Will Nokia's new CEO bring real change?

Phil GoldsteinNokia's (NYSE:NOK) decision to drop CEO Olli-Pekka Kallasvuo in favor of Microsoft executive Stephen Elop was neither unexpected nor unwarranted. Elop now faces the challenge of implementing his predecessor's strategy--especially on smartphones and services--but the biggest impact he may have is on Nokia's culture.

As others have pointed out, the main rationale behind hiring Elop--who ran Microsoft's $19 billion business division and was responsible for its Office product suite--is to aid Nokia's transformation from a handset maker into a software and services company. Elop brings strong operational experience with software.

Nokia made services a key part of its strategy and identity under Kallasvuo, who spearheaded Nokia's Ovi initiatives in applications, mapping and other services. But while Apple (NASDAQ:AAPL) surged ahead with the iPhone, and made the iTunes-App Store nexus a tightly integrated offering that promotes a virtuous cycle of developer involvement and revenue, Nokia has failed to get that kind of traction with Ovi. Nokia pushed past its target of 80 million users of its Internet services for 2009, ending the year with around 86 million services users, according to a January Reuters report, which cited unnamed sources with direct knowledge of the figures. However, I don't think Ovi is the first thing that comes to mind for many smartphone users when they think of a popular smartphone service.

"The funny thing is that Nokia got on the whole services and software bandwagon really early," noted ABI Research analyst Kevin Burden. "The issue has been about their execution."

It's also worth noting that Elop, a Canadian, is the first non-Finn to run Nokia. He is not a career Nokia man focused on building devices. As Burden notes, he is part of what Nokia has been missing: "What they really need is someone who understands the software business, and can push that further and give them a little bit more credibility," he said.

How will Nokia's CEO fare?But Elop's appointment may signal a larger shift in Nokia's transformation. For years, Nokia dictated to many markets--including the U.S. market--what its devices would look and feel like. For a while, this worked, and Nokia reaped the rewards. However, in the second half of the past decade, particularly after the advent of the iPhone, Nokia was slow to grasp how rapidly consumer tastes and desires were changing, and its devices and services margins showed it. In the second quarter of 2007, Nokia's combined mobile phone and multimedia margin was 21 percent; by the second quarter of 2010, its devices and services margin had fallen to 9.5 percent.

"It certainly would have been better if they did this two or three years ago," Burden said.

If Elop can bring a different focus and execute faster on a services strategy, that's all good news for Nokia. But a main concern is whether he can bring back the luster to the high end. As CCS Insight analyst Geoff Blaber pointed out, a hit high-end product would be a strong platform through which Nokia could push its services play. "There is no one piece in this recipe that has all the answers," Blaber said. "They still need to have a product that carriers want to sell and consumers want to buy."

If Elop can crack that puzzle, the trip from Redmond to Finland will be worth it. --Phil

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