Building the Third Ecosystem

Stephen Elop, the new CEO of Nokia, has his work cut out for him. Reinventing Nokia as a smartphone manufacturer is only part of the challenge – a broader objective is in stopping Google from dominating the market.

On 21 April 2011 Nokia and Microsoft ratified the partnership that they announced in February. The Finnish cellular giant has hit an all-time low in terms of its smartphone market share with its Symbian operating system being displaced by Google’s Android that is now the leader with an estimated 33% global market share. With Microsoft in tow, it’s all eyes on Nokia’s new CEO Stephen Elop and the company’s next move that will be a Windows Phone-based device promised by the end of the year. I met with Elop in Dubai in March to discuss his strategy for re-establishing Nokia in the smartphone market and perhaps diversifying its product range. Emerging markets and new revenue streams were also put on the table – but Elop pointed to a more serious war underway in terms of mobile ecosystem providers. The agreement Elop has struck with Microsoft goes beyond Windows Phone. The two companies will also work on a new advertising platform that will make its way into Xbox LIVE, Windows Live, Bing and other Microsoft product sets. This platform will provide Nokia with a fresh revenue stream and should be music to Nokia shareholders’ ears. Nokia as a smartphone manufacturer is only part of the challenge – a broader objective is in stopping Google from dominating the market.

In with the old

The focus, however, remains on Nokia’s core business as a device manufacturer. Success in this space will depend on the company attracting developers to its platforms, and this includes existing systems. Developers I have spoken to are not convinced. They see Symbian as a dead-end street. If anything, they are looking to Windows Phone as a potential platform – but many will switch to developing for Android or iOS instead. Winning them over – or back – has to be a preoccupation for Nokia and is something Elop is fully aware of. “I think the best message for a developer to embrace, if you like, is to look closely at the strength that Nokia has, and what we bring to the market as it relates to Symbian today, and in the months and years ahead – because Symbian still has a large role to play even as we transition and focus on other things in the future,” he says. “For example, in my recent travels, which have included the Middle East and Africa, where we are today, last week in Russia and so forth, there is a wide range of markets where Nokia the brand and Symbian the platform are remarkably strong,” continues Elop. “And as we’ve described, we expect tens of millions of devices still to ship in the months and years ahead. There’s a tremendous opportunity there for developers, because when you look at the absolute scale of the operation, you say ‘wow, there’s something really there’, and so we’re definitely encouraging developers to continue with that, while also recognising that we hope to create a new opportunity around Windows Phone in the future,” he adds. Another challenge facing Nokia is how it will differentiate itself from other Windows Phone manufacturers. Services would be an obvious way to achieve this and Nokia has a powerful set of services grouped under its Ovi brand. However, the Microsoft agreement will see Nokia handing its services over for integration into Windows Phone and to the benefit of all manufacturers shipping the operating system. It seems a curious move at first, until Elop outlines his objectives. “First of all, the highest order point of differentiation that we need to focus on is Windows Phone versus Android versus Apple,” he explains. “Our number one competitor isn’t a Samsung or an HTC or whatever – it is Android. And so as we proceed in the months ahead, our expectation is that we have to take steps to ensure that the Windows Phone ecosystem is very strong and very powerful. Whether it’s us or even our competitors within Windows Phone who have access to some of the best technologies, we want to make sure that the platform holistically is very strong,” says Elop. “Now that being said, we have a number of different areas, be it in services, in hardware or in software, that can and will contribute to our efforts to ensure that we can differentiate,” he continues. “While mapping and navigation and location-based services are something that are crucial in the ecosystem, we will also make sure that we do unique and differentiated things on our devices, within that ecosystem, so that we work to stand apart from everybody else. But again, I emphasise, our principle competition is Android.”

