Research Notes

Stephen Elop, a man of big words and many promises but few results

 – he had the dream of creating shareholder values like Gordon Gekko but ends up as Mr. Flop for Nokia.

Microsoft’s purchase of Nokia comes is not a surprise especially if you look at how Stephen Elop has degraded shareholder value for Nokia. When he got the job, Nokia shares were at €8/share euro; now they are at €4. Nokia has gone from of being the leader in the smartphone market to an bit part actor in a play where mobile operators and end-users have difficulty understanding why they should buy an MS based device over one with an iOS or Android.

Stephen Elop while at Nokia he has been a man of big words and many promises and but few results. Elop convinced Nokia shareholders to undergo a two- year transition to earn a longer term operating profit margin of at least 10 percent, but many were skeptical including Strand Consult. A little over a year ago, Reuters journalist assigned to Nokia, Tarmo Virki wrote this article expressing doubt that Elop could pull of the turnaround promised. By the time Elop made his infamous “burning platform” announcement on 11 February 2011 (also called the world’s most expensive memo), Nokia had reached its height in sales of Symbian-based smartphones. Nokia sold more than 110 million Symbian phones in the prior year, more than iOs and Android together. At the Mobile World Congress, he told the mobile industry to that Nokia would give up the world’s best-selling mobile smartphone platform which was the for a multitude of new Nokia phones. The future would be Microsoft.

In practical terms, Microsoft will buy Nokia ‘s mobile hardware and license its patents and map services. This means that now Nokia, once a global powerhouse, has been reduced to an infrastructure company with patents and Navteq maps. Microsoft’s price of $5.44 billion is just slightly less than what Nokia paid for Navteq in 2007, $8.1 billion. With this acquisition, Finland has lost its one global brand, and it’s not clear what will happen with the 4,700 Finnish employees, not to mention the additional 27,300 around the world.

It’s ironic that the of The European Association of Communication Directors named Elop the best European CEO in 2012.

Stephen is recognized for his direct and transparent communication style, as evinced by his by-now famous “Burning Platform” memo. Stephen received the award in recognition of his unique communication style and commitment to which always puts his employees and customers opinions first

Strand Consult hopes that Elop will not be the new standard for the European CEO, otherwise, Europe will face significantly greater challenges than those we know today.

In any case, the Nokia saga is either the end of the mobile phone and the beginning of a new age when IT and internet companies define the hardware and services of phones. A few years ago, the U.S. role in the mobile world was marginal, but the Microsoft deal ensures that the USA has a central role in the mobile market along with companies such as Google, Apple, and Facebook.

Nokia’s decline from a historical perspective
After the 2011 Mobile World Congress Strand Consult published this research note:

The prelude to the Mobile World Congress was very dramatic this year, as Stephen Elop presented Nokia’s future strategy in London the Friday before the congress started. Our analysis was very simple; we believed that if Stephen Elop could deliver the goods that Friday, he would be the media darling of the whole WMC. But if he couldn’t, this year’s MWC would be the congress that everyone remembered because Nokia and Stephen Elop were mentally spanked for a whole week! Without going into details, it is safe to say that the MWC 2011 was not the year where Nokia was a media darling, or especially impressed the media. On the contrary, it is understandable that Nokia shareholders chose to dump their shares, sending the Nokia share plummeting by over 20 percent in just two days. Our preliminary conclusion is that Stephen Elop does not yet know how to spell the words “shareholder value”.

Late Monday afternoon the first big name took the stage in the form of Steve Ballmer. Let me make this very clear – this was 45 minutes where Mr Ballmer, despite promising the opposite, did not want to answer any questions. Instead he basically repeated what Microsoft said last year when launching Windows Mobile 7. There was nothing new in his presentation, aside from inviting his former employee, the happy owner of $3.4 million worth of Microsoft shares, Stephen Elop, on stage to tell about the new cooperation between Nokia and Microsoft. Again this was a repeat of what had already been said by Stephen Elop in London the previous Friday.

When we think of the presentation that Steve Ballmer and Stephen Elop gave on that first day, it wouldn’t surprise us if Steve Ballmer and Steven Elop will be standing on the same platform in 12 months engulfed in flames, despite all the media attention the platform received prior to the MWC. Our recommendation to Nokia shareholders is sell, sell, sell – and do it quickly. The Nokia share is probably one of the most high-risk shares on the stock market today. Perhaps one should start considering whether Nokia’s shares should be called junk bonds in the future? One thing is currently very clear, and that is that neither employees, shareholders, journalists or industry or stock market analysts have any idea of Nokia’s current direction or speed. And to be perfectly honest, we are not sure that Nokia knows either.

