Assignment Reference ME/Jan11/1Razman Tengku Othman, 8024686

Nokia- Microsoft Alliance

Nokia

Nokia is the biggest mobile phone maker in the world with a record of shipment of 400

million phones, meaning more than one million every day. Mobile communication evolves

rapidly in early 2000, where the trend of mobile device adding new features on the single

device from phone call to music, picture, pocket computer, games – which is often refer to as

digital convergence. Nokia market share and growth has shifted down in July 2009 till today

after Apple, RIM, Android make a big shift in the smartphone ecosystem.

Nokia specialises in making mobile hardware device and mobile internet services. Nokia had

many 1st mover advantages in the mobile industry from Mobile Handset to Mobile Network.

Telecommunication is a very vertically integrated industry controlling design, production,

marketing and mobile communication infrastructure.

In 1992, Nokia focused its industry from making multiple ranges of products to only mobile

technology and spread the mobile device into 9 segments in 2002. The specialisation of

Nokia in mobile phone market has created insight of market segmentation. Nokia owns all the

R&D design, production and marketing in various centre around the world, manufacturing

plants in many of the emerging countries and sales offices virtually all around the world.

Nokia uses contractors to produce phones when the demand becomes higher than what their

production can handle. Nokia’s brand is the 8th most valuable globally and has the 19th most

efficient supply chain in the world.

The mobile phone giant also builds their core competency in-house and has vertically

integrated most of its supply chain. Nokia Mobile has the economy of scale to produce global

demand for mobile phones and also the economic of scope producing the network

1

infrastructure through Nokia Network Division to make the mobile phone usable seamlessly

in any country.

Nokia suffers what economist calls Penrose Effect from 1991 to 2009, after 18 years of

sustaining super profit. In 1998 with 6100 series model, Nokia operation profit jumped 75%,

stock price increased by 220% and market capitalization of $70.39 Billion. In 1999-2000,

with the mobile Internet related technology being introduced on mobile phones , Nokia

market capitalization leaped to $211.05 Billion.

In the 1st of the 9 years which Nokia grew, clearly using the Baumol model, where price and

cost is the key driver to increase market share. In telecommunication Average Selling Price

(ASP) and Average Revenue Per User (ARPU) are well known revenue yields from asset. In

Mid 2005, Nokia is the only company that did not rely on subcontractors in their design

reference and solution. Nokia had the competency in house across all the product segments

from high end to low end device. In term of TCE, Nokia’s expertise in mobile device R&D,

production and sale enjoyed economic of scale by delivering one million phones everyday.

In 2006 on average, it cost Nokia 69 euros ($87.63) to make a phone, and on average it sells

phones (ASP) for 102 euros ($129.54), creating a gross margin of nearly 33%, better than its

rivals . In 2010, Nokia Mobile phone ASP is 64 euros($91.41 ). That is a drop of 37% from

5 years ago. In 2009 Nokia stopped using subcontractor like Foxxcon, China BYD American

Jabil and Eloteq, after the market demand for Nokia phone reduced and had excess capacity

in the market.

2

Figure .1 ASP Cost breakdown of mobile phone

Source: Infoma 2010

3

Figure. 2 ASP Evolutions across market segments

When ex-CEO Jorma Ollila stepped down in mid 2006 and was replaced by 25 year veteran

Olli-Pekka Kallasvuo, Nokia strategy changed to service oriented industry. With the fast

growing internet industry and complex ecosystem mobile industry, Nokia faced Bounded

Rationality, three of them being ; limited and unreliable information regarding possible

alternatives and consequences, limited capacity to evaluate and process the information and

limited amount of time to make decision. There is evidence when Nokia came in late in the

clam shell design, slim and touch screen. In summary, Nokia was too focused on the current

User Interface using keypad and its icon software - Symbian. Nokia also ignored the social

factor of the consumer hunger for innovation products and services. Nokia often made

decisions based on satisfying the complex situation. In 2010 Nokia spent $4Billion in R&D to

reduce phones’ sizes and increase performance with opposite effect on its market share of

smartphone.

