Nokia’s 140,000 word 2010 report: Risks of the Nokia-Microsoft partnership, Elop’s Contract + more

Ins and outs of Nokia:

MS-Nok partnership aims, risks and other Nokia activities.

There’s a document available – Nokia’s Annual Report for 2010 which documents the complete ins and outs of the company.

It’s over 140,000 words long, spanning over 270 pages. Tomi Ahonen has warmed us to lengthy Nokia related pieces but this is something else.

http://www.sec.gov/Archives/edgar/data/924613/000095012311024458/u10545e20vf.htm

The document covers pretty much everything of the ins and outs of the operation at Nokia though what I thought was interesting in the time I read through:

1. Reasoning of the Nokia-MS Partnership
2. RISKS of the Nokia MS Partnership << VERY, VERY, VERY Detailed account of nearly EVERYTHING that could go wrong from the Nokia Mirosoft partnership. It seems that it’s good if Nokia has taken such extensive risk assessment that despite all those risks, the Nokia-Microsoft Partnership is still THE BEST OPTION.
3. Stephen Elop’s Contract. Nearly 7 Million to join, plus salary details.
4. R&D
5. Competition
6. Future Plans
7. Miscellaneous stuff of interest

1. Reasoning of the Nokia-MS Partnership

• Current smartphone platform uses Symbian, investing own resources to provide royalty free OS.
• Also working with Intel to develop MeeGo.
• Other smartphone platforms with related ecosystems have gained significant momentum and marketshare, specifically iOS and Android.
• “Until very recently, we believed our competitive position in smartphones could be improved with Symbian, as well as MeeGo, and our strategy based on those platforms. We are now of the view, however, that for the longer term our Symbian platform is not sufficiently competitive in leading markets.“

• “…broad strategic partnership with Microsoft that would combine our respective complementary assets and expertise to build a new global mobile ecosystem for smartphones”
• Microsoft partnership will provide Nokia to innovate and customize the Windows Phone platform that will differentiate Nokia’s smartphones from competitors on WP.
• MS partnership will provide opportunities for revenue sharing from combination of services, e.g. location based assets with MS’s search and advertising platform.
• During transition to Windows Phone, Symbian investment will be leveraged.
• Strategy aims to retain and transition installed base of approximately 200 million Symbian owners to Nokia Windows Phone.
• We will continue our development of MeeGo with increased emphasis on longer-term market exploration of next-generation devices, platforms and user experiences.
• We expect the transition to Windows Phone as our primary smartphone platform to take about two years. (2011, 2012)
• Not android though it is free – Difficulty in product differentiation, potentially increased risk of commoditization resulting in downward pressure on pricing

2. RISKS AND UNCERTAINTIES OF THE PARTNERSHIP

This portion of the report discusses the risks and uncertainties of the Nokia MS partnership. This is quite heavy reading and I guess should be a post in itself. This includes risks due to failure in expectations, failure on Nokia’s part to deliver.

