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Nokia Conducting Search for a New CEO

Very provocative headline for an interesting WSJ piece:

“They are serious about making a change,” one person familiar with the matter said. Nokia board members are “supposed to make a decision by the end of the month,” that person said.

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They should be very serious about making a change – its been disappointment after disappointment at the former Finnish phone giant (and its stock price, see above). But, this gives me a great chance to play $100-armchair CEO. So, what would I do if I was in the big chair at Nokia? I’d be focusing on three things:

  • Change the OS approach: With Nokia’s next OS Symbian^3 delayed and widely perceived to be inadequate, you really need to question the ability of Nokia to keep up in the industry-shaking smartphone platform war. In particular, Nokia’s challenge is that its attempting to take a software platform built to enable carrier services and high reliability on lower-end phones that weren’t meant to run software and somehow force it into achieving the same high-end software functionality that Apple’s iOS and Google’s Android provide. While there’s nothing that says this is impossible, this is an order of magnitude more difficult than Apple/Google’s initial problem of just creating a software platform without the burden of any legacy constraints/approaches, and, in an industry as fast-moving and disruptive as the smartphone space, that’s two orders of magnitude too many, invites all sorts of risk with no clear reward, and discards Nokia’s traditional strengths in wireless communications R&D and solid hardware design. What does that mean? Three things:
    • Re-tool Symbian for the low-end to be more like Qualcomm’s BREW (or heck, maybe even adopt BREW?): an operating system focused on enabling carrier/simple software services on the many featurephones out there. That category is Nokia’s (and Symbian’s) traditional strength, and that’s where Symbian can still add a lot of value and find a lot of support.
    • image In the mid-market (high-end featurephone/low-end smartphones), I’d tell Nokia to bite the bullet and adopt Android. Not only is it free, but it immediately levels the software playing field between Nokia and the numerous  OEMs who are itching to adopt Android allowing Nokia’s traditional strength in hardware design to win over.
    • imageIn the high-end, Nokia should go all-in with Intel on their joint MeeGo platform. In that space, Nokia needs a killer platform to disrupt Google/Apple’s hold on the market, and MeeGo is probably the only operating system left which might contest Android and iOS and drive the convergence of mobile devices with traditional computers that this category is pushing towards.
    • Double-down on Qt to make it easier for developers to “develop for Nokia”. A few years ago, Nokia bought Trolltech which had created a programming framework called Qt (pronounced “cute”). Qt had gained significant traction with developres as it made it easier to make a graphical user interface which ran across multiple devices and operating systems. This is a key asset which Nokia has tried to use to make MeeGo and Symbian more attractive (and which is probably one of the main reasons both OS’s still have reasonable levels of developer interest; although, interestingly, there has been an effort to bring Qt over to Android), but it needs to be emphasized even more if Nokia wants to stay in the game.
  • Pick your battles wisely: It is entirely possible that Nokia has lost the high-end smartphone battle in the US and Europe (even despite the operating system approach laid out above). But, even if Nokia was forced to completely cede that market, its not the end of the war – its simply the loss of a few (albeit important) battlegrounds. Nokia is still well-positioned to win out in a number of other markets:
    • image The featurephone world: Many of us tech aficionados often forget that, despite all the buzz that the iPhone and the Droid devices generate, smartphones actually make up a very small unit base. Featurephones are still the vast majority of the volume (for cost reasons) and, as devices like the iPhone continue to capture mindshare, there will be significant value in helping featurephones imitate some of the functionality that smartphones have. While it is true that Moore’s Law makes it easier for high-end operating systems like iOS and Android to be run on tomorrow’s featurephones, the incentives of Apple and Google are to probably better aligned with taking their mobile operating systems up-market (towards higher-end devices and computers) rather than down-market (towards feature phones) to chase higher margins and to continue to build highly optimized performance machines. So, given Nokia/Symbian’s traditional strength in building good devices with good support for carrier services, its natural for Nokia to solidify its ownership of the feature phone market and to emulate some of the functionality of higher-end devices.
    • Emerging markets: This is related to the previous bullet point, but much of the developing world is now seeing vast value in simply adopting basic services and software on their (by Western standards) very low-end phones. As banking systems and computer availability are extremely limited in Africa and parts of Asia, this represents an enormous opportunity for someone like Nokia who has spent years making their phones capable of mobile payment, geolocation, and carrier-enabled services. Couple this with the fact that there is enormous growth waiting to happen in markets like India, China, and Africa (where cell phone penetration is nowhere near as high as in the US), and you have the makings of a potential end-game strategy which could offset short-term setbacks in the US/European smartphone market.
    • image Japan: While Europe and the US are eagerly adopting smartphones (as in phones with rich operating systems), Japan has been a laggard due to differences in the carrier/vendor/services environment. While its been difficult for foreign companies to break into Japan, the recent technology deal between Japanese semiconductor company Renesas and Nokia might provide an interesting “foot in the door” for Nokia to enter a large market where its weakness in software is not so much of a hindrance and its strengths in hardware/willingness to play nice with carriers are a big asset. This is in no way a slam-dunk, but its definitely worth considering.
  • Figure out the key ecosystem player(s) to partner with: The previous two bullet points were mainly tactical suggestions – what to do in the short-run and how to do it. This last bullet point is aimed at the strategic level – or, in other words, how does Nokia influence the creation of a market environment which leads to its long-term success. To do this, it needs to figure out who it wants to be and what it wants the mobile phone industry to look like when all is said and done. I don’t have a clear answer/vision here, but I’d say Nokia should think about partnering with:
    • Carriers: Although Apple/Android have had to play nice with the carriers to get their devices out, the carriers probably see the writing on the wall. If smartphone platforms continue to gain traction, there is significant risk that the carriers themselves will simply become the “dumb pipes” that the platforms run on (in the same way that  internet service providers like AOL rapidly became unimportant to the user experience and purchasing decision). Nokia has an opportunity to play against that and to help bring the carriers back to the table as a driving force by helping the carriers expose new revenue streams/services (which Nokia could take a cut of) and by building more carrier-friendly software/devices which help with coming bandwidth issues.
    • image Retailers/Mobile commerce intermediaries: One of the emerging application cases which is particularly interesting is the use of mobile phones for the buying and selling of goods. This is something which is extremely nascent but has a huge opportunity as mobile commerce can do something that traditional desktop-bound eCommerce can’t: it can bridge the gap between pixels on the screen and actual real-world shopping. It can be used as a mobile coupon/payment platform. It’s camera and GPS enables augmented reality functionality which can let shoppers look up information about a product without having to type in search-strings. It can be used to provide stores with more information about a shopper, letting them tailor new ad campaigns and marketing efforts. I haven’t run the math to build a forecast, but there’s good reason to believe that this could be the application for mobile phones. While Nokia may have to cede application/ad revenue to Google/Apple, it may be able to eke out a nice chunk of profit (maybe even bigger than the one Google/Apple can get) from focusing on this particular need case instead.

