Nokia on the edge: Inside an icon's fight for survival

CNET's Roger Cheng traveled to Finland to meet with employees of the struggling cell phone giant and to take the measure of CEO Stephen Elop's risky turnaround plans.

Winter snow falls on Nokia's flagship store in Helsinki, Finland. Roger Cheng/CNET

HELSINKI, Finland -- I came here to listen for a death rattle.

It was a late Monday morning in late November when I arrived, and there was no sunlight. None. The sky was gray, bleaching out the city's colorful buildings. I asked the cab driver whether it would get any brighter, but he wasn't confident. The sun comes up late in the day and fades early in the afternoon this time of year. As even the Finns concede with a stoic chuckle, it's depressing.

Unsurprisingly, it's considered the worst time of the year to travel to Finland. So, naturally, after months of planning, this was when I was able to arrange a visit to Nokia on its home turf. My goal: to chronicle life at the cell phone giant as it fights for survival in the onslaught of iPhones and Androids. And I'd listen closely for the last, desperate noises (maybe they'd be pleas for understanding, or a willful ignoring of facts) of a dying company.

Nokia is fading; there's no easy way to say it. Five years ago it controlled more than 40 percent of the global mobile market. Now it's less than a quarter, largely made up of rapidly deteriorating sales of its now-defunct Symbian phones and its ultra-cheap (read: less profitable) Asha devices . In the more critical smartphone business, its market share in the third quarter plunged to 4.2 percent, from 16 percent in just one year, according to Gartner. Samsung, by comparison, has a leading 23 percent share thanks largely to its Galaxy S phone line.

Not surprisingly, Nokia's financial results have been dismal. In the third quarter, Nokia posted a loss of 576 million euros ($753.5 million) , or eight times wider than the loss it reported a year earlier, as revenue fell by nearly a fifth to $9.47 billion. Its net cash and liquid assets fell by a third to $4.68 billion. The company also warned that the fourth quarter would be "challenging" as it begins to sell its new products, so its cash position will shrink further.

"They're definitely a different company than what they used to be," said Gartner analyst Carolina Milanesi. "They're a shadow of the old company."

With that tough outlook in mind, I expected the mood at Nokia HQ, known as Nokia House or NoHo, to be as bleak as the local weather. But the Nokia faithful surprised me. They said they were confident the latest round of Windows Phone 8 products -- the Lumia 920 and Lumia 820 (read CNET's review of the Lumia 820 here ) -- offer enough whiz-bang features to finally turn some heads and bring back some buzz to the company.

Employees said they have faith in Nokia CEO Stephen Elop, who they say has changed the company's culture, injecting a new sense of decisiveness and direction. Elop, who pronounces the company as "noe-kia" as opposed to the traditional pronunciation, "knock-ya," brought an engineer's perspective to the development of the Lumia phones and was more intimately involved with the process than former executives. He also pushed for the company to move more quickly than ever before.

"There's been a marked shift toward this 'challenger' mindset," Elop told me. "We have to move with urgency."

Read: Nokia CEO: We have to move with more urgency.

The early word on Nokia's latest flagship smartphone, the Lumia 920, has been positive (read CNET's review here), and the phone was initially sold out at many AT&T stores.

"We're on the brink of a turnaround," said Raghunath Koduvayur, who runs product marketing for the Asia-Pacific region for Nokia. "Under Stephen, we have direction, and we've really rallied behind him."

The question is whether that's just magical thinking. Time and technology have marched on since the glory days here five years ago, and Nokia, not unlike Canada's Research In Motion, has too often failed to keep pace. It stuck with the Symbian operating system for too long. Prior to the smartphone era, it failed to recognize local trends like the U.S. preference for flip phones, which allowed others such as Motorola and Samsung to displace it.

And now it's betting on Microsoft's Windows Phone operating system, with only 2 percent share (compared to 75 percent and 15 percent, respectively, for Android and the iPhone's iOS), which doesn't sound like a recipe for a rebound. Will Nokia cut and cut and cut until there's little left but some patents sold at auction? It's already reduced its workforce 17 percent to 44,630 employees -- which excludes workers in its Nokia-Siemens telecom equipment joint venture -- over the last five years and has vowed to slash 10,000 jobs by the end of next year.