• Going WP forgoes more competitive alternatives that might have achieved greater and faster acceptance in the smartphone market. E.G. Android, but may be even MeeGo.
• Partnership may not be entered into a timely manner or in terms beneficial to Nokia.
• Failure to finalize partnership or benefits of partnership leaves Nokia with limited options and competitive alternatives may not be available quick enough or at all.
• WP is very recent, largely unproven to market focused on high end smartphones with very low adoption and consumer awareness relative to Android and IOS. NOK-MS may not succeed in developing it into sufficiently competitive smartphone platform.
• Transition to WP may prove too long to compete effectively given ongoing developments of other competing smartphone platforms. BLOODY DELAYS.
• Ability to innovate and customize on WP may not materials as expected to produce the differentiating factor from competitors. I thought they would stay with minimal customization anyway?  Though the option is there.
• Nok-MS may not achieve the necessary scale, product breadth, geographical reach quick enough to be sufficiently competitive.
• Microsoft partnership may erode our brand identity in markets where we are strong and may NOT enhance our brand identity in markets where we are weak. Association with MS brand may impair current strong market position in China and may NOT accelerate Nokia’s access to increasing market share in the United states.
• New sources of revenue, e.g. increased monetization opportunities from services and intellectual property rights may not materialise as expected if at all.
• Bing and NAVTEQ integration with adCenter to generate to revenue may not materialize as expected or at all, decreasing value of Nokia’s location based assets.
• May not be a profitable business transitioning from royalty-free in house smartphone platforms to royalty-based windows phone platform, possibly due to inability to offset higher cost of sales resulting from royalty payments with new revenue sources and reduction of operating expenses, particularly R&D.
• Nokia needs to continue to innovate and find additional ways to create patentable inventions and other intelectual properties as they are no longer developing hte core platform technology for their smartphones. This means they may not be able to generate sufficient patentable inventions or other IP to maintain the same size/quality of patent portfolio Nokia has had historically.
• Mode of working or culture may not change to enable working effectively and efficiently with MS to realise stated benefits in timely manner.
• Implementation of NOK-MS requires significant time, attention and resources from senior management and others in organization, potentially diverting attention from other aspects of Nokia’s business.
• Partnership may cause dissatisfaction and adversely effect business with current partners, mobile operators, distributors and suppliers and prevent ability to do business with new partners, mobile operators, distributors and suppliers.
• MS partnership may cause disruption and dissatisfaction among employees reducing motivation, energy, focus and productivity, causing inefficiencies and other problems across the organization, leading to loss of key personnel and related costs of dealing with such matters.
• May not have or be able to retain/motivate appropriately skilled employees to implement WP platform.
• May be required or choose to share personal or consumer data with MS, which could increase risk of loss/improper disclosure or leakage of personal/consumer data or create negative perception to maintain confidentiality of data.
• No tablets in mobile product portfolio which may result in inability to compete effectively in that market segment in the future or forgoing potential growth opportunity.

3. Stephen Elop’s Contract

• Annual Gross Salary (not including bonus…100-150%) is 1.05EUR. OPK was 1.233 EUR.

• On Joining Nokia, Elop is to receive in total, nearly 7M USD/>5M EUR (1M EUR in fees/legal expenses)
  • 2,292,702 EUR for loss of income from moving from previous employer. Oct 2012.
  • 3,000,000 USD in Oct 2011 second payment (2.16M EUR)
  • 509,744 EUR to reimburse fees obligated to repay former employer.
  • 312,203 income, inducing tax assistance, resulting from legal expenses paid by Nokia associated with his move to Nokia
• In case of EARLY TERMINATION of employment, Elop is obliged to return to Nokia all or part of these payments related to his move to Nokia.
  • Termination by Nokia rewards 18month severance. Forfeit equity.
  • Termination by Elop, 6 month notice. Forfeit equity.
  • “In the event of a change of control of Nokia” elop may terminate employment, +18 month severance. Change of Control of Nokia? By new CEO or like a buy out?
• 500,000 stock options, 75,000 performance shares at threshold performance level and 100,000 restricted shares.
• Severance of OPK was 5M EUR. Equity under the plan was forfeited and reduced actual liability to EUR 10 154 000 as OPK’s employment was terminated before reaching retirement age (60. OPK is 57)

• The value of the stock awards with performance shares valued at maximum (four times the number of shares at threshold), for each of the named executive officer, is as follows: Mr. Elop EUR 2 718 091; Mr. Kallasvuo EUR 4 854 540; Mr. Ihamuotila EUR 1 753 078; Ms. McDowell EUR 1 586 091; Mr. Öistämö EUR 1 623 653; Mr. Savander EUR 1 586 091; and Mr. Simonson EUR 1 919 984.

4. R&D

• Devices and Services’ Research and Development expenses is 3.0Billion EUR in 2010, WITH 16,134 employed in R&D.

• In Recent years, the Nokia Research Center has been a contributor to almost half of Nokia’s standard essential patents.