Obviously, none of these are guaranteed home-runs, but if I were a Nokia shareholder, I’d hope that the next Nokia CEO does something along the lines of this. And, yes, I’d be willing to accept $100 (and “some” stock) to be Nokia’s CEO and implement this :-).

(Image credit – Business Insider) (Image credit – Android logo) (Image credit – MeeGo logo) (Image credit – feature phone montage) (Image credit – Japanese phones) (Image credit – Mobile coupon)

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Net Neutrality 2.0

If there is one consensus in the very polarized technology world, it is that more and more people and more and more devices will be connecting to the internet. Consequently, the amount of internet traffic that will be delivered over these networks will explode – estimates by Cisco suggest that total internet traffic will grow on average 41% every year resulting in an almost inconceivable 327 exabytes per year in 2012. To put that into context, that’s the equivalent of ~84 billion DVDs!

The growing size and importance of the internet has pushed regulators and activists to advocate for new rules and regulations to preserve the internet’s independence and neutrality from political and corporate interests. This movement has been called “Net Neutrality” and seeks to make it impossible for network owners to gain too much power over the content and information that a consumer can access.

Now, I am a firm believer in the aspirations of net neutrality – I am no fan of “walled gardens” and am even less a fan of Comcast/Verizon/AT&T throttling access to content they don’t approve. I am also well aware that major network owners, at least those in the US, are granted public licenses by the FCC to operate, and thus have a moral and legal obligation to provide a public and valuable service. But, aspirations and obligations without a realistic assessment of technological and economic realities are meaningless, and I suspect, based on many of the arguments I’ve heard on the internet, that many net neutrality proponents don’t have a good grasp of why their Eden-esque visions of net neutrality may be missing some of the bigger picture needed to make sure their implementation is more effective than naive.

The fundamental reality around the economics of network construction is, in short, that it is expensive as hell. There are enormous upfront costs that need to be recouped, and there are plenty of maintenance costs and challenges. This has two direct consequences:

  • Network providers tend to be large
  • The cost of an incremental byte of data transmitted is marginal (because the equipment is already there), but the cost of incremental capacity is extremely high (because the provider has to buy new equipment, contract new construction/digging, bring it online, etc.)