Nokia's three main buildings all feature an open central area and glass skylight. Roger Cheng/CNET

It was with these doubts that I arrived at Nokia House. NoHo is 10 minutes away from the center of Helsinki in a neighboring city called Espoo, and its three connected buildings make up the centerpiece of an industrial park that counts Microsoft, Angry Birds creator Rovio, and Finnish elevator manufacturer Kone as neighbors. Sitting on the water by the complex is a World War II-era Finnish transport vessel, the Wilhelm Carpelan, a fixture of the bay that Nokia employees use to joke was manned by spies from rival handset manufacturers.

The glass-encased offices in the middle of NoHo's three buildings look down upon a main cafeteria, called the Cantina. It's NoHo's largest public space, and doubles as a meeting area for the company's largest announcements. In July, Elop gathered the troops in the Cantina when he announced the latest round of job cuts. It's an impressive collection of wood, steel, and glass, part Ikea display, part ski lodge, and a testament to Nokia's former glory and excess. But it's a hollow reminder, just as likely to reinforce the notion that the old Nokia is dead; in its place is a much smaller, scrappier competitor.

It's also a company in a far worse financial situation. Nokia earlier this month sold NoHo to software consultancy firm Exilion for 170 million euros ($222 million), but has agreed to lease it back at a lower price. A colleague quipped that there are two disaster moments for a tech company: First, when it builds the big, indulgent headquarters; second, when it's forced to sell off the headquarters and say it has no business being in real estate.

I can't say I disagree.

The inside perspective
I spent the better part of a day at NoHo, watching as Nokia employees filed into the Cantina. I spent another chunk of the day and most of the next in a corner conference room at the top of the central building of NoHo greeting a lineup of executives that lasted through sundown.

I met Stefan Pannenbecker, head of industrial design at Nokia. He looked the part. He was sharply dressed with a black suit, white shirt, and silver Prada watch. He has a neatly trimmed goatee and his hair was neatly parted to the right. Pannenbecker spoke clearly and with purpose.

"With my team, the only thing I'm interested in is whether people love this product or not," he said. "We could have the best quarter in Nokia's history, and I wouldn't care a bit about it if I didn't feel the products were exciting."

When asked about the opposite -- relevant given the terrible results Nokia has been posting over the past few quarters -- Pannebecker didn't budge, arguing that good products will eventually win out.

The first floor of Nokia House's central building houses the Cantina, the largest public space in the company's headquarters. Roger Cheng/CNET

On the other end of the spectrum was the more casual-looking Jussi Ropo, the senior technology manager working on the Lumia 920's display. Ropo wore a yellow-and-white-striped long-sleeve shirt, black glasses, and short brunette hair, and spoke with an engineer's ease when I sat with him in the crowded Cantina.

Ropo is from Salo, roughly 70 miles west of Helsinki and the city hardest hit by the massive layoffs . Starting four years ago, many of its manufacturing facilities were shuttered or moved out of the country. The factory finally shut down in June. One former Nokia employee who wished not to be named said the city was devastated by the shutdown, and compared it to Detroit when the automakers were hardest hit.

Ropo, however, painted a different picture. He says that the emergence of the Lumia 920 and 820, which were designed in Salo, has given the city a source of pride. "Of course we feel sad to see people from the production line no longer with us," he says. "But people started feeling proud and gradually believing again when they started seeing the devices."

Ulla James, director of finance and legal operations, lent some perspective from her 27-year tenure at the company. When she started in the late '80s, Nokia was in a bad spot, transitioning from the paper supplier business into other industries. On top of that, then-CEO Kari Kairamo committed suicide.

That's right, Nokia has been on the ropes before. The company even considered selling its then-fledgling mobile phone business. But the board instead took a chance on Jorma Ollila, who turned the company in a cell phone giant.