Looking at Microsoft’s acquisition of Nokia in 2013, it doesn’t change the challenges that Microsoft and Nokia have. When Stephen Elop says in today’s press release”With this combination of talented people, we have the opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone product” one is tempted to wonder whether Stephen Elop now going to deliver what he promises when he comes back to Microsoft. Since he has come to Nokia , he has not been able to deliver what he promised – it’s not the first time that Stephen Elop promised to accelerate results for the benefit of shareholders.

After the Mobile World Congress in 2012 we wrote this research note where we wrote the following:

HTC’s Peter Chou and Nokia’s Stephen Elop both held fine presentations, both almost repeating what the other had said and both with the same basic messages. The only difference was that Steven Elop was very proud of being able to present a mobile phone with a camera with a higher resolution than Peter Chou could muster. To be honest they behaved a bit like two small boys standing in a men’s room comparing the size of their tools! The fact of the matter is that both their companies are facing some very large and real challenges and nobody is quite sure exactly what role these two companies will be playing in the mobile handset market in three years. Will they be kings of the market, or be reduced to marginal players that will have difficulty making money on a market with increasing competition, decreasing subsidies and an ASP making the smartphone market far less exciting?

With Microsoft’s acquisition of Nokia then change it do not know the challenges that Microsoft and Nokia have and the question is whether Microsoft buys a healthy business or buying an insurance policy against a Chinese take over the partner that drives the development of sales of Microsoft -based mobile phones. One thing is certain and that is that the other manufacturers who make Microsoft -based mobile phones ( HTC , Samsung and Huawei ) probably will consider how cooperation should look like in the future – the question is whether Microsoft will be the only manufacturer of hardware on the platform as it is case with XBox or if there will be a range of hardware manufacturers as we know it from the PC world – we believe that Microsoft is hoping the last and we believe more in the first.

Long live conspiracy theories
Some have suggested that Stephen Elop was a Trojan horse that Microsoft had placed in Nokia with the aim of driving down the stock price so Microsoft could buy the company cheap. We do not believe these theories, but we note that it is ironic that Stephen Elop has not delivered the results he promised. Elop will return to Microsoft and get his old email back, and will be responsible for this business at Microsoft. That Microsoft would want to continue to run the business down while it is under its own roof is unlikely.

A press release from Nokia quotes Elop as saying, “With this combination of talented people, we have the opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone products.” One may be tempted to wonder whether Elop belongs to this group of talented people and if that is the case, then one should ask just where exactly his talent is from Nokia’s shareholders’ perspective.

In the coming days the conspiracy theories will flood the media. Strand Consult does not believe these theories, but on the other side, the theories are fueled by the disappointment that Nokia has not delivered on what it promised and that Microsoft ‘s purchase represents that it has secured control over their only serious partner in mobile space.

Microsoft ‘s acquisition of Nokia does not solve the challenges Microsoft
Strand Consult believes that Microsoft has purchased Nokia as an insurance to guarantee control over the distribution of their software. If Nokia had been bought by Lenovo, Huawei or another player, Microsoft ‘s role in the mobile world have been reduced to nothing in a short time. Microsoft has tried for more than 10 years trying to get into the mobile market, and they have previously experienced how their close partner HTC moved the focus away from Microsoft’s products toward Android. Microsoft doesn’t want that to happen again so they purchased a $5.44 billion hedge.

It is exciting to see how Microsoft increasingly competes with some of its partners – including the partners who make phones with MS operating systems, the partners that make PCs that are entering the smartphone market to make Android phones . The question is whether Microsoft will be the general business and dominant firm in the mobile space as they are on the PC market or whether they will be one of three to five platform vendors who compete for the mobile market.

This acquisition gives Steve Ballmer considerable exposure as he will soon step down at Microsoft. There is no doubt that he will be remembered for this purchase, but time will tell whether it is a good one. Who will replace Ballmer is still uncertain. Stephen Elop probably has a dream of getting the job. If he does and managed Microsoft the way he did Nokia, then God help Microsoft’s shareholders.

Today is the day when Nokia Board of Directors recognize that Stephen Elop did deliver the good. It is the day when Nokia throws in the towel, the day when Stephen Elop takes the plane to Redmond and where it is barely dawned on the man that he has been an economic disaster and that he was a recruitment mistake.

3 September 2013 was the day when we wanted to revisit the old movie “Wall Street” where Gordon Gekko asserts, “Greed is good. Greed works”. The difference between Gordon Gekko and Stephen Elop is that Gekko created shareholder value. Elop did not.

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