Turning it around

Windows Phone had a less than ideal launch phase and uptake has been slow, to say the least. Last year Microsoft’s global market share in terms of smartphones was estimated at 5%. This year it has actually lost ground and dropped to 3%, according to Canalys. Elop and his colleagues at Nokia obviously think that this can be turned around. “I think there’s an opportunity to first of all differentiate on the range and quality of services that are provided within that ecosystem. For example, Microsoft brings certain properties – take the Xbox gaming environment, which in certain environments is a very powerful capability,” he says. “I think that we also bring a quality of mapping and location-based services that is better than and is differentiated from everything else, so there are elements of that. But when you look at it from a developer perspective, there’s actually a range of things you consider: does it have breadth, are there lots of people using Windows Phone devices? Well, not today – but clearly with the relationship between Nokia and Microsoft, we believe that there will quickly be tens of millions of people who are using these devices,” states Elop. “There needs to be great monetisation for the developers,” he adds. “Nokia brings operator billing with more operators in more countries and regions around the world than anyone else by far, and that we will bring to the ecosystem for general use,” he promises. “Developers need great tools; they need a solid development platform. Clearly that’s part of it already in terms of what Microsoft brings to the table. And then of course developers need the support from the vendors, such as Nokia. For example, here in Dubai today we’re asking what we can do with developers to help them build local applications and local capability,” he says. “At Ramadan, for example, there were applications supported and encouraged by Nokia, delivered by our development community, that were unique for this region at that time of the calendar. And it’s those types of things that we will do to ensure that this is a great platform for developers to target as they go forward.”

Building out

There has also been speculation that Nokia is working on a tablet device. In the past we have seen diversified products from the company, such as its Booklet 3G laptop computer. Elop sees potential for other devices in the future, but isn’t sold on tablets unless Nokia can do something wholly different with the form-factor. “We are building and contributing to this ecosystem with the belief that the opportunity is much larger than mobile phones, smartphones – however you would characterise them,” he explains. “The challenge I have for our team is to make sure that as we enter adjacent markets, that we have a unique and differentiated position. Today you can go and buy one of 150 or 180 – I’ve lost count – different tablets out there that frankly you can’t tell apart, and most of them aren’t particularly useful for much,” says Elop. “There are a couple that are very successful and we know who some of those are, at least one of them, and that’s fine. But Nokia has to look at itself – its market opportunity, the strength of its ecosystem, the geographies where it has strength – and consider what we can do that sets us apart and goes after a unique opportunity.” He continues: “We have some specific ideas, but are not announcing things there today. It’s not just about tablets – there are other devices, platforms, things that can be done, that take advantage of the ecosystem, and contribute to the ecosystem, and these are places where you may see us play in the future.” Nokia is also looking to emerging markets as a key strategy for the future. In these markets it has tried to play a more meaningful role than some of its competitors who are very good at talking the talk instead of delivering real value. I ask Elop whether Nokia has placed an emphasis on hyper-localised content that is not only designed for particular regions, but is actually developed by local developers. “You’ve just described a key element of our strategy, and that is the local aspect,” agrees Elop. “Local content, local applications and local services are hugely important to our efforts to differentiate. And indeed the strength of the Nokia brand in emerging markets and Africa and other places is largely because we have delivered more than anyone else on the promise of a great experience that makes sense within your local environment,” he adds.  “While other ecosystems and players churn out devices at a furious rate, we’re far more focused on making sure that you have a great experience that connects you. You know our overall statement about the company – ‘connecting people’ – well, that’s about connecting people with their community, with the environment in which they operate, with opportunity. That’s what Nokia is focused on. “And so, when you think about it, yes we’ll have great devices, we’ll have wonderful software and services that go with that, but to the extent that we deliver an experience that is unique and differentiated in the environment in which people are working … you’ve seen it already,” he says. “And we can go so much further with that. That’s part of the excitement that travelling around to these different regions is: you feel that, you meet people whose lives have been changed by the experience. And that’s not just about placing a phone call, or doing an SMS, it’s the whole experience.”

