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Among the many barriers to innovation success, one of the most painful and dangerous is rapidly gaining momentum in the United States due to an almost perfect storm of challenges to patent value. I speak of the blight of “efficient infringers,” the many companies, often large and politically influential, who make the cruel calculation that it’s more efficient to blatantly steal intellectual property from small opponents rather than pay for the property they want to use. The victims are the usual suspects, small companies, startups, and lone inventors. I use the word “suspects” deliberately for these victims, for they are suspects in an economic and media climate that increasingly views innovators as a key problem (e.g., “trolls”) for daring to own and perhaps even assert intellectual property against the benevolent titans of Silicon Valley and others who feel they are too big and too entitled to pay for what they take.
In the ruthless calculations of the efficient infringers, they recognize that if their infringing actions are detected, many patent owners won’t have the resources to challenge them in a long, costly battle. They recognize that if they are sued, the abundant new tools they have helped Congress create to kill patents may prevail and eliminate the problem in the USPTO’s Patent Trial and Appeal Board (PTAB), where one keep filing new attacks against the same patent over and over until the judges declare a patent to be abstract or otherwise invalid. The rules are stacked against the patent owner there, and just in case, it’s even possible for judges there to make rulings that favor companies with whom they have obvious connections, as in a former Apple employee making rulings in favor of Apple, with no apparent requirement to recuse themselves for conflict of interest.
If by some chance the patent owner prevails, the owner probably won’t be able to get a permanent injunction against the infringer due to a horrific Supreme Court ruling, Ebay, that removes one of the most important tools a patent owner should have to shut down an infringer. They will just have to pay some reasonable royalties and can avoid the real pain that deliberate infringement ought to bring. So in light of the slight risk of having to pay something to the occasional patent victor, many companies decide they can just do what they wish and treat potential patent losses as the relatively low cost of doing business. Efficient, but ruthless.
Gene Quinn of IPWatchdog.com accurately describes the dire situation in his latest post, “The Great Escape: Efficient Infringers Increasingly Seek to Abuse Antitrust Law.” Read the article and subscribe, for IPWatchdog is one of the most important voices daring to stand up against the anti-patent forces that are causing so much harm to our economy and such ongoing innovation fatigue for those who had the courage to invest in innovation. Efficient theft of the fruits of that innovation will hurt all of us in the end as innovation grows weary.
Be careful about the vehicle you’ve been driving. As sturdy, tangible, useful, and inventive as it looks to you, it may turn out to be merely an abstraction, perhaps nothing more than the mere idea of “transportation” or “going places,” making it unworthy of the thousands of patents protecting its numerous technologies — if the USPTO and America’s elite judges get their way. An abstract automobile? You don’t want to be caught dead driving one. Unfortunately, since the USPTO’s Patent Trial and Appeal Board (PTAB) just ruled that an MRI machine is abstract and thus not patentable under the odious and vague principles of the Supreme Court’s recent Alice decision, it could be that automobiles and virtually every other machine under the sun could be next on the anti-patent chopping block. Your trusty Toyota or your faithful Ford are about to go abstract on you, courtesy of the USPTO. Look out.
In the PTAB’s elite view, as Gene Quinn explains, all the physical wizardry of the mighty MRI machine as claimed in a recent patent application for an improved MRI is just an abstract idea based on the abstraction of “classification.” It defies logic and defies the requirements of the Alice decision and the USPTO’s rules for applying Alice, but the PTAB has become a patent munching zombie that doesn’t seem bound by logic or law. They are one of the strongest forces promoting innovation fatigue. Many innovators are just giving up or going to other nations where IP rights are more meaningful.
The anti-patent forces that have taken hold of far too many influential posts in America view property rights and especially intellectual property rights as a barrier to the ideal society they envision. If only we could get rid of patents, they seem to think, drug prices would fall and Obamacare, for example, would not be such a disaster. But the bounty some intellectuals promise by weakening property rights is an illusion, for without IP rights, what is the incentive to take on the risks and costs of innovation if you cannot benefit from the occasional successes that come from your uncertain work? If your hit product can be taken and marketed by others who did not have to spend so much time and money developing it, then the inventor is often at a competitive disadvantage to everyone else. Why bother?
