Mark Pickavance looks at Stephen Elop, the ex-CEO who infamously made huge amounts out the failure of Nokia, the company he once controlled
On 17th June, Microsoft CEO Satya Nadella made public a series of structural changes within his company. One of these was to consolidate the Microsoft Devices Group under the Windows Division, with the new entity to be headed by Terry Myerson.
Devices had previously been the fiefdom of Stephen Elop, who Satya explained was leaving by some degree of mutual consent. “Stephen and I have agreed that now is the right time for him to retire from Microsoft,” Nadella said.
Having made his reputation at Microsoft, only to leave and head Nokia and then return, the departure of Elop marks the end of an era.
What did Elop achieve in his two tenures at Microsoft and, between that, at Nokia, and is there a lasting legacy of the Elop era?
Elop Ascension
A Canadian by birth, Stephen Elop studied Engineering and Management at degree level, before a brief career at Lotus Development Corporation in the late 80s. After that came six years as CIO (chief information officer) at Boston Chicken, before it filed for Chapter 11 Bankruptcy protection, at which point he joined Macromedia.
That company was subsequently bought by Adobe, and he moved again to Juniper Networks, before his big opportunity to join Microsoft came in 2008, when he became head of its Business Division. How he got such a big job controlling the part of Microsoft that makes roughly half the income isn’t well documented, but in the two years he ran that department, it launched Office 2010, a product that kept the dollars flowing into Microsoft’s coffers.
But after a relatively short time, and with no sign that Steve Ballmer was ready to retire, Elop looked outside the company for his next meteoric jump up the ladder.
In September 2010, he replaced Olli-Pekka Kallasvuo as CEO of Finnish phone giant Nokia, the very first (and last) CEO that wasn’t born in Finland.
He was just 47 years old, and he was controlling a company with more than 130,000 employees and the largest maker of mobile phones in the world.
How wrong could it go?
Nokia
At the point that he became CEO, Nokia was in a strange place, where it was still a huge worldwide supplier of phones and massively respected, but the impact on the market of Apple’s iPhone range was beginning to bite.
Years of complacency had seen Nokia intentionally stifle development, and its acquired Symbian OS wasn’t remotely up to the job of transitioning the high-end products to exploit the market Apple was creating. It had a new and potentially credible alternative in the form of Meego, but under-investment mean it this wasn’t nearly polished enough for an orderly transition away from Symbian.
To his credit, Elop realised the predicament that Nokia faced and issued an internal memo entitled ‘Burning Platform’ that ultimately became public. In the memo, a parallel was presented between Nokia’s dilemma and someone trapped on a burning oil platform (Piper Alpha?), where staying wasn’t an option, but jumping might be just as deadly.
Opinions were finely divided over this memo, because some in the company wanted it to wake from its zombie-like state, while others were shocked that things like this were being said so soon after Elop walked through Nokia’s doors.
However it was taken, less than six months later, both Symbian and Meego development was halted, and Elop announced that the future lay with Windows Phone 7, a Microsoft product that was only a few months old. There was only one Meego phone ever launched by Nokia, the N9, though curiously Nokia also made a really poor Android phone at this time, the Nokia X.
With the appearance of the Lumia devices, which looked just like the now defunct N9, Nokia became the main supplier of Windows Phone devices (though not exclusively), and it released a range of generally well received devices. They might have been liked by reviewers, but they weren’t a hit, either with the buying public or phone service providers, and the notion that Nokia would make a seamless transition to the new OS while retaining market share soon evaporated.
By the middle of 2013, Nokia had reached a point of no return, where sales had effectively collapsed and together Android and iOS devices entirely dominated the billion or more smartphone sales per year.
Microsoft had already invested $5bn in Nokia to keep making the Lumia range, but the company’s impending collapse endangered that strategy. An acquisition was negotiated, and the phone making part of Nokia became the mobile division of Microsoft for $7.2bn.
The deal also involved Elop standing down as Nokia’s CEO, but re-employed as executive vice president of Microsoft’s Devices & Services business unit. In the five years he’d run Nokia there were 21,000 layoffs, revenue fell by 40%, sales volume by the same ratio, and he’d wiped 85% off the stock value.
For him personally it was a very different story, one with lots of noughts behind it.
Success Through Failure
When Stephon Elop first went to Nokia, he managed to swing the sort of deal that few others in Finland have ever managed previously. The tax model in Finland has a progressive structure much like the UK, where the more you earn, the higher the tax bands you will encounter. But Elop’s tax status was a unique one where he got to pay a maximum of 35% fixed rate, regardless of what he earned.
This deal worked massively in his favour when he sold the business to Microsoft, because part of that arrangement saw him given a 18.8 million bonus – something that was a spontaneous renegotiation of his contract on the very day of the acquisition. The excuse that was provided later was that Stephen needed the money to fund his divorce, like this is somehow the responsibility of the company he once worked with.
What didn’t help was that Risto Siilasmaa, Nokia’s chairman, initially claimed that the massive payoff was reasonable by saying that the terms were “substantially similar to those of former Nokia CEOs”. And then he was forced to admit that due to a mistake that was made in the contract, he had in fact walked away with 14.6m more than the previous Nokia CEO, Olli-Pekka Kallasvuo. Truth – it’s a slippery beast at best.
When this was made public, Nokia openly asked that Elop accept a smaller bonus, which he refused, citing his aforementioned divorce as why he needed it all.
This was the last in a pretty large list of payments that Elop got from Nokia, which had paid him a $6.2m ‘golden handshake’ when he joined the company in 2010, on top of his $1.4m salary for that year.
But it wasn’t just Nokia (or was it himself?) throwing money at Elop; the cash just kept coming at him from all directions.
In the following 14 months from the Nokia takeover, Microsoft paid $18m dollars for the joy of his company – or $1.3m a month.
