Cover Story June 2, 2011, 12:40AM EST

Stephen Elop's Nokia Adventure

(page 3 of 7)

Windows-based smartphones are the first stage of Elop's three-part comeback plan. One huge incentive for dumping Symbian was to cut the company's bloated costs. With an estimated $1.4 billion annual savings from discontinuing Symbian, he says he will invest more to protect and build Nokia's massive low-end phone business in emerging and yet-to-emerge nations in Asia and Africa, which brought in 33 percent of Nokia's sales in 2010. Reinvesting in emerging markets is Part Two. "If you live in the U.S., you can't really understand their power," says Paul Jacobs, CEO of chipmaker Qualcomm (QCOM), whose technology is used in all Windows Phones. "They're going to be a great partner."

Elop's third priority has been dubbed New Disruptions. It's a fully sanctioned skunkworks, with teams in Helsinki and Silicon Valley, staffed by top technical talent from the discontinued Symbian and MeeGo efforts, especially MeeGo. That initiative began when Nokia hired a crew of inventive open source evangelists in 2009 with orders to dream up entirely new devices. A few months later they were reassigned to develop a replacement for Symbian. The goal, as Elop told a group of engineers in Berlin on Feb. 29, is once again to "find that next big thing that blows away Apple, Android, and everything we're doing with Microsoft right now and makes it irrelevant—all of it. So go for it, without having to worry about saving Nokia's rear end in the next 12 months. I've taken off the handcuffs."

Recent history has hardened employees to the opportunities of a new era. "Under OPK, you could work on something for four years" before a decision was made to halt it, says Tuomas Artman, a former employee and Nokia contractor. OPK is Olli-Pekka Kallasvuo, the former CEO frequently accused by ex-Nokians of running a politicized, indecisive organization. Kallasvuo did not reply to a request for comment.

On his visit to Salo, Elop was shown a hi-fi speaker that encloses a phone, giving a richer sound. Another engineer handed him a phone and asked him to toss it into a tank of water. When the engineer dialed its number, the device, still submerged, rang. A nanoscale coating makes electronic parts water-resistant. "This kind of stuff has been sitting around people's desks, because it's too hard to get anything done around here," Elop says. "If we can get some of this to market—that's what gives me confidence."

Nokia's initial reaction to the iPhone is the most embarrassing example of what went wrong. When Steve Jobs unveiled the device in January 2007, "it was widely disregarded," says former manager Dave Grannan, who now runs Burlington (Mass.)-based voice recognition company Vlingo. "The attitude was that we'd tried touchscreens before, and people didn't like them." It had no multimedia messaging (MMS) capability. The reception and sound quality were poor. It couldn't be used with one hand. There was nothing to fear.

As iPhone sales took off, Nokia remained strangely detached, say a dozen current and former executives. The company didn't sit still, exactly. It opened its own app store, Ovi—but never put marketing muscle behind it. With no runaway hit like the iPhone, app developers largely ignored it. When Elop euthanized the Ovi brand name on May 16, it had 50,000 apps; Apple had 500,000. "It was an ignorant complacency, not an arrogant complacency," says Nokia human resources head Juha Akras.

Whichever variety, complacency was rampant, and it left Nokia particularly vulnerable to Android. While Apple cleaned up the high end of the market, Google flooded the low and middle by giving away its sophisticated software to all of Nokia's handset rivals. Nokia executives seemed content trumpeting their success selling marginally profitable low-end phones in Asia, until Android's smartphone share flew from 4 percent to 23 percent in 2010. Says Elop: "It's often hard to see a challenger when you're dominant, but what happened with Android was faster than anything we've ever seen."

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