America’s war on patents is a war on the future of innovation. It’s a war we cannot afford to lose.
Abraham Lincoln said that the patent system “added the fuel of interest to the fires of genius.” Today the fires of genius and the fire of innovation itself is getting doused with something less helpful than fuel. These fires are being cooled and, in some cases, extinguished with harsh attacks on the IP rights that once enabled and motivated lone inventors and small businesses to take the fruits of their genius to the market.
The owners of small businesses, the people who generate most of the innovation and business growth in the United States have good reason to be worried. Their ability to attract funding through valuable intellectual property is being compromised. Their ability to protect their products and innovations from the power of corporate giants is being whittled away. This has come from many quarters, but there is a widespread anti-patent movement driven by politics and misinformation. It’s the bitter fruit of a bitter anti-property rights movement that exaggerates the threat of a few bad actors to justify widespread weakening of property rights in ways that will hurt the economy and our society for years to come.
We have seen a recent series of Supreme Court cases that have made it much harder to obtain patents and enforce them. We have seen massive changes in US patent law that make it easier to invalidate patents after they are granted and make it harder and more costly to stop infringers if your patent survives. Now the bogeyman of “patent trolls” is held up as a threat to America that requires more sweeping “patent reform” to make it even harder to enforce a patent, and it looks like both parties are united in a quest to do “something big” to shake up the IP rights that helped drive the American economy for so many decades. Corporate giants benefit from this reform as it clears away the annoyance of other people’s IP rights standing in the way of their marketing muscle. But the economy as a whole and the rights of many are hurt in this process this amplifies innovation fatigue .
Several recent articles highlight just how serious the problem has become. Louis Carbonneau in “Toxic Asset: The Gradual Demise of the American Patent” (IPWatchdog.com, December 10, 2014), surveys the radical changes in the past two or three years:
On the judicial front, in 2014 we saw no fewer than 5 Supreme Court decisions going against patent holders on the various subjects of obviousness (a key test for patent validity), what constitutes “abstract ideas” (which now undergo a more stringent test for patentability), business method patentability, indefiniteness (how you construe claims), reasonable royalty (how you calculate damages), willful infringement (how you punish the “bad actors”) and fee shifting (making losers pay for winners legal fees). All of these decisions have collectively made it harder for patent owners to: i) maintain the validity of duly issued patents (previously presumed by law), ii) pursue infringement claims, ii) prove damages (let alone treble damages), iv) have open discussions with potential infringers prior to litigating, and have left the unsuccessful patent owner at risks of paying millions in legal fees to the other side if the judges so decides.
Parallel to judicial reform at the federal courts, recent US patent reform with the American Invent Act (AIA) introduced a new post grant review mechanism called Inter Partes Review (IPR) which allows a party to challenge the validity of any issued patent before the Patent Trial & Appeals Board (PTAB). Strangely, despite the PTAB being an emanation of the same USPTO that delivered all these patents in the first place, there is no longer a presumption of validity before the PTAB for the patents being challenged while other rules make it easier to invalidate patents based on prior art.
Finally, on the political front, in 2013 the US House of Reps. passed the Goodlatte bill, which would erode rights conveyed to all patent holders despite being primarily directed at NPEs. It is now expected that the new Republican led Senate will revive the bill -currently on hold- in early 2015 and, with a rare showing of bipartisanship from the White House, it is expected to be signed into law. At the same time, 27 US States have passed or are in the process of passing laws that make it harder for people to assert the patents they own.
