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Nokia Plots Its Comeback Plan

(Bloomberg)—Sitting in a meeting room that looks out on a frozen Baltic bay, Nokia Oyj Chief Executive Officer Olli-Pekka Kallasvuo mentions a biography he's reading. It's about Mauno Koivisto, the president who butted heads with his own Social Democratic Party en route to opening Finland's 1992 bid to join the European Union.

"He didn't always pay too much attention to what people were saying," Kallasvuo says, warming to the point. "He believed in what he was doing."

Like the former president, Kallasvuo, 56, has had to develop a thick skin in his struggle to pull Nokia out of its swoon, Bloomberg Markets reports in its April issue.

Since "OPK," as he's known inside the company, took over the world's largest mobile phone maker in 2006, he has been hit by challenges on every front. Nokia, which put a Web browser on a phone during the Netscape era in 1996 and emerged as the must- have brand after its sleek 8110 model appeared in the 1999 movie "The Matrix," has stumbled in modern smartphones. Apple Inc.'s iPhone has been a particular bane.

In 1999, under CEO Jorma Ollila, Nokia reached the highest market value of any European company: 203 billion euros ($275 billion at the Feb. 24, 2010, exchange rate).

In 2007, the one-time rubber and paper maker from the icy realms of Finland posted a record 7.2 billion euro profit. By 2009, earnings had shrunk 88 percent to 891 million euros. Nokia shares tumbled 66 percent from 28.60 euros on Nov. 7, 2007, to 9.84 euros on Feb. 24.

Who's the Biggest?

Apple CEO Steve Jobs added to the pain in January. He proclaimed his company to be the world's biggest mobile device maker by revenue, saying that iPhones, iPods and laptops made up most of Apple's $15.68 billion in sales during the fiscal first quarter that ended on Dec. 26, 2009. Jobs' remark was enough to set the "Nokia Conversations" blog ablaze with comments— some agreeing that the U.S. upstart had an edge, at least in style points.

"I've been pretty down on the Nokia story for a while, partly because of their inability to come up with new devices," says Jeremy Gleeson, a London-based fund manager at AXA Framlington, who sold his Nokia shares in mid-July. "Their best days are behind them, and it's going to take a lot to get them back on track."

Kallasvuo is clawing back in smartphones, the palm-sized devices that typically cost $200 to $700 and can be used to place a call, edit a document or download a TV show.


Industrywide smartphone sales are forecast to surge 60 percent from 2008 to 2010 to account for $80 billion of the $188 billion handset market, according to research firm Gartner Inc.

The day after Jobs took his swipe, Nokia reported fourth- quarter sales of 8.18 billion euros ($11.24 billion) in its devices division, which, unlike Apple, has only one laptop model.

"Nokia is the world's largest maker of mobile devices, using the generally accepted and established definition," Kallasvuo told Helsingin Sanomat, Finland's biggest newspaper.

Nokia's share of smartphones worldwide rebounded to 40 percent in the fourth quarter from 35 percent in the third. Net income jumped 65 percent to 948 million euros, sending the stock up 9.9 percent on Jan. 28. Smartphones make up about 15 percent of Nokia's stable and contribute roughly half of its annual handset gross profit of 9.27 billion euros, according to Credit Suisse Group AG.

Playing Catch-Up

Kallasvuo is playing catch-up. In 2007, when Apple unveiled its touch-screen iPhone, most Nokia models featured 12-key telephone keypads. When Nokia introduced its touch screens the next year, they had cheaper hardware and menus designed for older models.

"What takes two to three steps to do on an iPhone or BlackBerry takes four to five on Nokia's N97," Francisco Jeronimo, a London-based analyst for research firm IDC, says.

Nokia has also struggled to offer the breadth of software that Apple fans enjoy. In January, Jobs bragged that a user had downloaded the 3-billionth iPhone application.

"Nokia smartphones don't have the applications that iPhone and Android do," says Yu Ji, a T-Mobile USA dealer in the Boston suburb of Burlington. "There's no wow feature. If I'm going to spend that kind of money, there's no reason I wouldn't get an iPhone."