The next billion

Nevertheless, manufacturers still have a long way to go in terms of scaling prices for the broader market in developing economies. Nokia has managed to get its non-feature phones down to ridiculously low prices, but smartphones are still just out of reach of the average emerging market user. This is changing rapidly, however. Elop believes that affordable devices in terms of these markets is around the corner. “I think it’s much sooner than people realise. The rate at which price points can be addressed, starting at the high end and moving well down, with smartphone experiences or ‘smartphone like’ experiences even plunging below the prices [$100 mentioned in discussion], I think there’s a lot of opportunity there,” he says. “There’s work that we’ve already done to bring some elements of a ‘smartphone like’ experience to very inexpensive handsets. The thing that I keep in mind, and this is particularly true in a region like Africa, is that today 80% of the world’s population is within cell phone signal range,” continues Elop. “They’re close enough to a tower, and yet only 20% of them have had an Internet experience. And that’s why we’ve called this strategy ‘the next billion’. How do we bring the next billion to their first Internet experience, to give them their first banking experience, using their device? Some of that is smartphone capability, some of it is lower in the price point than that, but I think you’re going to see things come down much faster than anyone would have previously predicted,” he says. “And in our relationship with Microsoft that was a key part of the conversation with them: to make sure we jointly agreed to that, understood how it would be done, and could begin the engineering work to make it happen.” Elop reinforced his previous statements that the first Windows Phone-based Nokia product will be on sale before the end of 2011. One can only imagine the kind of frenetic work underway behind the scenes at Nokia to pull that one off. The smartphone market is inherently frenetic. Apple set the pace when it committed to annual iPhone updates. The market scrambles to keep up and revisions come hard and fast. Android seems an unstoppable force at the moment, but Elop apparently sees it as inevitable that Google is kept away from a dominant market share. Microsoft and Nokia need each other and may just be the perfect combination to bring the fight to Apple and Google. By this time next year we should know for sure.

The markets were abuzz with rumour and speculation. Skype had been on the market for a bit and many were rumoured as suitors. Google was mentioned, as well as Facebook; both were well credentialed as purchasers of smart companies in the past. It was however another large tech company that did the deed in the end – one many considered the most unlikely. Microsoft finally bought Skype for a whopping US$8.5 billion and put paid to all the rumourmongering. Skype had revenue of $860 million and operating profits of only $264 million, which after expenses resulted in a small loss of US$7 million for the year 2010. What was of more concern to many was its long-term debt of US$686 million. The question that had to be asked was why Microsoft would buy a loss-making company with huge debt. And of even more importance was why Microsoft would pay an amount that made Skype its largest single acquisition ever. Skype has an interesting and, for some, rather chequered history. The creators of the Skype software were the founders of Kazaa, which was a peer-to-peer file-sharing application that was used to share MP3 music files, much to the horror of music companies worldwide. The founders of Skype, Niklas Zennström from Sweden and Janus Friis from Denmark, sold the company to eBay for around US$3 billion and shortly thereafter Skype reached 100 million users in early 2006. Skype became the technology of choice for anyone with loved ones overseas or who welcomed a simple and inexpensive way to communicate with anyone else who had a computer and a reasonable internet connection. The cracks began to show in 2008 with the Skype founders and eBay not seeing eye to eye on many issues, not least that the number of subscribers had plateaued, and financial metrics had not been met. In late 2007 eBay had taken a so-called "impairment", essentially a write-off, of its investment in Skype of US$1.4 billion. The marketing and the Skype product were revamped with greater focus on premium services aimed at business and consumers. These efforts resulted in solid growth throughout 2009. At this point eBay announced it would spin off Skype through an initial public offering or IPO. To cut a long story short, much legal wrangling ensued and the IPO looked somewhat uncertain. The key issue at that point was that Skype was valued at around US$2.4 billion and then they hit the big time. Microsoft bought Skype for three times its value 18 months ago. Microsoft has been in the news a lot lately and it is perhaps in this context that the purchase of Skype may make some sense. In my opinion it was an extremely strategic and well thought-out purchase. Microsoft is on a bit of a roll and has not been seen to put a foot wrong since its launch of Windows 7. After the huge failure of Windows Vista and the publicity nightmare that caused for Microsoft, the Windows 7 series – both the desktop and the new Mobile OS – have been a breath of fresh air. More fundamentally, along with the new software came a new outlook from Microsoft. Gone were the days of closed techie-based software, and in came an era of openness and apparent concern for what customers wanted from Microsoft, and what they wanted from its software. It is also clear that Microsoft realised that the future of communication was increasingly mobile and would become more and more integrated and converged. Microsoft already had a huge Skype-type service called Windows Live messenger, which offers free voice and video chat services to around 330 million active users on a monthly basis. Skype actually has around 120 million active users at any point in time, with a lower number of concurrent users than Windows Live messenger. The key differentiation here is that Skype has around 8.5 million paying users of the service whilst Windows has none. Skype also has outbound and inbound points of presence globally, allowing users to break out into traditional telecommunication networks on a global basis. In fact Skype currently is a major player in international call minutes across all networks, both mobile and fixed. These attributes alone would make Skype an attractive addition to the services that Microsoft currently offers, such as Lync, Live Messenger and various Exchange services. The other key issue is that the Skype service was predominantly a video service and with 180 million people actively using Skype to make video calls from all manner of computers and devices it was a compelling and attractive proposition, especially as more and more users are migrating to faster flexed landline and mobile platforms such as fibre to the home, and 4G LTE for mobile. Internet-based video calling is becoming one of the fastest growing sectors in communication. Microsoft is currently a bit of a slumbering giant: the bottom line is if Microsoft switched off all its current licences for all the servers and desktops out there worldwide, the world as we know it would stop. The same can't be said for Google or Apple. Microsoft has a huge portfolio of products and patents that run the entire gamut of technology, and almost all companies involved in tech today owe it some of their success – and may in fact be paying Microsoft for some technology in use in their offerings. What Microsoft currently lacks is a coherent – and may I say 'cool' – consumer strategy. The elements are there: Windows 7 on the desktop, Xbox in the lounge, Windows phone 7 emerging from your pockets, Bing pretty much everywhere, and much of the behind the scenes server technology that runs all the above. Skype represents another building block in Microsoft's determination to become globally cool and dominant once again. Mobility and converged communication is a given going forward, and despite the price Microsoft paid for Skype, and taking into account that much of Skype's technology is already owned by or could easily be replicated by Microsoft, the purchase of Skype was a canny one for Microsoft. Skype is a well-known and respected service. In the words of a noted magazine publisher: "It is personally, I think, the single most useful work tool I use in my daily life ... (It) just makes comms so easy." In a nutshell, that is why Microsoft paid what it did. Once we see Skype on our Xbox, TV, mobile phone, office phone, public phone, in fact everywhere, we will finally understand why Microsoft needed to buy Skype.