Carbonneau goes on to explain that in recent Federal Circuit cases, patent owners are being crushed, and in Inter Partes Review (IPR) cases before the USPTO, nearly 80% of the owners of challenged patents are being told by the USPTO that their patents are not valid over the prior art that the USPTO itself supposedly considered before granting the patent in the first place. Carbonneau puts it rather wryly:
The most interesting statistics come from the PTAB [the USPTO’s Patent Trial and Appeal Board, which processes IPR cases] because it only focuses on validity issues based on prior art; the very same prior art patent examiners are supposed to have found and analyze prior to issuing a patent. Since patents going through IPRs are usually the same ones that being litigated, you would assume that owners did a lot of due diligence before investing in a costly patent lawsuit. Well, the PTAB is declaring 77.5% of reviewed patents invalid! And this is not limited to “abstract” software; patents related to biotech and pharmaceuticals, medical and mechanical devices, are being invalidated at an even higher rate! Remember, this is an offspring of the very same agency that inventors paid thousands of dollars in the first place to review applications and issue their patents. Now, after having to pay a quarter to a half million dollars in legal fees (average cost of an IPR procedure for a patent holder), the same agency is telling patentees nearly 80% of the time: “Very sorry we made a mistake; we would not have allowed your application had we looked more carefully for existing prior art. And no, there is no refund available.”
Personally, I cannot think of any industry that could survive more than a month with a nearly 80% defective rate, let alone by forcing you to spend a fortune for the “privilege” to confirm that indeed your title was invalid in the first place! Only a government can come up with such a broken system and get away with it.
The impact of these anti-patent efforts has been a surprisingly sudden break from the trend of increasing IP litigation, with litigation in 2014 down about 13% from the previous year according to a new 2015 PwC report on patent litigation. The problem of explosively increasing patent litigation, a common excuse to justify the slashing of patent rights, is not supported by the data.
Richard Lloyd, writing for the IAM Blog, draws this observation from the PwC report:
Of these three classes [of patent litigants considered], NPE [non-practicing entity] companies have been successful 31% of the time in patent cases brought since 1995; this compares with a success rate for universities and non-profits of 48% and a lowly 18% for individual inventors. Individual patent owners also do far worse with damages pay-outs, getting a median award of $3 million compared with $11.5 million for company NPEs and $16.2 million for universities/non-profits.
There could be many reasons for individual inventors doing relatively badly. Although the PWC study doesn’t provide any, it’s easy to speculate that small inventors may have lower average quality patents to begin with, while they probably don’t have the same kind of litigation savvy as other NPEs and are much less likely to have access to the same kind of litigation expertise that larger, better funded patent owners can turn to.
But what PWC’s numbers also strongly suggest is that the US patent litigation system is strongly stacked against small, patent owning entities. Bearing this in mind, it is worrying that the main packages of reform proposed in the House of Representatives (the Innovation Act) and the Senate (the PATENT Act) are only going to penalise them further.
Lloyd notes that potential irony now that many lone inventors, recognizing that they have little chance of winning and have almost no chance of affording the punitive legal bills they may face if they sue and lose, may be more likely to turn to NPEs (“patent trolls”) for help as the most practical way to realize any benefit from their work.
There is a need to rebuild an innovation climate in the United States, starting with educating our leaders about the need for IP rights and the value of patents. If we don’t teach this lesson from within, it will eventually be taught rather loudly from without, for Europe and China are both moving to strengthen IP rights and strengthen IP enforcement. Europe’s Unitary Patent system could be a boon to IP there, though much remains to be seen, but the changes in China are strong and dramatic. That nation has gone from no patents and no IP system in the early 1980s to the world’s biggest source of IP generation and IP litigation, with many changes steadily strengthening the nation’s IP system. There is a long ways to go for China still and there have been some setbacks, but at current rates we can see China becoming a leading source of global innovation while the US loses its lead.
Will the flames of innovation be largely quenched in that nation? Much depends on what we do with IP rights now, the rights that will shape our culture and economy for decades to come. May the fires of genius be encouraged with something other than the cold water Congress and Courts have been sloshing.
Prisoners of Hope: How engineers and Others Get Lift for Innovating by Larry Vincent is an unusual book on innovation that I found to be a refreshing guide to strengthening innovation with great practical value. Part of what makes this book unusual and, for some, perhaps highly challenging, is that it is written from the perspective of a preacher turned innovation champion, filled with references to biblical material, including frequent passages cited from scripture and analogies, sometimes extensive and detailed, drawn from the Bible. Although I treasure the Bible, initially this approach caught me off guard. In fact, at first I felt the attempt to find practical secular lessons for innovators from Bible stories was strained, even to the point that I initially disliked the book after the first chapter or two. But after a few more pages, I began encountering many valuable insights and modern case studies that revealed the author really did understand the practical challenges of bringing innovation to life, especially in a corporate environment. Once I got past my initial challenges with the unique angle of the book, I found it well worth my time, even inspiring. I still struggle with some of the passages using scripture to explain innovation and its challenges, but others may enjoy that. On the other hand, I was impressed by his application of Ezekiel’s “dry bones” vision in the Old Testament, where the prophet Ezekiel saw a valley of dried bones that became living humans again. His treatment made it a very apt and interesting analogy for the challenges inventors face in breathing life and commercial success into their inventions.