Back in the Game

Meantime, Research In Motion Ltd.'s BlackBerry remains the top-selling QWERTY keyboard phone brand. And products by HTC Corp., Motorola Inc. and others using Google Inc.'s Android software are emerging as alternatives to the iPhone. At the end of 2009, almost half of Nokia's smartphones still had telephone keypads only.

Kallasvuo says he has a plan to put Nokia, based in the Helsinki suburb of Espoo, back in the game. The CEO, whose square face and black hair bring to mind Garrison Keillor of radio variety show "A Prairie Home Companion," says Finland's biggest company is changing from a phonemaker to an Internet leader that connects people through social networking and services tied to a user's location. Touch-screen smartphones are just the beginning.

"We're now in a combination of several industries: mobility, Internet, PCs, media, content," he says.

Beefing Up

In July 2008, Kallasvuo forked out $8.1 billion for mapmaker Navteq so Nokia wouldn't have to license maps from Tele Atlas NV or Google to let customers search for the nearest sushi restaurant. He has bought Loudeye Corp. for its music catalog, Cellity AG to manage contacts and Twango Inc. for photo sharing. Downloads on Nokia's Ovi Store—the word means door in Finnish—are up to a million a day. On Feb. 15, Nokia said it would work with Intel Corp. to make it easier to create applications for devices—from phones to tablet computers—from various manufacturers.

"The No. 1 priority is to improve the user experience," says Alberto Torres, whom Kallasvuo tapped to lead design and testing for new phones and software. Torres says his boss isnt shy in meetings. "One of his favorite sayings is 'That's not enough,'" Torres, 44, says.

Marko Ahtisaari, 41, who is in charge of the look of everything from packaging to software, says it's imperative to make smartphones simple and "kung fu smooth."

Recruiting in U.S.

Kallasvuo isn't hanging everything on smartphones. Altogether, Nokia shipped about 431.8 million phones last year to more than 150 countries, including Bangladesh and the Republic of the Congo. A 20-euro model has a flashlight for villages with scarce electricity. The $5,000-and-up Vertu line, sold in jewelry stores, features titanium and sapphire crystal.

The CEO is pledging a comeback in the U.S., where the once- hot Nokia brand is offered with cheap prepaid calling plans. He jets to the U.S. almost monthly to meet executives at U.S. headquarters in White Plains, New York. Nokia developers work in San Diego. Researchers are in Silicon Valley and Hollywood, California, and near the Massachusetts Institute of Technology. One of Kallasvuo's four mobile phones has a U.S. number.

"We've been very actively recruiting from Internet services: the Yahoos, Microsofts and Googles," says Niklas Savander, 47, one of two Nokia services chiefs. "It is of course frustrating for us who have long been in the industry that newcomers like Apple and RIM needed to teach us how to do it."

Taking on Apple and Google on their turf is one way to revive Nokia's buzz. In 1976, the year Jobs co-founded Apple, Nokia was making toilet paper and boots for Finns and phone cables for the Soviet Union.

'Friendly But Competitive'

Ollila shed nonphone businesses, pushed industrial design and built factories in Hungary and China. Ericsson AB and Motorola couldn't keep up. Nokia customers embraced their phones as fashion statements. The chrome-plated 8810 designed by Frank Nuovo was a style icon. In 1998, Nokia became the world's top mobile phone maker by market share.

During those heady days, Kallasvuo returned from two and a half years of running Nokia's Americas business from Dallas.

"I loved that," he says. "I would have stayed, but the assignment was not forever."

The U.S. tech industry was a far cry from Finland. Biology teacher Kaarina Valkealahti recalls young Olli-Pekka riding his bicycle past pastel-tinted houses in Raahe, about 175 miles (280 kilometers) from the Arctic Circle.

"He was a very determined student, friendly but competitive," she says.

Not a fan of cold nor of four-hour twilit days, Kallasvuo escaped south to study law at the University of Helsinki in 1972.

'Earn My Living'

"I just wanted to earn my living and not disappoint my parents," Kallasvuo says before pausing. "I'm not really comfortable talking about myself."

Kallasvuo joined Nokia's legal department in 1980 and made an immediate impression on Kari-Pekka Wilska, who was running Nokia's mobile phone business. "KP" was upset at first that headquarters had sent a rookie to help draft an agreement with a Swedish company bringing its managers on as partners.