"I've seen this before," James said. "You go and you work your way through the cycle."

A startup mentality
It was Wednesday at 8 a.m., and I was back in the conference room. Outside, it was pitch black. Up first in another lineup of executives and employees was Hans Henrik Lund, head of marketing, strategy, and gear for the Lumia line, and Vesa Jutila, who runs global marketing for the Lumia phones. Lund is part of the new guard at Nokia, having joined just three years ago. He wore a white shirt and dark jeans. His graying hair contradicts the youthful energy he exudes with his quick, upfront statements.

"I'm motivated by a turnaround," he said. "I need that kick to do my best."

That drive, as he told it, didn't make Lund any friends when he proposed a key addition for the Lumia 920 a year and a half ago. The feature, he argued, was on the cusp of breaking out with competitors and he didn't want Nokia left behind. Lund, who then ran the accessory business, made his case during a technology meeting with 16 engineers, designers, and high-level executives, including Jo Harlow, head of the company's smart devices unit.

Hans Henrik Lund, vice president of marketing for smart devices and accessories at Nokia. Roger Cheng/CNET

"Do you want to be last?" Lund asked. The room was divided by what Lund called a difference between "engineering and magic" and "rational and emotional." The engineers, in particular, grumbled that it would add an unnecessary complication, and the debate went on for several hours.

Lund had a good feeling Harlow would go his way, and after getting the nod, the feature he had fought for -- wireless charging -- was a highlight of the Lumia 920 when Elop introduced the phone in September. In fact, the aggressive push of wireless charging and the myriad of related and colorful accessories have many seeing Nokia as a leader in this trend.

That Lund's idea, unpopular with many of the traditional power blocs within Nokia, made it into its flagship product underscores the dramatic changes that have gone on in the company. In years past, Nokia would have stuck a burgeoning technology, such as NFC (near-field communication), into a one-off device with little mass appeal. Or it would have stayed in a lab for years.

"Back when Nokia was on top, wireless charging would have easily been dismissed," Lund said.

It's the new Nokia that also rushed out an LTE-enabled Lumia 900 when AT&T demanded a phone customized for the U.S. market. It came in half the normal development time, and was ready enough to be shown off at the most recent Consumer Electronics Show in January.

"In the past, Nokia has had good intentions to meet our needs, but they never quite delivered up to our expectations," says Ralph de la Vega, head of AT&T's mobility unit. "What I notice with Stephen [Elop] is he has the capability to make things happen."

How AT&T, Nokia pulled Windows Phone into the 4G LTE world

While employees praise Elop for his personal touch and ability to cut through the clutter, his 27-month tenure hasn't been without its problems. Notably, the heavily promoted Lumia 900 launched with a significant bug that hurt the wireless connection in some units.

And when unveiling the Lumia 920, Nokia showed video footage supposedly shot with the smartphone's camera to demonstrate the image stabilization feature. It turned out that the video was shot with a professional camera, a disingenuous move for which the company quickly apologized. The company has declined to comment further on the incident.

A different tack
Nokia's quick action with the Lumia 900 was rewarded with a flagship slot at AT&T and heavy marketing, the kind that helped Samsung dominate the smartphone world. The result was marginal success. De la Vega and Elop both declined to comment on the specific sales figures, but Elop has said they were better than expectations.

As a result, Nokia is going a different route with the Lumia 920. The company will be investing in training the sales staff at carrier and retail stores, working more with digital media, and attempting to spark more of a word-of-mouth campaign. In the U.S., the Lumia 920 is AT&T's flagship smartphone for the holidays. Nokia is hoping to ride the massive campaign for the Windows 8 operating system, which shares the same look and feel as Windows Phone 8. De la Vega said only that the Lumia 920 is "doing extremely well for us," calling it one of his top-selling phones.

The Lumia lineup faces huge competitive challenges this holiday season, but Elop told me he was starting to see interest picking up. He was at Heathrow Airport in London recently when the passport inspector spotted his bright yellow Lumia 920 in his hand. Instead of telling him to put it away and checking his documents, he asked Elop about the phone, and the duo ended up stalling the line as they talked about some of the camera features.