Lanny Vincent understands innovation and the life and challenges of innovators, especially those in corporations. Inventors and innovators are the “prisoners of hope” of the title, people driven and even held captive by their vision of changing the world with their innovation. It is their faith and hope that drives them forward, and this faith and hope allows for many biblical insights to be relevant. Whatever their feelings about scripture, this book can be valuable for them and for those who guide or influence them. Vincent understands how they can be more successful.
Aspects I especially enjoy are the numerous case studies and examples. While many come from the consumer products industry, especially from Kimberly-Clark Corp. where Lanny Vincent had a great deal of industrial experience, the lessons and practical guidance from the author will help engineers, scientists, and other inventors in many disciplines, and may be especially helpful to leaders responsible for innovation and business development. In these case studies, Vincent draws out key lessons to guide and inspire innovators today.
One of my favorite sections is in the middle of Chapter 6, “Inspiration and Appreciation,” where Vincent recounts how we worked with a team of automotive engineers in Michigan to help them innovate in the area of automotive suspensions. As he observed their responses and discerned that they were there because they had to be, not because they wanted to be, he departed from his normal process. He sought a way to help those jaded survivors of extensive downsizing become more inspired about the innovation task before them. He asked them to tell him the basics of the suspension system, including the history of its development. Admitting his naiveté and asking the engineers to share their knowledge seemed to engage them. They were then asked to draw a timeline of the development of related systems and then to characterize major epochs of the timeline as if they were historians. Then, in light of the past, how would they characterize the next era of development? They energetically and swiftly responded, and then Vincent simply explained that that was the area where they needed to invent. The invention workshop turned out to be highly productive.
One of the interesting insights regarding corporate barriers to innovation is the tendency for companies to promote successful innovators in their ranks to new positions where their rich innovation experience may be unused or essentially lost. The wheels of innovation are constantly being reinvented in companies as those who succeed are moved away from the field where they were able to create success.
Vincent also calls for corporations keep inventors and innovators close to projects as they become commercialized. There is a tendency in large corporations to hand off new products to others and leave those with the original vision and passion out of the picture by the time consumer feedback is being obtained, but Vincent identifies this as a huge missed opportunity. The inventors and innovators may have exactly the insights and knowledge needed to interpret and apply the feedback from the market, and they should play a pivotal role in refining and adapting the product as it moves forward.
A former technical expert at one of the world’s most famous consumer product companies told me of a hiring decision that made $80,000 for one executive, hurt several careers, cost the company millions of dollars, and crushed innovation in a once-promising unit of the company. This recipe for innovation fatigue has numerous variations, but they all combine poorly considered incentives coupled with selfishness in those who can exploit the incentives at the cost of corporate health.
In this case, the company had instituted an incentive program for senior management to promote its hiring goals. Unfortunately, the result of the incentives was that one executive realized that if he hired a particular unqualified outsider for a key leadership role, he would reach his goal and get a large bonus. On the other hand, if he were to select one of several experienced employees who were ready and qualified for the promotion, he would not get his bonus. He was blunt about that in ordering one of his direct reports to hire the unqualified candidate. “I meet my goal and $80,000 if hire that person. Do it.” The leader ordered to make the hire tried explaining that this position required a knowledge of science, technology, and markets that the unqualified candidate did not have. It required experience that the candidate did not have. It would hurt the company. But none of this mattered. What mattered was an incentive the company was offering, a perverse incentive indeed.