• Nokia Research Center’s research agenda is focused on four core areas:

1. Sensing and Data Intelligence: Interactions between people and their surroundings, location, and social environment provide the basis for new classes of services in areas such as traffic, health and entertainment, enabling new business models to emerge.
2. New User Interface: Future user interfaces will utilize intelligence and context-awareness to enhance user experiences, integrating the personalized and adaptive aspects of devices with data-sharing capabilities.
3. High Performance Mobile Platforms: Research focuses on improving the performance-to-power ratio, delivering new sensing capabilities as well as extending platform architecture to enable interoperability and facilitate application development.
4. Cognitive Radio: Research in this area examines ways to utilize wireless spectrum dynamically to improve connectivity and capacity and enable large-scale sensing.

5. On Competition

• Major value and volume of growth is in smartphones
• Tablets, eReaders have emerged . Not replacing mobile phones but is a secondary device.
• Strategies and tactics:
  • Certain competitors choose to accept significantly lower profit margins than we are targeting.
  • Certain competitors have chosen to focus on building products and services based on commercially available components and content, in some cases available at very low or no cost.
  • Certain competitors have also benefited from favorable currency exchange rates. For instance, the depreciated level of the Korean won against the euro and US dollar continues to benefit our Korea-based competitors. Further, certain competitors may benefit from support from the governments of their home countries and other measures which may have protectionist objectives.

6. Future plans

Finally, we believe that we must invest to take advantage of future technology disruptions and trends. Through ongoing research and development, we plan to explore and lead next-generation opportunities in devices, platforms and user experiences to support our industry position and longer-term financial performance.

We expect 2011 and 2012 to be transition years, as we transition to Windows Phone as our primary smartphone platform and we invest in building a new ecosystem with Microsoft. During this transition, we believe that our Devices & Services business will be subject to significant risks and uncertainties. Those uncertainties, among others, include consumer demand for our Symbian devices and potential market share losses as competitors endeavor to capitalize on our platform and product transition. Therefore, we believe that it is not appropriate to provide annual targets for 2011 at the present time. However, we expect to continue to provide short-term quarterly forecasts to indicate our progress in our interim reports as well as annual targets when circumstances allow us to do so.

 

Over the longer-term we target (quite generic stuff):

• Devices & Services net sales to grow faster than the market, and

• Devices & Services operating margin to be 10% or more, excluding special items and purchase price accounting related items.

(Our operating profit for 2010 increased 73% to EUR 2 070 million, compared with EUR 1 197 million in 2009. The increased operating profit resulted from a decrease in the operating losses at Nokia Siemens Networks and NAVTEQ somewhat offset by a lower operating profit in Devices & Services. Our operating margin was 4.9% in 2010, compared with 2.9% in 2009)

We believe that our Devices & Services net sales and profitability are currently driven primarily by the following factors and trends:

• Continued convergence of the mobility, computing, consumer electronics and services industries;

• Increasing importance of competing on an ecosystem to ecosystem basis with new monetization models;

• Increasing challenges of achieving sustained differentiation and impact on overall industry gross margin trends;

Speed of innovation, product development and execution;

• Increasing innovation in the mobile phone market; and

• Operational efficiency and cost control.

7. Miscellaneous things I found interesting.

Motorola Acquisition

On July 19, 2010, Nokia Siemens Networks announced that it had entered into an agreement to acquire the majority of Motorola’s wireless network assets for USD 1.2 billion. Under the terms of the agreement, Nokia Siemens Networks will acquire assets related to the development, manufacture and sale of CDMA, WiMAX, WCDMA, LTE and GSM products and services,

Environmental Management at Nokia

Nokia aims to be a leading company in environmental performance.

I missed out many other things including info about NAVTEQ/NSN.

sec.gov via businessinsider

cheers Alan for heads up.

Tags: featured

Category: Maemo, MeeGo, Nokia, Rant, Symbian, Windows Phone