"Maybe I sold a Lumia device," he said.

Play

Elop's big bet
Getting consumers to give Nokia another chance and building the Lumia brand are the key missions for Elop, who gambled heavily and ruffled a lot of feathers with the Nokia old guard when he dumped its previous operating system, Symbian, as well as its next-generation MeeGo platform.

Read: Nokia's defunct MeeGo finds new life as Sailfish

In his now famous "burning platform" memo, he declared the need for radical change. Elop's supporters and some Nokia employees hail it as an example of the new kind of transparency in the company. But former executives and critics believe it was a reckless move that hastened the decline of Symbian products.

For Elop, it was all about standing out from the crowd, and he admitted that Nokia couldn't do that with Android.

"The single most important word is 'differentiation,' " he said. "Entering the [Android] environment late, we knew we would have a hard time differentiating."

Now, Nokia has no choice. Windows Phone is Elop's all-or-nothing bet.

"Nokia is by far the leading Windows Phone [original equipment manufacturer], analogous to Samsung for Android," says Terry Myerson, head of Microsoft's Windows Phone unit. "You're talking about the [manufacturer] that defines what's possible with the brand."

Still, Microsoft isn't exactly all-in with Nokia. It promoted an HTC smartphone, the Windows Phone 8X, as its flagship device for the holiday. Microsoft is also rumored to be launching its own smartphone, just as it did in the tablet business with the Surface. And the early word on the Windows Phone performance has been mixed. While shipments of Windows Phone units have grown from a year ago, the growth is largely from Nokia's expansion into new markets, and not customer acceptance in the more developed markets, according to Sanford C. Bernstein analyst Pierre Ferragu.

Dramatic changes
Nokia has been a huge source of pride in Finland. Until recently, it had been the country's largest employer and most valuable company, and in 2000, contributed 4 percent of the country's gross domestic product.

That breadth and those resources meant Nokia was also willing to tinker with side projects -- perhaps too many. "There was too much action," said Stephen Johnson, who left in Nokia in 2010 to work on a mobile health initiative called Aging 2.0 in New York. "There were lot of different projects, but there was no laserlike focus."

Side projects were legion. There was the ill-fated mashup of a cell phone and handheld gaming device, the N-Gage, which Nokia supported for a few years. It was the first company to produce a phone with an NFC chip, although the product itself wasn't particularly attractive. It tried out different designs, such as a lipstick case-shaped phone. And culturally, the company was strangely both arrogant in its unflagging support of Symbian and too cautious, with approval bodies and countless meetings.

"You needed approvals from 150 people to get something done, and any one person can stop something," said Atte Lahtiranta, a former 11-year Nokia veteran who now works for a startup called ShopAdvisor. "The whole structure was built to prevent mistakes."

Juha Alakarhu, head of imaging for Nokia, at the company's Tampere, Finland, R&D facility north of Helsinki. Roger Cheng/CNET

One recent concept that managed to navigate that bureaucracy was the PureView 808. The phone camera technology, which began as a sketch on a cocktail napkin six years ago, involved a massive 41-megapixel camera that allows users to zoom in threefold without losing image quality. The PureView name won some cachet at Mobile World Congress, where the phone was unveiled, and the Lumia 920 borrowed it for the image-stabilization technology used in its camera. Nokia is now using PureView as a brand for its best camera technologies.

"From an imaging point of view, it's been an amazing year," says Juha Alakarhu, head of the camera technology for Nokia. He works in the Tampere office about 113 miles north of NoHo, where 3,100 jobs have been cut over the past two years. But he and his team have been insulated, he said, noting the company has actually increased its investment in imaging technology.

Local impact
By Thursday, the snow began to fall hard. My cab driver slammed on the gas, and the cab slowly crawled forward, tire chains struggling to find traction on the icy road.