"When I was walking him out, he stopped me and said, 'If I were heading this business, I wouldn't sign that contract,'" Wilska says, recalling that Kallasvuo didn't like the partnership idea.

Wilska backed out of the partner deal and brought on the Swedes as employees instead.

"I never forgot that, because it's very rare that you get good business advice from a legal adviser," he says.

'A Kind of Jockeying'

Kallasvuo shifted to finance in 1988. The board made him chief in 1990. When Ollila became CEO in 1992, he and his reserved CFO slimmed Nokia to its mobile phone units and traveled to convince investors beyond Finland to buy its new shares.

"Olli-Pekka told me they talked every day at the same time for like 10 years," says Mary McDowell, 45, an American executive vice president at U.S. headquarters and Nokia's highest-ranking non-Finn.

McDowell, who spent 17 years at Compaq Computer Corp. and Hewlett-Packard Co., says Nokia embodies Nordic taboos against overt power displays.

"In American companies, there's a kind of jockeying: how am I doing, here's my new car, here's my new house on the golf course," she says. "You don't see any of that here."

Kallasvuo fit the egalitarian mold. In February 2007, less than a year after he took over, some employees in Finland walked out to protest job cuts and reduced bonuses.

'Behind the Screen'

"Engineers and programmers went on strike, which was remarkable in Finland," says Ari Hakkarainen, a former Nokia manager and author of a history called "Behind the Screen." Kallasvuo apologized in a video blog entry, saying the rules would be rewritten, and gave up part of his annual bonus.

"People responded very well, and it was immediately solved," Hakkarainen says.

Kallasvuo had bigger troubles outside Finland. Customers increasingly viewed Nokia's bar-style phones as boring.

Motorola's Razr flip model pushed Nokia phones off U.S. shelves. BlackBerry grabbed Wall Street and the corporate market. Then came Apple, which, as Jobs promised, reinvented the phone.

Users who expected a quick response were disappointed. British actor Stephen Fry, a self-described Nokia fan, called the company's first high-end touch-screen model "a crushing disappointment."

"No one who has used an iPhone would do anything other than laugh, weep or bray with contempt," he wrote on his blog in June.

Plowing Ahead

Kallasvuo plowed ahead. He added phone features to a minor line of tablet computers that connected to the Internet via Wi-Fi. The resulting N900 runs several applications simultaneously on its touch screen and also has a slide-out keyboard, countering some Apple shortcomings.

"The screen has a lot more resolution than the iPhone; the keyboard is much better than Motorolas Droid," Silicon Valley radio show host Leo Laportesaid in December.

Kallasvuo is also fighting in court. Nokia sued Apple in October, saying that the U.S. company infringed patents and seeking back royalties on every iPhone sold. Apple countersued in December, saying Nokia infringed its patents. The two have filed complaints with the International Trade Commission to stop the sale of each others products in the U.S.

Active Users

As the legal battles play out, Kallasvuo is tracking how many of Nokia's more than 1 billion customers tap the Ovi portal. He wants 300 million active users by the end of 2011 so he can sell them more downloads and show them ads.

Video screens around the company remind workers of the goal, which influences 10 percent of their individual bonuses. Nokia had about 65 million active users in mid-February after adjusting its measurement methods. McDowell notes that bonuses now depend on the success of complete products rather than just on finishing hardware on time.

While Kallasvuo has his sights on competitors like Apple, he talks more willingly about what's going on inside Nokia.

"There is so much commentary," he says of posts—both signed and unsigned—on internal blogs that are reserved for employee comments. "People can say a lot without fear, and they say stuff because they want to change Nokia."

The company extended the dialogue to outsiders in April 2008 with the Nokia Conversations blog, which is available to anyone. One comment posted in January observes:

"Why are Europeans and other high-income populations abandoning Nokia and buying Apple? Because they have better phones."

After meeting with Bloomberg News in December, Kallasvuo bustled off to talk about software with 250 employees.

"These people are not shy," he says.

Nor are investors. "A year from now, iPhone, Android, RIM will have evolved," says Kulbinder Garcha, a London-based analyst at Credit Suisse. "Investors don't want to be having the same conversation next year about whether Nokia can come back."

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