The outsider was hired and proved to be a disaster. Lacking the experience and knowledge needed to make key decisions, the division was run by stalling and passing the buck, with many diversions that wasted the time and efforts of numerous employees. Several highly talented people left in frustration, including one person who probably should have been given a chance to lead the group. Significant innovation projects essentially ground to a halt, a classic case of innovation fatigue and a painful reminder of how poorly considered incentives can harm a corporation.
Perverse incentives that encourage employees to harm the company for their own benefit one of the many factors that can block innovation and entrepreneurship in corporations
Related resource: A excellent business book, “The Science of Success” by Charles Koch of Koch Industries, has a good chapter on incentives that discusses the problem of perverse incentives.
In many large corporations, there’s a painful and frequently repeated scenario of invention theft that we treat in several ways in the book, Conquering Innovation Fatigue. The invention theft I’m thinking of today is not from foreign spies or evil competitors. It is internal theft, wherein a powerful employee or team within a corporation takes credit for another individual’s or team’s innovation. Sometimes the theft is so blatant that a powerful person files a patent in his or her own name, leaving off the name of the real inventor. Sometimes the real inventors are told to drop the project completely and hand over the keys of the new vehicle they have created so that someone else can ride it across the finish line and take all the glory.
When this happened to a truly brilliant man in a large company where I was providing some guidance in the past, I warned him that his kind of behavior was deadly for the future of their company. When people lose trust for their company and fear that their innovations will be stolen, they clam up, shut down their innovation engines, and save their best thinking for someone else, such as their own business one day or a future employer. When people don’t get any credit for what they do, they quit doing. If a company tolerates or even rewards internal invention theft and doesn’t zealously seek to reward true inventors, real inventors move toward secrecy or inactivity and the light of innovation goes dark. This is the fast and easy way to bring your company to your own version of the Dark Ages.
Yes, time travel is easy. You can go back in time by decades or centuries when you crush innovation by allowing it to be stolen from within. Going backwards is surprisingly fast. Once you feel the pain of your mistake, clawing your way back to the modern world might take a little longer than your think. Actual, most companies shrouded in the mists of the Dark Ages never realize what they’ve been doing wrong because they are out of touch with the voice of the innovators within. They can spend a lot on consultants solving the wrong problems and talking to the wrong people and never rebuild the trust they have shattered. When it comes to long-term corporate innovation success, trust between employees and the company is everything.
The new intellectual property book by Nick Nssing, Patents and Strategic Inventing: The Corporate Inventor’s Guide to Creating Sustainable Competitive Advantage (McGraw-Hill, 2013) is a refreshing guide to help inventors and leaders in corporations. It is a collaborative work with a variety of contributors (myself included) providing a few chapters in addition to the excellent core material from Nick.
Nick has many years of inventing and IP strategy experience at Procter & Gamble and Monsanto, where he is currently the Biotech Strategy Lead. He is also founder of Luminosity LLC, a consulting firm focused on new product development and patent strategy for large corporations. He is also an adjunct professor at Washington University. I’ve known Nick for a number of years and have been impressed with his approach to IP strategy and his business sense when it comes to IP.
This book provides a rich variety of material to help corporate inventors. Too often corporate inventors just sit back and let the attorneys handle everything, but Nick’s book shows that much better results can be achieved when the inventors are educated in patent strategy so that they can invent more strategically and work with the attorneys more effectively.
Part 1 offers a sound introduction to patentability, patent searching, and the role of the corporate inventor, and then explores patents in light of the America Invents Act. Many highly practical nuggets are there such as Chapter 9, “Working with Your Attorney: Nine Steps to a Better Utility Patent,” which offers insights from Byron Olsen, assistant general counsel at Monsanto. This section provides very practical information including a recommendation that inventors work with the attorney to “superinvent,” adding new concepts and uses for the invention to greatly broaden and strengthen the patent.
Part 2 deals with Patent Strategy, followed by Part 3, “Strategic Inventing.” These two sections get into more advanced topics such as building portfolios, analyzing landscapes, life-cycle management of IP, disruptive innovation (that’s my chapter: “Intellectual Property and Disruptive Innovation: Strategies, Tactics, and Lessons from China”), TRIZ, and guidance on implementing patent strategy at the project level. Overall, I find the book to be fresh, original, clearly written, and a good example of how one expert author can add value by collaborating with other contributors.
