Byline: Kevin Fitchard

They're called Chinese walls - those mechanisms a company employs to keep conflicts of interest in check. Normally, Chinese walls are metaphorical, sliding ephemerally between two corporate divisions to keep those divisions honest. But in Nokia's case, the Chinese walls are tangible: On the handset maker's gigantic Helsinki campus, its mobile software division is screened off from the rest of Nokia by walls of actual mortar, stone and glass, with doors that require real key cards to access. And if your key card happens to belong to an employee of Nokia Mobile Phones, you can expect to be denied entry.

When Nokia first announced it would license its Series 60 mobile middleware platform, the company insisted it was trying to create a smartphone market, not cement a monopoly on smartphones themselves. To prove its point, Nokia helped form the Open Mobile Alliance and promised its commitment to open standards. It also threw its weight behind the Symbian smartphone operating system and founded a sizable developer program.

Nokia, of course, faced skepticism from the wireless industry, if not outright cynicism. That skepticism is still largely present today.

So Nokia created a competitive paradox, pitting two divisions of its company against each other and giving each a different philosophy and a different goal. Nokia Mobile Phones is committed to growing its formidable 40% market share, while Nokia Mobile Software is tasked with spreading the smartphone gospel, perpetuating its Series 60 software and the Symbian OS across the globe and into the hands of its sister division's competitors.

Mobile Software develops the middleware that fills the crucial gap between the OS and the user. It allows users to access the phone's functionality and its accompanying applications through a thumb pad, keyboard or stylus. While Mobile Software builds several middleware platforms proprietary to Nokia devices, Series 60 - its primary and most versatile product - is open for anyone to license.

Balancing on that tightrope is Antti Vasara, vice president of market operations for Nokia Mobile Software. Vasara not only manages the sales, marketing and developer operations of the business unit - he also is responsible for the company's overall software strategy. For most firms, strategy can be boiled down to a few simple mantras: increase market share, drive revenue, target new markets. For Vasara, strategy means not only promoting mobile data, but also creating a market that all vendors will benefit from, not just Nokia.

Nokia gets its returns by dipping into a larger overall market - a larger cake, as company officials are fond of saying - even if it must share that cake with its competitors. But simultaneously, Mobile Software is running a business - one that is not necessarily expected to be profitable but is certainly expected to succeed. So in Series 60's case, success means attracting as many licensees and encouraging as many Series 60 devices as possible, regardless of whether they are produced by Nokia - meaning that to Vasara, Nokia Mobile Phones is just another licensee and just another customer.

Understandably, that type of relationship can create tension within a company. "It is true there is a little bit of dissonance between our divisions," Vasara said. "Our strategy seems counterintuitive to what the market leader should do, but we always have to address changes in the marketplace. We wouldn't be the market leader if we didn't."

In many ways, Vasara is accustomed to contradictions within his professional life. Though entrenched in a highly competitive business environment, the 38-year-old comes from academia - and not from the usual circles of engineering you'd expect of a telecom executive, either. He completed his Ph.D. dissertation on optical diffraction at the Helsinki University of Technology and spent many years as a pure researcher. ("It hasn't been very useful in everyday life, but it certainly impresses people," he said.)

Vasara has been at Nokia only nine months, but he arrived at the exact time when Nokia Mobile Software was growing from a small niche division into a business unit of increasing significance: Symbian-based smartphones were actually starting to show sizable sales numbers, Nokia's licensee plan was getting off the ground and the first non-Nokia Series 60 handsets were making their way to trade shows. Nokia Mobile Phones shipped 1.2 million smartphones in the second quarter alone, according to IDC, and by the end of Q1 2004, Nokia expects to ship 10 million Series 60 devices.

But Vasara refuses to pat himself on the back. He is quick to point out that standard handsets comprise a 400 million-unit annual market, and while 10 million may seem like a significant number, it is a paltry sum compared to where he wants (and Nokia expects) the market to grow.

"The smartphone segment is a very small piece of the overall pie," Vasara said. "We feel very humble still. Right now the only thing we have is very high numbers in a very small market." Still, Nokia now has a 60% market share on all smart devices, a lead that IDC expects the company will keep for some time. Its strategy, for all its complexities and contradictions, appears to be working.

But Nokia is about to face its first real test. So far, every single Series 60 device shipped has been a Nokia-made device. Over the current and the following quarter, its four existing licensees - Siemens, Matsushita/Panasonic, Samsung and Sendo - will all launch their first Series 60-based handsets, competing directly against Nokia with its own OS. And across the Atlantic, Microsoft is gearing up its Windows-based smartphone platform, having struck significant licensing deals with Nokia's competitors. The market is about to get much more interesting - and Vasara is about to find out whether Nokia's strategy will truly pass muster.

