Nokia’s Creative Destruction (Accent on ‘Destruction’)

Photographer: Tomi Setala/Bloomberg

Nokia’s store in Helsinki, Finland

Update: Here we are a day later and the bleh response to the Microsoft-Nokia deal has turned into derision. See Felix Salmon at Reuters, who argues that buying Nokia’s phone business just makes an already bloated Microsoft bigger and ties the hands of Ballmer’s successors. Salmon thinks there’s zero demand for another smartphone operating system. I’m not sure I see that. More to the point, before slamming this strategy it’s worth trying to come up with another one for Microsoft. Surely it’s not to just keep burning DVDs of Windows and Office until the desktop computer becomes obsolete, right? That day is coming fast. Think you won’t see Android on the desktop? Just click here and put in your order. Henry Blodget sums this one up succinctly: yes, like all combinations of big and troubled companies this one is not blessed with high odds of success. That doesn’t mean it’s stupid.

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Is there anyone truly enthusiastic about the news of the Microsoft-Nokia tie-up? As one analyst told Bloomberg today, “The question is whether combining two weak companies will get you a strong new competitor — it’s doubtful.” It’s a rare story about the Microsoft-Nokia deal that doesn’t make the point that Microsoftand/or Nokia are struggling.

This post started out as something of a contrarian item, eager to argue that other technology companies have returned from the brink before. Exhibit No. 1 was supposed to be Apple, which famously was on its last legs before bringing Steve Jobs back in from the wilderness. Except, as a little bit of research showed The Market Now, Apple’s travails back then don’t begin to compare to Nokia’s now. In 1996, Businessweek ran a story titled, “How Much for One Apple, Slightly Bruised?” That story said that Apple’s market share had slipped from 8.3 percent in 1994 to 7.8 percent in 1995.

Anyone at Nokia would be thrilled with numbers like that. Take a look at the chart to the right. From 2010 to 2012, Nokia’s smartphone shipments went from 100 million down to 35 million, according to research firm IDC. Market share (not on the chart) dropped from 32.8 percent in 2010 to 4.8 percent in 2012. Even Blackberry, with its string of middling products, hasn’t lost market share as fast. Eventually every dominant company has to settle for a smaller share of a big pie. That’s not what’s happening. If sales at Nokia kept falling at the same rate by the end of 2013 they’d reach … well, zero.

That’s not exactly the case. Smartphone sales ticked up a bit in the last quarter, to 7.4 million. But you can’t say that Nokia’s Stephen Elop (now returning to Microsoft) didn’t do what he promised. Nokia’s jumped off its old platform and never looked back. Nokia’s just found that things don’t get any less scary when you hit the water.

What we’re seeing here is a problem of dominant companies as old as capitalism: When you’re the leader, everybody innovates around you while you have a lot of incentives to stay in place. In theory, the solution here is to tear down your old business before others get to it. Nokia got to that late in the game. Microsoft, on the other hand, has been furiously trying to anticipate threats without quite being able to make it click. Nokia now may be the purest test of the destroy-yourself-first-and-then-rebuild idea ever. It’s good that Microsoft has pockets deep enough to pay for the rebuilding part of that.

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