4

Microsoft

Microsoft is the biggest software company in the personal computer industry with 92%

market share in Window Operating System. Recently, Microsoft Kinetic, broke the Guinness

World Records for being the fastest-selling consumer electronics device ever released, selling

an average of 133,333 units per day in 60 days between 4 th November 2010 and 4th January

2011. Last year in Feb 2010, Microsoft launched Window Phone 7 to gain the mobile market

ecosystem. This is the latest mobile OS that Microsoft launched after 10 years of developing

Pocket PC in 2000.

A lot of feedback from analysts, quoted the Window Mobile being wrong market segment and

has become irrelevant. Microsoft is known for specializing in making software for personal

computer and not mobile phone. When Microsoft noticed that the market has been introduced

a new technology which the company does not have within, Microsoft uses a common

strategy to gain entry - strategy embrace, extend and exterminate. When Microsoft reached

the vertical boundaries in technology, for example, Browser with Netscape, Java with SUN,

Networking with Kerberos, Instant Messaging with AOL, MS Office with Adobe System ,

Google with Bing and recently Wii with Kenitec.

The Evolution

The beginning of 2007 brought significant changes in mobility, computing, consumer

electronics and service industries shifted from device oriented towards platform oriented

strategy. “Smartphone specialists” like RIM, Apple, HTC(Android) took the spot light from

the mass production of middle and low cost devices such as Nokia, Samsung, LG, Motorola.

That changed the vertical chain of most companies that has been in the industry for more than

10 years whom focused on production of the hardware devices to Service and Application.

5

Smartphones today embrace microprocessor, memory, operating system, application and

function from PC and internet. The Specialization of each of these components has made the

mobile phone industry break the value chain and vertical integration to every layer of the

hardware and software leading expertise. One of the major components is Operating system

that Nokia uses in all are phone model call Symbian.

In 2008, purchased 100% share of Symbian off the market and make the OS its open source.

This move transformed Symbian OS to become royalty free and encouraged developers to

create application on Symbian Foundation to compete against iOS from Apple and Android

from Google. The royalty Symbian charged a phone OEM was average $4.10 and on the

extreme Window Mobile Microsoft OS charged $8 to $15 per device. Nokia invested $1.4

Billion on Symbian R&D vs. Apple only invested $744 Million to produce iPhone 4. Market

share of Symbian device fell dramatically despite the huge investment into the technology.

Android has become the number one spot of next smartphone device in term of next device to

buy and current market leader.

6

Figure.3 U.S. Smartphone Market Share Jan 2011

7

Issue Tree Question

Are there existing suppliers that can attain economic of scale that in-house unit could not

attain?

Nokia: Yes vertical integrated from R&D, Manufacturing and Sales. It have production HW

and OS in multiple country China, India, Brazil, Hungry. However the demand and market

share reduce. Nokia spend 4B euro in R&D double than Apple 1.7B. and 1.3B euro to

Symbian and Meego

Microsoft: No production only OS

Do they posses execution capability that an in-house would not?

Nokia : Yes. However the VP resign execution leader gone

Microsoft: No

There demand for smart have shifted to Android due to multiple HW manufacture using the

OS

Would “intermediate” arrangements (alliance, close-knit supply arrangements) suffice?

Nokia: Had alliance with Microsoft in 2009 for Eseries with Microsoft Office Mobile

Microsoft: Had start communication sector alliance with operator and Hardware vendor in

communication industry

Strategic Alliance

Feb 11 , 2011 CEO Nokia Steven Elop and CEO Microsoft Steve Balmer, made a Strategic

Alliance for the new third ecosystem for smart phones. Nokia will use WP7 OS with Nokia

8

Devices. In this strategic alliance, Nokia – Microsoft will form vertical strategic alliance and

fall in arm’s length market transactions. Both company will remain mutual independent and

involve a lot of cooperation, coordination and information sharing. However these

requirements produce uncertainty in behaviour and create opportunism.