Q&A with Samsung's Paulo Ferreira (PF), Head of Product & Business Solutions and Brett Loubser (BL), Business Development Manager, Mobile Applications

This issue of Africa Telecoms is focused on VAS, apps and operating systems (OS) for mobile. In your personal opinion which OS currently has the best software and apps? And why do you say that?

PF: Quality of apps is subjective. However, what we're seeing in the market is the popularity of both the Apple iOS app store and the Android market. The growth of the Android market in particular has been phenomenal and the result of Google's attraction to developers, locally included. The recent announcement of a paid-for Android market in Africa is further evidence of Google's commitment to fostering a vibrant and healthy developer ecosystem.

BL: It is a difficult question to answer simply, because the 'best' application is the application one would use the most and of course we all have such wonderfully diverse lives these days. This is a highly competitive environment at present, and perhaps a better way to look at this in the African context is to evaluate which OS is most relevant for Africa. My money is on Android without question. We are delivering Android devices at highly competitive price points, building a platform for relevance in Africa that is unmatched.

Samsung seems to be offering three smartphone OSs at the moment, Android, bada and Windows Phone 7. Are Samsung planning on launching devices with all three operating systems in South Africa?

PF: We currently have devices with all operating systems locally (for example, WP7 = Omnia 7; Wave = Wave II; Android = Galaxy SII).Our smartphone platform support is admittedly biased toward Android, as this is where the consumer interest and demand is at present.The above choice of platform is part of Samsung's strategy to offer consumers and business customers a choice of operating system. The bada OS is proprietary software developed internally.

Do you think that it is a serious competitor in a market dominated by Android? And how does Samsung plan on growing the app ecosystem for bada?

PF: One needs to understand the positioning of bada. Samsung introduced the platform to ensure that we have smartphone offerings in the lower price points. bada has achieved that successfully for us globally and it's very much part of our strategy moving forward. We're also engaging with the developer communities to ensure that localized content is available on these devices and that they use the platform as a revenue opportunity moving forward.

