Nokia Knew Not to Challenge Samsung Directly

Stephen Elop left Microsoft to become Nokia CEO in September 2010. Just months later, he sent out a candid memo to employees that acknowledged the company's troubles, comparing its ecosystem strategy to a "burning platform." A day later, Nokia would partner with Elop's former employer. The Apple iOS and Google Android duopoly was already starting to take hold, so investors couldn't help but wonder why Nokia didn't just go with Android.

Now we know what Elop was afraid of. At Nokia's Lumia 1020 unveiling last week, Elop said that the way that the Android ecosystem is structured, it became clear that there was a "very high risk that one hardware manufacturer could come to dominate Android." The open-source nature of the platform ensures an intense level of competition within OEMs, which accelerates commoditization and margin degradation. Chances were good that one OEM could grow to rule the platform on the hardware front, and exert tremendous control over Android's overall direction.

That OEM has emerged -- it's Samsung, which used Android to become the No. 1 smartphone vendor by units in late 2011, just months after Nokia's switch. Elop hinted that he suspected Samsung, saying a company with deep pockets and extensive vertical integration was the most likely to come out on top.

Nokia's unit volumes would decline as the long transition away from Symbian began, which is now nearly complete.

Source: IDC.

Elop also continues to see a strategic opening in offering a differentiated platform, even though he was well aware that Windows Phone is a challenger facing an uphill battle. As wireless carriers have an incentive to diversify the platforms they offer with the hopes of lowering subsidy expense, they would be willing to give Windows Phone a fair shot at becoming the No. 3 player.

The CEO's fear of a dominant Android OEM have proven justified, as HTC has fallen on hard times. HTC was once the hottest Android vendor in town and still releases impressive flagships like the One, but Samsung's advantages in scale, integration, and marketing have made short work of the Taiwanese OEM's market share.

Nokia is also one of the few manufacturers that remain quite willing to cater to device exclusivity. At a time when almost all OEMs are fighting that trend in favor of broader reach and reduced development overhead, Nokia continues to put out carrier-exclusives. The Lumia 1020 is an AT&T exclusive, Verizon Wireless sells the Luma 928 and Lumia 822, and T-Mobile is the only one offering the Lumia 925 and Lumia 521. Offering exclusive devices that increase platform competition is earning Nokia goodwill with carriers, who will in turn help promote the devices.

Nokia's turnaround has taken years to engineer, but it is now gaining traction. Will investors have the patience to stick it out with Elop?

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The article Nokia Knew Not to Challenge Samsung Directly originally appeared on Fool.com.

Fool contributor Evan Niu, CFA, owns shares of Apple and Verizon Communications. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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