Nokia Needs More Than New CEO Stephen Elop to Reverse Its Steep Market Decline

Nokia Corp. (NYSE ADR: NOK) on Friday announced it was replacing its chief executive with Microsoft Corp.'s (Nasdaq: MSFT) Stephen Elop, in an effort to reverse its steep decline in the U.S. smartphone market.

The world's largest mobile phone maker said Chief Executive Officer Olli-Pekka Kallasvuo will step down and Elop, head of Microsoft's business software unit, will take the reins Sept. 21. The move represents a drastic shift for Nokia, which until Canadian Elop had never hired a non-Finnish executive for the top spot. But the company needs a strategy and management overhaul to compete in the profitable future of smartphones.

The move should appease Nokia's frustrated investors who have watched its market value slip 70% in the past three years as Apple Inc.'s (Nasdaq: AAPL) iPhone, Research in Motion Ltd.'s (Nasdaq: RIMM) BlackBerry, and phones using Google Inc.'s (Nasdaq: GOOG) Android platform stole the smartphone spotlight.

"This is the best thing Nokia could do for investors who had grown tired of hearing it knew how to fix its problems," Carolina Milanesi, research director in the mobile device division of research firm Gartner Inc. (NYSE: IT), told MarketWatch. "They may not have the right products yet, but at least now they've gone and done something at the management level."

Elop's top priorities include developing a Nokia competitor for the iPhone and restructuring a corporate culture that weighs down innovative products with long approval processes and a lack of leadership.

"That Finnish mindset of caution has to be overturned," Lee Simpson, an analyst with Jefferies Group Inc. (NYSE: JEF) told MarketWatch. "They need to get to the lead of the pack again."

Nokia's share price has tumbled more than 22% so far this year. While Nokia remains the overall handset leader with 38% of the market, it has not been able to compete successfully with higher end U.S. smartphones, and its U.S. market share now is less than 10%. 

Analysts are speculating that Elop's Microsoft connections could signal future collaboration between Nokia and Microsoft, which also is struggling to transition from the PC world to mobile phone software.

"Having an ex-Microsoft person running Nokia suggests lots of interesting possibilities for the future," Nick Jones, an analyst with Gartner, told The New York Times. "Nokia plus Microsoft allying to fight Google and Apple. Now there's a thought." 

Elop said he will focus on the "user experience," since one of the biggest complaints against Nokia is that its smartphones do not have user-friendly designs for connecting to the mobile Internet.

Some see Elop's experience with U.S. corporate culture in the highly competitive field of technology as a huge bonus going into the Nokia role.

"The guy comes with the right passport and he's got the right experience," said Simpson. "He's worked at the biggest software firm in the world. This is very important for Nokia, which is trying to go from being a Finnish box maker to being a player in the U.S.-centric software and Internet-services business."

Royal Bank of Scotland Group PLC (NYSE ADR: RBS) analysts called the leadership change the catalyst they had been waiting for, and upgraded Nokia stock to buy from hold.

But not everyone is sold on the idea that Elop's experience is strong enough to boost Nokia where it needs to be to compete with its rivals.

"We're really of two minds about him," said Gartner's Milanesi. "He comes from a software background, which is good, but he also comes from a company that's had the same issues as Nokia in terms of adapting to a new world."

Another key problem with Nokia that Elop's appointment fails to address is that it never established relationships with U.S. operators Sprint Nextel Corp. (NYSE: S), AT&T Inc. (NYSE: T), and Verizon Wireless, the joint venture of Verizon Communications Inc. (NYSE: VZ) and Vodafone Group (Nasdaq: VOD). Together the carriers operate more than 90% of the U.S. smartphone market.

"Everyone's talking about his U.S. experience like it's a big asset. Well, not really when you get someone with no connection to the carriers," said Gartner's Milanesi.

Another area of concern is Elop's lack of experience in hardware design. While Nokia wants to focus on developing software, a consumer-friendly handset is also key to winning markets.

"[I]t remains to be seen how well he will do on hardware devices. Engineers don't have a great track record of designing attractive handsets," said Neil Mawston, an analyst at Strategy Analytics.

And some analysts think his industry experience is not enough for the drastic strategy overhaul that Nokia needs to be a global smartphone competitor going forward.

Elop joined Microsoft in 2008 after leaving his chief operating officer position with Juniper Networks Inc. (NYSE: JNPR). Prior to that he was president of Adobe Systems Inc.'s (Nasdaq: ADBE) global sales organization and CEO of Macromedia Inc.

"He [Elop] might be a superstar, but on paper, it is not reassuring," Pierre Ferragu, an analyst with Sanford C. Bernstein & Co. who referred to Elop's career trajectory as "patchy," told The Wall Street Journal.

Ferragu also voiced concern over changing the CEO when the bulk of the Finnish-minded company culture was still in place. He said Elop could "have a hard time playing a strong leadership role, stuck between a very powerful chairman and a long-standing management team with a strong cultural bias."

"The house is burning and things are going to be even more difficult in the short term," said Ferragu.

It's unsure whether Elop will attend Nokia's annual product trade fair, "Nokia World," in London next week, when the company is slated to unveil its new smartphone model, the N8.

Nokia shares rose 1.84% Friday to $9.94.

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