comparing Nokia’s predicament to standing on a "burning platform". But four years later, when he masterminded the sale of Nokia’s all-important handset division to Microsoft, many accused Elop of being a Ballmer plant and deliberately sabotaging Nokia in order to deliver it into the hands of his former employer.

In 2012, two years after Elop had taken over as CEO, Nokia posted a $1.2 billion loss, despite being the number two phone maker in the world.

The big problem was that Nokia had effectively lost its profitable smartphone sales to Apple’s iPhone and the 200 hundred million-or-so feature phones that Nokia still sold each year just weren’t profitable enough to make up the difference.

Recapping the greatest phone maker in history

The 2005 Nokia 1100—the best-selling phone ever: 250 million units sold and many still in use!

In the course of 22 years, Nokia has sold a mind-boggling number of mobile phones—more than any other company, or any 10 companies combined.

Between the paltry three million units sold in 1992 and the 250 million units in 2013, Nokia has recorded a total of…wait for it…4,396.600,000 units sold.

That’s over 4.3 billion phones!

Nokia’s absolute best year was 2008, when it sold 475 million units, but it was the number one seller of mobile phones for 17 straight years between 1995 and 2011. And the company only dropped one spot in 2012 and 2013, falling to number two behind Samsung.

The top-selling mobile phone models of all time remain the Nokia’s 1100 from 2003 and the 1110 from 2005, each with 250 million units sold.

In an eight year period, between 1999 and 2007, Nokia had 22 best-selling mobile phones, with combined sales of at least 2,006,000,000 units—well over two billion!

By comparison, between 2006 and 2013, Samsung has had nine bestsellers with combined sales of 464 million units

And Apple, which is credited with pulling the rug out from under Nokia in 2007 by taking away the smartphone category, has had five best-selling iPhones, between 2010 and 2014, with combined sales of only 248 million units.

The key to understanding how Nokia can been seen as a failure with such astronomical sales, while Apple has become the world’s most highly valued company on the strength of relatively paltry sales lies in the night-and-day difference between each company’s operating profit margin.

Apple’s profit margin as a company, is estimated at somewhere between 23.39 percent and 39.5 percent. Nokia’s profit margin, on the other hand, is estimated at only 5.54 percent.

The iPhone 6: the best bottom line in history

As Znet explains the real cost of an iPhone 6, after the multi-year contract is unraveled, ranges from between a low of about US$500 to just over $1,000.

On the other hand, a teardown analysis of the iPhone 6 last year by research firm IHS estimated that it only cost Apple between $200 and $247 to build one, yielding a profit margin of about 69 percent for the entry-level model.

Meaning that Apple is making well over $300 profit on the sale of each iPhone 6.

I’m not sure if this is a case of quality beating quantity or outright gouging, or both. But certainly it explains an important part of the the appeal that Apple has to the financial markets.

Whatever else you can say about them, Apple’s incredible profit margins are a difficult and enviable achievement (if they were easy, every tech company would enjoy them). Investors also see them as proof of how successful the Cupertino company has been behind the scenes at streamlining it’s product offerings and rigorously controlling its supply chains.

Apple’s real advantage may be a conceptional leap

Nokia’s real failure against Apple was, I think, one of imagination. It couldn’t imagine that it was doing anything but making computer hardware.

Nokia has always imagined phones as hardware—bursting with buttons, build quality, fascias, and fabulous cameras—hardware that could run the mediocre Symbian operating system or Windows, or whatever.

The smooth, featureless iPhone, with its single Home button was the antithesis of a Nokia phone. It introduced a new and effortless-looking paradigm that completely submerged the hardware into the functionality of the software and redefined what quality looked like in a computer device.

Microsoft under Ballmer may have thought that simply putting its software on Nokia’s hardware was the perfect answer to the iPhone but that just proved, among other things, that Microsoft thought of software the way Nokia thought of hardware, as an standalone thing to be plugged in to other standalone things.

It’s true that Microsoft has always had to imagine its Windows operating system independent from hardware, without ever having more than a general idea of what kind of machines it might run on—from towers to laptops to bank machines.

On the other hand, all of Apple’s experience has been in developing its own operating systems to run on its own computer hardware and vice versa.

This has allowed Apple to evolve a uniquely holistic approach that only cares about the hardware and operating system in the way that they mesh together to create a whole device.

An Apple desktop system, an iPod, and an iPad—and yes, an Apple Watch—are simultaneously completely different types of devices with different user interfaces but are still all completely recognizable in their “Appleness”, like bespoke suits made for different people by the same master tailor.

No computer maker running either the Windows or Android operating system can really match the tight integration between hardware and software which Apple achieves but not every user needs that or can even see it as added value.

Many companies, like Pebble and Motorola, and yes, even Microsoft with its Surface Pro, are figuring out in their own ways how to hit Apple where it lives.

Nokia probably can’t wait to be let off the leash

The Nokia N1 Android tablet, which has been selling (and selling out) in China since February, shows that Nokia, old dog though it may be, can quickly learn new tricks.

The N1 is, by all accounts, a nicely made 7.9 inch Android tablet, running stock 5.0 Lollipop. It has has 32GB of storage and uses the new USB-C connector. It bears an uncanny resemblance to an iPad Mini and is even manufactured by Foxconn, which manufactures iPads for Apple.

The only difference between the NI and a knockoff iPad Mini is the Nokia logo, the custom Nokia Z Launcher and, arguably the reported high build quality.

The Nokia of seven years ago would never have stooped  to copy a competitor’s product this way. But that Nokia nearly went bust.

If Microsoft’s CEO Nadella doesn’t want to follow Ballmer’s original game plan, he may be happy to give Nokia its head in the marketplace and see what happens.

Nadella certainly won’t mind if the result is more great-selling products like the N1 that bite Apple in the bottom line.

It’s worth noting though, that in Nokia, Microsoft has a tiger by the tail; an equal really—a proud company with a long history as a successful tech innovator and a tough competitor.

Nokia the cellular phone maker only dates back to the 1980s but Nokia the company actually goes back to 1865. And over the course of its 150-year history, Nokia has repeatedly reinvented itself and otherwise done whatever it needed to do in order to survive.

Nadella should be careful. A Nokia unleashed by Microsoft could very well become the tail that wags the dog!