During this time he penned the amazingly insensitive memo telling a further 12,500 ex-Nokia people that their services were no longer required, which inappropriately started “Hello there”.
If you’ve ever seen the classic final episode of the UK version of The Office, where David Brent tells his staff that they’ve all lost their jobs, but he’s got a new better paid one, then you’ve got the flavour of that memo already.
It takes a mind-numbing 11 paragraphs of Elop talking about “creating the hardware that showcases”, “appropriate financial envelope” and “to continue to enrich the Windows application ecosystem” before he finally tells them they don’t have a job.
With Nokia now part of Microsoft for good (or more probably bad) and most of its staff handed their marching orders, there was only one person who needed to clear their desk, and that was their beloved leader.
What his settlement deal is hasn’t been revealed, and as he’s one of the senior people that Microsoft doesn’t reveal financial information about to SEC, we may never know. But given his track record, divorce or not, he probably won’t ever need to work again, whatever the lifestyle is he chooses to lead.
The Elop Legacy
It’s hard to gauge his performance at Microsoft prior to Nokia, because Office 2010 was in development long before he arrived, and that division has made lots of money even when Microsoft has entirely mucked up its Windows launches. But at Nokia his influence was less ambiguous and has in some quarters been categorised as the ‘Elop effect’, as a variation of missteps that have been made by such industry legends as Adam Osborne and Gerald Ratner.
Infamously, Adam Osbourne showboated that future models of his portable computers would massively outperform the existing line-up, immediately killing the market for those products, with their replacements some considerable way off.
And the unfortunate Gerald Ratner, CEO of British jewellery group Ratners (now Signet Group), went on record to say that the reason it could sell the products it made for such low prices was “because its total crap.”
Elop’s twist on both of these strategies was to immediately devalue the efforts of a large part of the company he’d just taken control of and then to entirely hitch Nokia’s wagon to an unproven technology with no established market, and which Microsoft hadn’t properly funded or supported prior to this point.
By ending Symbian development so promptly, he painted all those existing products as being worthless and then admitted that no new products would be replacing them for at least nine months. The impact on the market for Nokia products plummeted dramatically, and when they did appear, the arrival of Lumia-branded products did little to slow the rapid descent.
What many forget is that while not doing brilliantly before Elop, Nokia in the quarter before he took over managed to grow smartphone unit sales by 7%, average sales prices by 14% and unit sales revenues by 22%. Post-Elop unit sales dropped 41% and revenues 47%. A profit of $640m became a loss of $230m, so that’s a move in the wrong direction of nearly a billion dollars.
Big staff reductions, stopping development and other cost reduction exercises only made disastrous figures seem marginally better and led to only one inevitable conclusion. Microsoft, now almost entirely dependent on Nokia to remain a player in the mobile space, ended up buying the company, which was predestined from the point that Nokia became wholly dependent on Windows mobile OS.
The closeness of this relationship also put off other phone makers from supporting Windows Phone, forcing Microsoft’s hand when it was apparent that on its own Nokia wouldn’t survive long.
I’ve seen it argued that the underlying job of the CEO is to get good value for his stock holders, regardless of the employees’ wishes. But that’s not the story of Nokia, because the crash in stock value that proceeded the changes and the massively reduced worth of the company part that Microsoft ultimately bought represented just a fraction of what stockholders previously held.
Since the company and Elop transferred back to Microsoft, it hasn’t launched a single flagship product in the Lumia line, and instead it seems content to mine the low-cost feature phone market with what are supposedly smartphones.
At this point, Microsoft’s mobile product range is no more of a threat to Google and Apple than BlackBerry now is, and if anything the small market share it once carved out is shrinking towards 2%.
Final Thoughts
I’ve seen quite a few pundits claiming that Stephen Elop did rather well with Nokia, considering the state he found it in 2010 when he became the CEO. I can’t really find it in my heart to be that generous, given the desolation he ultimately unleashed on that company and its employees.
What he did was turn Nokia’s own fiasco, admittedly of its own making, into a huge success story for him personally. That huge bank balance he accrued didn’t extend to almost anyone else who worked for the company when he took over. It was a singular triumph against a panoramic background of financial loss for almost everyone else involved.
A more cynical position that I’d probably support is that the rise and success of this man is a shining example of how once people get to a certain level in organisations (and government) they’re rewarded mostly for abject failure – and often quite gratuitously.
Nokia as a phone company no longer exists, most of the people who worked for it are employed elsewhere (hopefully), and Microsoft stands astride the smartphone market brandishing an abysmal 3% market share like it’s a winning lottery ticket. There’s also lots of talk now that Satya Nadella really wants to have done with the Window Phone products altogether, because buying Nokia wasn’t something he supported initially.
Unless the arrival of Windows 10 turns around Microsoft’s mobile fortunes is short order, and I doubt that’s even possible, then Terry Myerson will soon be available to play golf with Stephen Elop, if they’re friends.
But does he really care? Well, given how much cash and share options he holds these days, you’d think not, but then he’s quite egotistical, and coming back to Microsoft and not being offered the CEO role must irk him severely.
For that reason, I’d be surprised if we’ve heard the last of him, as there are plenty of other drowning tech companies out there that would like a known name as CEO and the possibility of being bought out by Microsoft down the line.
The problem for Satya Nadella is that with Elop gone and Myerson now saddled with both Windows 10 and devices, there’s less of a meat-wall between any perceived failure and himself. Should Windows 10 fail to deliver the success that Microsoft’s investors expect, it’s not like they have enough time to rehire Stephen Elop and hang that albatross around his neck.
In the final analysis, this is a man who was a triumphant success at being Stephen Elop, the super-rich corporate person. At other roles, most notably CEO, evidence of positive achievement seems more challenging to identify.