For more information, see the book’s website, StrategicInventing.com.
As we discuss in Conquering Innovation Fatigue, the profit motive can be important for inventors but is often not the real incentive behind the quest to invent. Steps that eliminate the opportunity to profit from invention, though, can be serious barriers to a nation’s innovation potential. The profit motive can be important for prospective innovators. However, a focus on profits can be utterly destructive to innovation within a corporation, where the incentives to those who lead other would-be innovators can create new barriers that kill the innovation future of the company. Ironically, what can be a helpful incentive for innovation to an individual can easily become a disincentive once distorted by the internal workings of a corporation. This is illustrated in recent analysis from Clayton Christensen. See an overview in the article “Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy” at Forbes.com. Christensen argues that ratio-based metrics for profitability distort corporate thinking and reward behavior that ultimately destroys the future of the corporation by creating short-term benefits in apparent profitability. We illustrate a related problem in the book with the Apple Tree Analogy, in which metrics for short-term profitability for an apple harvester get a dramatic boost when the apple trees are toppled, making it much faster to harvest the fruit. The future, though, becomes barren.
Corporations need to carefully consider the metrics they use for profitability, as Christensen teaches, and unlearn some of the sacred concepts they were given in business schools. They should also go one step further an consider the impact of their metrics on not just the long-term growth of the company as a whole, but also the individual innovator and the innovation culture within the company. Listening to the voice of the innovator inside the corporation should be an important exercise for its top leaders.
In the United States and many other nations, a question is being asked by many who struggle with the brutal reality of innovation fatigue. In many sectors, it is taking bigger investments, longer times, and much more pain to deliver innovation, and much of what passes for innovation in some sectors ends up being incremental fluff or mere cost-cutting. Some blame it on employee productivity, some blame it on short-term thinking in pubic companies driven by the unnecessary compulsion to please stockholders above all others, some blame it on the MBA culture instilled by leading business schools, and others blame it on governments that make every entrepreneurial move a slow trudge across the regulatory mire and a possibly fatal descent into quicksand. Some point to numerous factors including the capital crunch, creating a perfect storm in which even cash-rich companies are afraid to invest in real innovation because of uncertainty and fear.
Innovation fatigue, of course, is not uniform. Individuals and individual companies often buck trends and rise above currents of fatigue, and sometimes entire sectors seem energized and vibrant with innovation. For example, innovation in mobile applications and devices seems vigorous, but even then we have former innovation leaders like Nokia and Motorola feeling the burn of fatigue across many parts of their business.
Where are the real pressure points? What are the next steps that America or other nations need to take to restore a vigorous innovation culture across many sectors and help their nations overcome innovation fatigue? What do corporate leaders need to be doing differently to turn their companies in havens of innovation that can deliver growth and success for the long term? What do our political leaders need to do and understand to let the fire of innovation burn more brightly?
Let me know your thoughts. The five answers I like best will be rewarded with a free copy of Conquering Innovation Fatigue mailed to wherever you are. All submissions will implicitly have your permission to share them, though I will withhold your name if you ask me to. Send your comments to jeff at magicinnovation d0t com.
A painful message from the CEO of Nokia, shared below, reminds us that the pain of disruptive innovation often catches major incumbents unaware. As they listen to their existing customers and improve existing products and services, often incrementally, they may not sense the tsunami of change that is coming from afar. The innovations that will disrupt them often seem not good enough to threaten their core business. By ignoring the threats and opportunities around them, they continue to focus on core competencies and core markets and feel little pain until the new competition, ignore too long, has developed the skills and competencies to strike at the core itself. When the pain is felt, it is often too late. When the heat of a raging fire is finally felt and awakens you from your dreams, it is often too late. You may escape if you are lucky, but the building is likely to be lost. How will Nokia cope? Read the speech below, then we’ll discuss their newly announced plans.
Nokia’s CEO, Stephen Elop, gave this speech to employees last week and the transcript has been posted on several sites such as Casey’s Daily Dispatch, the Wall Street Journal’s TechEurope Blog, Ongo.com, MSDN.com. It is brutal and painful. A few years ago tech stock experts recommended Nokia as one of the leaders in the business and best investment opportunities. But by focusing on their existing markets and competencies, they missed the changes that would envelope the market and misallocated their innovation resources. They are now on a “burning platform.”