Kenichi Ohmae mention strategic alliance is like a marriage, “There may be no formal

contract….There are a few, if any, right binding provisions, It is loose, evolving kind of

relationship.” All it need is a lot of trust and reciprocity compare to long complex contract

and negotiation to resolve issue.

Nokia-Microsoft Alliance is the natural candidate which:

1) The third ecosystem will cover multiple technology and activity; it will have an

obstacle of complex and long contract. This is because of the future activity is

uncertain and each other bounded rationality.

2) The third ecosystem transaction is going to be in term service and application will

create relation-specific asset by both company and each company could hold up each

other.

3) The third ecosystem will create new way of doing for both company, standard

commercial and contract law does not foreseen the gaps it will created thus create

incomplete contract.

4) The third ecosystem will share the cost of developing the R&D together by using the

both experience curve by Nokia in mobile hardware and Microsoft in OS software.

5) The third ecosystem market is unknown and uncertain it will continue for a long time,

this enable both company to remain independent and run business as usually.

6) The third ecosystem will use US as their market opportunity, which is the Microsoft

have home advantage and also Nokia biggest shareholders.

9

Picture 1. Third Ecosystem

The hybrid or immediate structure is the key topic of Nokia Microsoft Alliance. The new

CEO of Nokia, Steven Elop was from Microsoft and he knows Microsoft in terms of culture

and has relationship with Steve Balmer who is the Microsoft CEO. The technology

contribution from both leaders in mobile industry, Nokia and software operating system

development, Microsoft will create a new way in which smartphone functions and performs.

The time to launch the product will be crucial to offset the negative momentum of Symbian

and maintain the smartphone sales volume. Speed is the paramount key competitive

advantage that Nokia has in mobile phone value chain.

10

Strategic Alliance usually comes with the issue of instability, suboptimal performance and

also break-up, all these issues comes with high failure rate. There will be an issue with

cooperation between the two companies. Of course the incentive to take opportunism or cheat

will be advantageous to maximize the gain each company will create the cost of the agency.

This incentive to cheat will bring us back to the prisoner's dilemma situation. In order for both

to win and gain its highest return, both companies have to voluntarily cooperate. For the

cooperation to be successful, a non-zero sum game theory must continue for Nokia and

Microsoft to create the third ecosystem focusing on transactional cost of economic. The

frequency of interaction and behavioural transparency in sharing information, need to be

enhanced and promoted throughout the strategic alliance. The response time needed for Nokia

–Microsoft to deliver the third ecosystem, though mentioned two years, must be faster to

show the power of signal to the market.

Microsoft agreed to pay $ 1 Billion to Nokia for supporting the new Window Phone 7 OS ,

showed a non-recoverable investment of Microsoft towards the commitment of this alliance.

This also shows Microsoft is serious in the partnership, as Microsoft wish to dismiss its

reputation of embrace, extend and exterminated. This also promotes goal of congruence

between companies. The new Nokia-Microsoft Alliances needs to evolve into soft

cooperation, informal relationship and trust-dominated process which will guard against

opportunism, reducing transaction cost and improving efficiency.

11

Reference:

http://edition.cnn.com/2010/BUSINESS/09/17/nokia.fight.back/index.html?iref=allsearch

http://www.ft.com/cms/s/0/e4d3cf7c-53e8-11e0-8bd7-00144feab49a.html

http://www.businessweek.com/globalbiz/content/aug2006/gb20060803_618811.htm

http://images.businessweek.com/ss/06/08/makingof_nokia/index_01.htm

http://review4mobile.co.cc/2011/02/the-cell-phone-market-in-2010-from-a-financial-p-o-v/

http://www.businessweek.com/news/2011-02-11/nokia-falls-most-since-july-2009-after-