At the recent VAS Africa event held in Johannesburg, the contention was made by various delegates that applications are simply next generation VAS offerings not using USSD technologies. This would seem to indicate that apps would take over from VAS. Do you agree and how do you see this development in the future?

PF: The question I would propose is: Who owns the valueadded services? Corporate vertical apps fall within their own space and need to be differentiated here too. The paid app versus the free app market seems to be changing substantially, with more and more people being prepared to pay for apps. Is this trend happening in Africa?

PF: The positive reaction to the Android paid market in the continent would suggest this. Paid app stores offer more choice to the consumer (premium apps, for example) and a mechanism for developers to monetize the apps. Important too is the mechanism for payment of these applications and here the OEMs, operators and app stores need to ensure that the billing mechanism makes it attractive for the consumer to download paid content.

Samsung has recently launched SamsungDive. Could you give a brief overview of the app and why you think it is such an important development?

PF: If you've ever lost your phone, you'll know it can be very frustrating.As smart phones become ever more sophisticated, we can store more personal information on them, and the loss of your phone can be far more than an inconvenience. The SamsungDive service will help your peace of mind by being able to see where you used it, and if you have lost it you can wipe your personal information. Samsung recently teamed up with the various universities around South Africa in an attempt to build the app developer community in South Africa.

Would you consider the first couple of months of the programme a success? What has been your best experience in being involved in this programme since its inception?

BL: We are incredibly excited about the opportunity with the educational institutions in SA. As it goes with the application creation environment, a few months is not necessarily going to show huge results. However we have been given visibility of some of the projects underway: watch this space for some exciting developments!

The term "local is lekker" is very South African, however it introduces an interesting question. How much do you think local content in Africa will drive app usage in the future? And what is Samsung doing to develop local content across Africa?

BL: We believe at Samsung that this is imperative to the longterm success of our application environment. Much of our focus is on building locally relevant applications and building lasting partnerships with the local developer community. Samsung have invested hugely in Africa this year, and we are delivering on our "Built in Africa" plan. Apple and Android are certainly dominating the app ecosystem at the moment.

Do you feel that the Microsoft offering of Windows Phone 7 and Samsung bada have what it takes moving forward to compete on the app developer front and as an ecosystem?

BL: Samsung also currently support WP7, and we believe that the platform certainly shows promise for the future. Ultimately bada will remain significant within the Samsung environment. We have already started delivering unique value in our bada store: for example, premium SMS billing is now supported, which is significant in our market.

We believe that the bada environment will show clear and specific value in the African context. And why do you feel that Apple and Android are in such a dominating position?

BL: In my opinion, this comes down to user experience and application diversity. Delivering simple usability first, and creating an environment that draws developer engagement is a winning recipe. Android's amazing growth – superseding the Apple environment in terms of device deployments – also shows the importance of device diversity and affordability.

The Samsung Forum this year was held in Nairobi, Kenya. It was themed: "Develop technology to building Africa for Africans by Africans". What does this mean to you?

PF: Samsung believes in the mantra of being a first-class corporate citizen in the African continent. Not only do we sell our innovative products to the African consumer and business customer, but we are also committed to making those products relevant for the local market. With this in mind, Samsung has embarked on ensuring that we take feedback from our customers and incorporate this feedback into our products – by adapting them for the African market. The same applies to software, apps and content, where we're working with local developer communities and content providers to ensure that it's locally relevant.

BL: It is such an exciting time for Samsung in Africa. No other organization has the research and development power across this wide a portfolio of product, and the focus in Africa shows this. This year Samsung will be delivering product throughout the range that takes into account the special needs in Africa. Mobile phones with a month of battery standby and fridges with built-in backup batteries are just two examples of the innovation being delivered. Of course this theme will be followed through on the application side too. We have already seen amazing innovation coming from this continent from a mobile development perspective. We aim to nurture this talent and give it the exposure it deserves. Africa is an environment with huge potential. We believe that our initiatives will help Africans access a richer, more interactive mobile experience.