I took refuge in the cafeteria of Aalto University, where I sat with Tuula Antola, director of economic and business development for Espoo. Antola wore a black blazer, white shirt, and a silver bracelet on her left wrist. Her assistant, dressed in a black suit, sat next to her, briskly running through a Powerpoint presentation about the growth prospects for the city. It was afternoon, and the room, filled with white tables and colorful chairs, was empty except for us. Antola, like many, hopes for the best for Nokia, but is preparing for the worst. She told me Finland is investing in education and support to foster a larger corridor of startup firms, hoping to replicate the success of breakout hits such as Rovio and Supercell.

Read: Angry Birds and Rovio's plans for world domination

"We don't back one horse," she said. "It's more healthy that we have a lot of smaller players in the ecosystem."

Espoo, specifically, is leaning toward new growth engines, Antola said, pointing to Aalto as a source for local talent. In Salo, where the 3,500 jobs cut by Nokia hit the community of 50,000 hard, women who initially trained to be in the medical field but quit for better-paying Nokia factory jobs are starting to go back to the nursing field. Others, however, haven't had as much luck. More layoffs may be coming. When Nokia abandoned Symbian, it outsourced the support work to Accenture, which inherited a lot of the employees. But Accenture has warned it may cut more jobs as Symbian continues to decline.

The government has supported laid-off workers with education, training, and other aid, according to Mika Lautanala, director of enterprise and innovation in the country's Ministry of Employment and the Economy. But Lautanala said Finland is just barely dealing with the increasing job cuts, compounded by a downturn in other industries, including paper products. He said 60 percent of laid-off workers from Nokia have found a new job or "solution," but concedes that rate may fall if the European economy continues to slump.

Finland's wealth of talent, however, hasn't been lost on other companies. Antola told me a Japanese mobile game maker is set to move into Espoo, and Huawei has committed to opening a facility in Helsinki that will focus on user experiences for Android and Windows Phone devices. Like Antola, Lautanala is hopeful for Nokia, and is a longtime user of the company's phones. But he has no illusions of Nokia returning to its former glory and doesn't have a sentimental attachment to the wheezing giant.

"It doesn't make sense to prop up a company that is not competitive in the marketplace," he said. "You have to look to new companies."

Moving on
By Friday, snow had fallen relentlessly for two days, making the hike to the city's center difficult. Leading the way was Valto Loikkanan, business adviser for EnterpriseHelsinki, a city-backed group that provides support and advice to local startups.

"Just wait until it gets colder it and snows harder," Loikkanan said as we trudged through the snowfall. "Then you really have to put on a lot of clothes." We grabbed coffee after ducking into Stockmann's flagship department store (think Macy's in New York) and navigating our way through a series of underground pathways and connected stores.

The downturn at Nokia has coincided with a cultural shift in Finland. It used to be the mark of success was joining a large, stable company. Starting a business was usually considered a last resort. But over the past few years, an entrepreneurial streak has developed. The success of Rovio has inspired college students to strike out on their own, as would be the case in the U.S.'s Silicon Valley.

The Lumia smartphones on display at the flagship Nokia store in Helsinki. Roger Cheng/CNET

But alongside young entrants into the startup world are a number of smaller businesses created with the support of Nokia's through its Bridge program, which provides former employees help in the form of technical training, financial aid, and in some cases, patents. Jolla, a Finnish startup attempting to resurrect MeeGo, and Mobile Brain Bank, another local developer matchmaking service, for instance, both got support from Bridge.

Still, there's a sense the country is moving on with or without Nokia. I was at the Nokia flagship store in Helsinki's city center earlier in the week when a man hurriedly walked in looking for something. He was greeted by a sales clerk eager to show off the latest Lumia phone, but the man was only looking for replacement headphones for his iPhone. The salesperson gave him directions to the nearest Apple store.

One of my cab drivers also told me he owned an iPhone 4, and was considering upgrading to an iPhone 5 or Galaxy S phone when his contract expires. After a few minutes, he added that he would consider a Lumia phone, too.

"I heard," he said, "they've gotten better."

The backside of Nokia House, facing the bay. Roger Cheng/CNET

 

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