microsoft-deal.html

http://www.reuters.com/article/2009/03/27/us-nokia-subcontractors-

idUSTRE52Q6Q820090327

http://www.phonearena.com/news/Nokias-Q4-operating-margin-better-than-Q3-but-its-

market-share-slips-with-2-in-2010_id16265

http://www.hs.fi/english/article/Nokia++a+company+shackled+by+its+own+size/

1135260835669

http://www.hs.fi/english/article/

Nokia+stops+using+subcontractors+in+mobile+phone+manufacture/1135244619649

http://www.fool.com/investing/general/2011/03/24/heres-how-nokia-may-be-failing-you.aspx

http://c3.yousaytoo.com/rss_temp_image/pics/23/24/60/5191323/original/

remote_image20101220-7484-ftm6qn-0.png

http://en.wikipedia.org/wiki/Nokia

http://www.businessweek.com/magazine/content/02_26/b3789008.htm

http://news.cnet.com/8301-13506_3-20041213-17.html#ixzz1IS2sFQkh

http://www.businessweek.com/news/2011-02-11/nokia-falls-most-since-july-2009-after-

microsoft-deal.html

http://www.businessweek.com/technology/content/feb2011/tc20110214_758033.htm

12

http://www.microsoft.com/presspass/press/2009/aug09/08-12pixipr.mspx

http://www.businessweek.com/news/2011-02-11/nokia-falls-most-since-july-2009-after-

microsoft-deal.html

http://www.itwire.com/opinion-and-analysis/cornered/45084-nokia-and-microsoft-need-for-

speed-is-paramount

http://www.intomobile.com/2011/03/29/nokia-ceo-stephen-elop-planning-cut-16000-jobs-

and-peoples-4-week-summer-holiday/

http://www.itwire.com/opinion-and-analysis/cornered/18158-nokia-ceo-flags-shift-into-

services

http://conversations.nokia.com/nokia-strategy-2011/

http://www.microsoft.com/presspass/press/2009/aug09/08-12pixipr.mspx

http://www.macworld.com/article/157844/2011/02/nokia_microsoft_apple.html

http://www.businessweek.com/technology/content/feb2011/tc20110214_758033.htm

http://edition.cnn.com/2011/TECH/mobile/03/30/gahran.android.domination/index.html?

iref=allsearch

http://www.mobilebusinessbriefing.com/article/report-google-tightening-control-on-android-

ecosystem

http://www.idc.com/getdoc.jsp?containerId=prUS22762811

http://money.cnn.com/2011/03/29/technology/windows_phone_7_forecast/index.htm

Perkehe A. Strategic Alliance Structuring: A Game Theoretic and Transaction Cost

Examination of Interfirm Cooperation , The Academy of Management Journal

Vol. 36, No. 4 (Aug., 1993), pp. 794-829

Mike W. Peng, Jessie Qi Zhou, Most cited articles and authors in global strategy

research, Journal of International Management, Volume 12, Issue 4, December 2006,

Pages 490-508,

13

Riedy, M, Beros, S, & Wen, H 2011, 'MANAGING BUSINESS SMARTPHONE

DATA', Journal of Internet Law, 14, 9, pp. 3-14, Business Source Premier,

EBSCOhost, viewed 19 March 2011.

Ridley, P 2010, 'Outsmarting the smartphone fraudsters', Network Security, 2010, 12,

pp. 7-9, Business Source Premier, EBSCOhost, viewed 19 March 2011.

ANKENY, J 2010, 'Setting sale on smartphones', Entrepreneur, 38, 12, p. 44,

Business Source Premier, EBSCOhost, viewed 19 March 2011.

Shambora, J 2011, 'THE GREAT iPHONE MIGRATION', Fortune, 163, 3, p. 35,

Business Source Premier, EBSCOhost, viewed 19 March 2011.

ANKENY, J 2010, 'THE SMARTPHONE GETS SMARTER', Entrepreneur, 38, 11,

pp. 56-60, Business Source Premier, EBSCOhost, viewed 19 March 2011.

14