David Nagel has seen companies juggle software and hardware before. He worked as an executive at Apple before he became CEO and president of the newly spun-off PalmSource, the company that now develops and licenses the popular Palm operating system, and he recalls the brief moment when Apple flirted with licensing its Macintosh OS. After companies like Power Computing snatched up the Mac licenses and began producing cheap clones that hurt Apple's own sales, it wasn't long before the licenses were revoked and Apple became the sole source for Macintosh OS-based computers once again.

"I've been on both sides," Nagel said. "I've worked with companies that opened up their software and with companies that kept it closed. What Nokia is trying to do is very difficult. It's hard to juggle those competing interests in your company, and once you open that Pandora's box and start licensing, it's very difficult to go back."

What strikes Nagel as odd is that Nokia seems to be moving in exactly the opposite direction as the rest of the industry. The dominant trend is to create as much separation as possible between your licensed software and the hardware it runs on. It's why Palm spun off PalmSource in October 2003, and it's why Microsoft grew to such dizzying magnitudes. "At the same time the rest of the industry is becoming more open, Nokia has become more closed," Nagel said. "That has to be creating concerns among Symbian's other licensees as well as the industry in general."

Not only is Nokia licensing its middleware and user interface to its customers, but the company also has an interest in Symbian, the developer of the OS underlying the vast majority of smartphone products. This summer, Nokia and Symbian founder Psion bought out Motorola's stake in Symbian after Motorola opted to go OS-neutral, licensing both the Microsoft and Symbian software and also developing its own Linux/Java-based software.

The sale made Nokia Symbian's largest shareholder with a 32.2% stake in the company, followed closely by Psion and its 31.3% stake. While Nokia and Symbian both insist that the only privileges Nokia receives from the OS developer are the same that any company would assign to its biggest customer, Nagel said it's difficult not to form the opinion that Nokia is controlling Symbian - a perception only fueled by recent European media reports that Nokia is trying to buy out Psion's stake in the OS developer.

Complicating the matter even further, Nokia and Symbian are actually competitors in the middleware department. Symbian has developed its own user interface middleware called UIQ, which competes more or less directly with Series 60. Sony Ericsson uses the interface in its own handsets, and even former Symbian shareholder Motorola has licensed it.

Symbian Vice President of Communications Peter Bancroft acknowledged that the separate user interfaces are a complication in his company's relationship with Nokia, but said it is a relatively minor one. He pointed out the UIQ is a pen-based interface, while the Series 60 is keyboard-focused. As for Nokia's ownership stake, Bancroft said the idea that Nokia "controls" Symbian is preposterous. Even if Nokia is its largest shareholder, it's certainly not the majority shareholder. The remaining investors - Sony Ericsson, Samsung, Siemens and Matsushita - are Nokia's arch rivals, forming a voting block that would surely override any attempt by Nokia to use Symbian for its own competitive advantage.

"In an operational sense, our relationship with Nokia is simply that of a vendor and a happy customer," Bancroft said. "The equity ownership doesn't impinge on that relationship at all. Nokia's equity in Symbian is always given far more consideration than it deserves."

But as Nagel pointed out, perception is a critical factor in the wireless industry. While Nokia may not control Symbian, their relationship is far from neutral. Nokia has been Symbian's biggest champion since the OS developer's beginnings, and while many of Symbian's other shareholders have also become Microsoft and PalmSource licensees, Nokia has wholeheartedly cast its lot with Symbian. But both Nokia and Symbian posit that keeping each other at arm's length is a ridiculous notion. "It's a plain fact that Nokia's support has been very important to Symbian - nobody could argue that," Bancroft said.

Nokia's relationship to Symbian, as well as its relationships with its licensees/competitors, puts it in a somewhat precarious position in the overall wireless market. Nokia is trying to be all things to all people - a software provider, a standards setter and a competitive handset manufacturer. It's a model that puzzles Nokia's competitors, including the one that will most likely become its biggest competitor of all: Microsoft.

"It's clear where our motivations lay," said Ed Suwanjindar, lead product manager with Microsoft's Mobile Devices Division. "We're a software provider. I think being specific about what we develop and deliver for this industry is very important."

While Microsoft clearly dominates the office desktop, its move into the wireless space has been slow. It launched its PocketPC Phone Edition platform almost two years ago, but the OS is geared more toward wireless PDAs. Only at the end of last year did Microsoft release its Smartphone platform, its first OS geared entirely at converged devices and the one platform that goes head-to-head with Series 60. Since then Microsoft has been building up its portfolio of licensees, the most significant of which is Motorola, and the first Smartphone devices have begun eking their way into the market. A year's lead gives Nokia a formidable advantage, but nobody can fault Microsoft's business acumen when it comes to software. And considering that one of the main attractions of mobile data is integration with desktop software, Microsoft's dominance in the PC world has obvious advantages.