What does this mean for net neutrality? The cynical view would be that the network providers are primarily interested in minimizing new capacity investments/maintenance costs and in finding ways to “jack up” prices on data transferred, for example by only allowing content and devices where the content providers/device manufacturers pay the network owner a handsome reward. There is no doubt that network carriers can be guilty of this mindset, but the carrier’s current reaction to the smartphone revolution by opening up their formerly “closed gardens” and the failure of walled gardens like AOL to dominate the internet service provider space suggests that something else is at play. In my mind, what will dominate the business priorities of the network providers as time goes on is one question: how will network carriers profitably provide access for the exabytes of content that will be traveling through their networks?

The best example of what may come is in the mobile phone space where AT&T has been caught off guard with the enormous network demands from Apple’s iPhone. It seems the general consensus is that AT&T has been behind on its network infrastructure investments, but the fact of the matter is it will be increasingly difficult for network providers to keep pace with the investments in capacity necessary to maintain service quality for its users. This is especially complicated in the mobile phone space because of three things:

    1. the amount of wireless spectrum available for use is being consumed faster than it is being made available (although this could be alleviated by new regulatory policies)
    2. the quality of network service is dependent on more than just the wireless spectrum, but also an extremely expensive-to-upgrade, rapidly saturating “backhaul” network
    3. the spectral efficiency (how much data you can cram down a particular wireless pipe) is reaching the theoretical limit defined by Shannon’s Law (chart below)

I’ll admit I haven’t fully crunched the numbers (its been my experience that its pretty difficult for a casual observer to find good data on the costs of upgrading network capacity or on the ability of femtocells/network topology changes to help carriers cope with new data demands), but I suspect that network carriers will soon hit a real wall in terms of their ability to profitably expand their networks to meet new demands. If this is true, then there really are only four options open in the long run for profit-seeking network carriers:

  1. Dramatically increase cost of network service – Ending “unlimited access” plans and increasing the average monthly service costs and cost per byte transmitted could alleviate the profitability constraint in the short-run; but, depending on the economics involved, if the network service reached a high enough price, new users would be deterred from using the service, resulting in user attrition for the service provider and the loss of a potentially valuable network access for society
  2. Introduce tiered traffic and practice heavy network management – Allowing the carrier to preference certain traffic (e.g., to users/businesses or content providers/application developers who have paid more, or to preference emergency/government network traffic, etc.) and practice heavier handed network management could alleviate the network traffic constraint without dramatically changing the cost of network access
  3. Some combination of (1) and (2)
  4. Government bailout

None of these options (especially #4) are especially attractive, but it is important for regulators and activists to keep these potential futures in mind when considering their proposals. I fear that the strict form of net neutrality espoused by many would drive carriers to adopt course #1: something which could cut short the full potential of the internet to only wealthy individuals and businesses. This blogger’s humble opinion is that the best outcome would be to use regulation to pursue a variant of #2 for the following reasons:

  • AOL 2 is unlikely to happen: To believe that network carriers absent strongly worded neutrality regulations will rapidly clamp down on access is to believe that the failure of AOL’s walled garden and Verizon allowing Skype and Android on its network are flukes. The value from the openness of the “full Internet” is not trivial and no longer something that major network providers can ignore. And, based on Verizon’s recent promotion of the Droid by harping on problems with the closedness of Apple’s iPhone App Store, is something carriers have learned to use for their own purposes.
  • Regulations can be implemented just around content neutrality: Of all the concerns that I have about network neutrality, the one that matters the most to me is equivalent treatment of content. After all, the internet in the US would suffer a great deal if every ISP/carrier only provided content sanctioned by just a single political party. The remainder of the provisions (universal device access, universal platform access, ability of third party networks to piggyback off of the main network) are much less important, especially if content neutrality is mandated, and implementation of them may even weaken the ability of the industry to create high-quality integrated/tailored products (e.g., requiring AT&T to allow the iPhone to access Verizon’s network as well would have significantly delayed the iPhone’s release and probably would have worsened its battery-life and introduced additional problems). Furthermore, the cost of implementing content neutrality is likely minimal, whereas the cost of requiring networks to support every possible platform/device/third-party are likely to be significantly more prohibitive.
  • Enabled tiering/network management allows network providers to manage networks for higher quality experience: Strict network neutrality could limit the ability of network providers to manage the traffic on their networks, especially in times of peak demand, likely reducing quality of service for all parties. It also limits the ability of network providers to prioritize traffic that should be prioritized (e.g., emergency/government communications, traffic which businesses have network providers manage for them, or even packets related to keeping tabs on the network service quality or devices on the network) and potentially do basic things like block spam/DDoS attacks or manage the quality of internet experience by traffic type (the demands for web page viewing are very different from the demands of internet video and internet telephony).

I won’t claim to be the policy expert that knows what the right solution or sets of costs and tradeoffs are, but hopefully this gives a sense of some of the nuances behind the network neutrality debate.

(Image credit) (Chart credit – Qualcomm whitepaper)

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