"No one would argue that Nokia makes good mobile phones," Suwanjindar said. "But it will be very difficult for Nokia to be as good a software maker as it is a handset maker."

Analysts and the press have characterized the competition between Microsoft and Nokia/Symbian as an impending clash over the future of the mobile OS. Some analysts predict that even without Microsoft's software expertise and financial muscle, carriers and vendors would flock to its Smartphone platform just to keep Nokia in check. The tension between the two companies comes with the tacit implication that each is trying to dictate the future of mobile data, just as Microsoft currently dominates desktop software and Nokia, to a lesser degree, dominates the mobile handset market. But both Microsoft and Nokia claim that the market for mobile software will be so large that no single company will be able to exert any real dominance.

"Too much has been made of the competition between Microsoft and Nokia," said Timo Poikolainen, Nokia Mobile Software's vice president of marketing. "The way I see it, Microsoft and Nokia are in a competition to deliver smartphone platforms, but we are also working together to ensure Microsoft's desktop software synchronizes with our mobile software. We certainly compete, but we are cooperating in all the areas we ought to cooperate in."

Nokia's view of the software business also seems to go against the grain of the industry by viewing software as a means to an end, not an end unto itself. This outlook puts Poikolainen in a seemingly contradictory position.

Poikolainen comes from the network side of Nokia, having spent four years selling and marketing GSM infrastructure in the newly emerging Chinese market. You could say infrastructure is infrastructure - you play up the brand and the reputation, as well as the salient points of the product. But now Poikolainen is marketing more than a product. He's marketing an idea.

Everyone has seen the advertising: a world without wires, where all the tasks once reserved for the office cubicle are now conducted on the train, in some grassy field or at some fancy dress ball before midnight. It's not just Nokia promoting this concept, of course, but in the end those other companies are simply trying to sell their own brand of handsets. Poikolainen is trying to sell the very concept of the smartphone, regardless of whether it's made by Nokia or Siemens or Samsung.

"We do not believe that Nokia alone can create the global market for converged devices," Poikolainen said. "Of course, we are risking a lot by licensing out Series 60. We're giving away a very well-defined software to our competitors, but by doing so we're opening a dialogue with other manufacturers. We're creating the market for smartphones together."

Poikolainen admits it might be hard to swallow the idea that Nokia Mobile Software is really priming the world for wireless data and not simply pursuing its mother corporation's hardware interests. But he feels his division is starting to gain its licensees' trust. Nokia has been very careful to keep its divisions separate and independent, and Poikolainen said the deference Mobile Software has shown to Nokia's competitors has produced no small amount of tension with Nokia Mobile Phones.

Upstart U.K. phone maker Sendo has been working closely with Nokia over the past year since canceling its agreement with Microsoft and subsequently suing that company over intellectual property issues. Sendo originally established itself as a manufacturer diametrically opposed to Nokia and what many carriers considered Nokia's heavy-handed control of the handset market. Instead of mass-producing the same phone for sale over dozens of markets, Sendo offers to custom tailor and brand phones for specific carriers. So when Sendo head of product planning and strategy Ron Schaeffer attended his first development discussions with Nokia Mobile Software, he was surprised to find out just how sequestered from the rest of the company the division really was.

"I was really skeptical at first, but it was a revelation to see just how walled off Mobile Software is," Schaeffer said. "It became very clear to us that we were a customer of Nokia Mobile Software just as Nokia Mobile Phones is a customer, with both of us on equal footing."

Even more surprising was what Sendo actually received with its license: the source code to Series 60.

Nokia Mobile Software essentially handed Sendo the software blueprint to a Nokia smartphone. Most software makers are notoriously secretive about the source codes underlying their technology: Developers usually must deal with what are called "black boxes," chunks of hidden code that perform specific functions within a given application but to which developers otherwise have no access. Nokia not only handed over the code for Series 60, it gave Sendo permission to modify it, something almost entirely unheard of. (Microsoft, for instance, recently began opening up some of its code to developers but draws the line at allowing developers to actually tinker with it.)

"If you want to do any substantial differentiation to a handset, you have to be able to get at the code," Schaeffer said. "By modifying the Series 60 code, we were able to create a special idle screen in our handsets. That would have been impossible if we didn't have access."

The openness of the Series 60 platform has become one of its key selling points, and the prime example Nokia offers up to prove its commitment to open standards. Nokia's developer program does have limits, however, and certain critical elements of the platform must remain intact in every Series 60 device, said Lee Epting, who heads up Mobile Software's developers program. But otherwise, the platform code is intended as a starting point from which licensees and developers can build their own unique products.

Furthermore, all innovations in the code are essentially licensed back to Nokia for use throughout the development community, a philosophy that would seem to be more at home on an open-source message board than at a multinational corporation.

"This is really a shift in how we've approached the development community in the past," said Epting, a native New Yorker who came to Nokia after stints at Palm and Handspring. "Mobility is really about individuality. The ability to differentiate is very important in this industry."

Still, Nokia's open model has its perils. There's a reason that Microsoft doesn't open up all of its code to customers. Nokia is not just handing over to its licensees instructions on how to make a Nokia mobile phone - it's handing them the means of making one that's better. And its licensees are fully aware of the power Nokia has given them.

"I could go to a carrier and say, 'Do you like this Nokia phone? I can make almost the exact same phone with the exact same functionality, but specifically customize it for your needs,'" Sendo's Schaeffer said.

When thinking of Nokia, it's important to remember that it hasn't always been at the top of the wireless heap. In fact, Nokia was built on a foundation of industrial sectors completely unrelated to telecommunications. For the first half of the 20th century, it made electrical cabling, paper and even tires. Even when the wireless revolution came about, Nokia was just another vendor among many: Motorola ruled the handset industry from the outset, and it wasn't until the transition from analog to digital that Nokia emerged as the true global leader.

That was barely 10 years ago, and if any company understands the radical shift that technology can produce - and the equally radical shift in the fortunes of the company making that technology - it's Nokia, said Bob Egan, president and principal analyst for Mobile Competency.

"The good news for Nokia is that it's recognized the market," Egan said. "Nokia won't let what happened to Motorola happen to them. But for better or worse, Nokia is trying to play Microsoft's game. It wants to be to mobile software what Microsoft is to desktop software. That's a tough role to fill."

Competitively, that role is going to become tougher. As Nokia points out, the 10 million devices it's shipped are only a paltry sum. While IDC and other analyst groups predict Nokia may achieve smartphone market share as high as 75% next year, the company's position as market leader will become much more precarious as smartphones grow from annual sales of $8 million to $100 million.

Nokia has already hit its first bump in the U.S. market: In October, it released its highly touted N-Gage Series 60 gaming device to astonishing sales of 400,000 worldwide in the first two weeks - but by Nokia's own admission, sales in the U.S. were lackluster. Then there's the question of CDMA, a mobile technology segment where Nokia is once again trying to make inroads.

Globally, CDMA may not be as significant as GSM, but it is one of the dominant technologies in the world's largest market. So far, 90% of all data devices released for CDMA carriers have been based on the Palm OS, but those Palm devices have been more hybrid PDAs than true smartphones. Until last month, the market was wide open, but on Nov. 7 Samsung released the U.S. market's first CDMA smartphone. Though Samsung is both a Series 60 and a Microsoft Smartphone licensee, it chose to make its North American debut on the Microsoft platform - and neither Nokia Mobile Phones nor Samsung has yet finalized plans to release Series 60 CDMA devices.

Though Nokia appears to have a lock on the GSM market, it will face its first real test next year. In 2004, not only will Microsoft's Smartphone enter commercial production with several GSM vendors, but Series 60 devices made by Siemens, Sendo and Panasonic will also hit the market.

Nokia Mobile Software has managed to keep its integrity intact until now, but Nokia Mobile Phones has not yet had to deal with competition for carrier business against a vendor selling what is essentially a Nokia mobile phone. Nokia admits there's already tension between the two divisions, despite enjoying carte blanche over the market. What will happen when that market is flooded with devices based on Nokia's own software?

Antti Vasara has an answer for all of the company's critics and naysayers: "Nokia Mobile Software was conceived to serve Nokia, not Nokia Mobile Phones," he said.

To Vasara, the difference is very real, and very critical. In fact, he keeps the interests of all of Mobile Software's various licensees quite separate. Vasara claims he has no access to any of his licensees' product plans - he can't simply pull up product blueprints for the Sendo X or the Siemens SX1 or even the Nokia N-Gage on his laptop. That information resides exclusively on the computers of the individual managers who work with each licensee client. Putting those so-called Chinese walls in place has not been easy, Vasara said, but Nokia Mobile Software has been learning as it goes - and it's only improving.

"We have a way to manage complexity, and we are a lot better now than when we first started," Vasara said. "If we can accomplish what we've set out to do, the whole question doesn't matter. If we can truly provide openness in our software, then it becomes irrelevant where the technology comes from."

GLOBAL PENETRATION OF SMARTPHONE DEVICES BY OPERATING SYSTEM

IDC defines smartphones or converged devices as any handset that functions as a mobile phone and uses its wireless connection to access data.

Total market:

13 million handsets

Total market:

87 million handsets

Source: IDC

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