There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform’s edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters.
As the fire approached him, the man had mere seconds to react. He could stand on the platform and inevitably be consumed by the burning flames. Or he could plunge 30 meters into the freezing waters. The man was standing upon a “burning platform,” and he needed to make a choice.
He decided to jump. It was unexpected. In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times – his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a “burning platform” caused a radical change in his behaviour.
We too, are standing on a “burning platform,” and we must decide how we are going to change our behaviour.
Over the past few months, I’ve shared with you what I’ve heard from our shareholders, operators, developers, suppliers and from you. Today, I’m going to share what I’ve learned and what I have come to believe.
I have learned that we are standing on a burning platform.
And we have more than one explosion – we have multiple points of scorching heat that are fuelling a blazing fire around us.
For example, there is intense heat coming from our competitors, more rapidly than we ever expected. Apple disrupted the market by redefining the smartphone and attracting developers to a closed but very powerful ecosystem.
In 2008, Apple’s market share in the $300+ price range was 25 percent; by 2010 it escalated to 61 percent. They are enjoying a tremendous growth trajectory with a 78 percent earnings growth year over year in Q4 2010. Apple demonstrated that if designed well, consumers would buy a high-priced phone with a great experience and developers would build applications. They changed the game, and today, Apple owns the high-end range.
And then there is Android. In about two years, Android created a platform that attracts application developers, service providers and hardware manufacturers. Android came in at the high end, they are now winning the midrange, and quickly they are going downstream to phones under €100. Google has become a gravitational force, drawing much of the industry’s innovation to its core.
Let’s not forget about the low-end price range. In 2008, MediaTek supplied complete reference designs for phone chipsets, which enabled manufacturers in the Shenzhen region of China to produce phones at an unbelievable pace. By some accounts, this ecosystem now produces more than one-third of the phones sold globally – taking share from us in emerging markets.
While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. At that time, we thought we were making the right decisions; but, with the benefit of hindsight, we now find ourselves years behind.
The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience. Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes. Unbelievable.
We have some brilliant sources of innovation inside Nokia, but we are not bringing it to market fast enough. We thought MeeGo would be a platform for winning high-end smartphones. However, at this rate, by the end of 2011, we might have only one MeeGo product in the market.
At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America. Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.
At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us.
And the truly perplexing aspect is that we’re not even fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis.
The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyse or join an ecosystem.
This is one of the decisions we need to make. In the meantime, we’ve lost market share, we’ve lost mind share and we’ve lost time.
On Tuesday, Standard & Poor’s informed that they will put our A long term and A-1 short term ratings on negative credit watch. This is a similar rating action to the one that Moody’s took last week. Basically it means that during the next few weeks they will make an analysis of Nokia, and decide on a possible credit rating downgrade. Why are these credit agencies contemplating these changes? Because they are concerned about our competitiveness.
Consumer preference for Nokia declined worldwide. In the UK, our brand preference has slipped to 20 percent, which is 8 percent lower than last year. That means only 1 out of 5 people in the UK prefer Nokia to other brands. It’s also down in the other markets, which are traditionally our strongholds: Russia, Germany, Indonesia, UAE, and on and on and on.
How did we get to this point? Why did we fall behind when the world around us evolved?
This is what I have been trying to understand. I believe at least some of it has been due to our attitude inside Nokia. We poured gasoline on our own burning platform. I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven’t been delivering innovation fast enough. We’re not collaborating internally.
Nokia, our platform is burning.
We are working on a path forward — a path to rebuild our market leadership. When we share the new strategy on February 11, it will be a huge effort to transform our company. But I believe that together, we can face the challenges ahead of us. Together, we can choose to define our future.
The burning platform, upon which the man found himself, caused the man to shift his behaviour and take a bold and brave step into an uncertain future. He was able to tell his story. Now we have a great opportunity to do the same.
Alex Daley’s commentary at Casey’s Daily Dispatch on this memo is among the best. A few excerpt from Alex follow:
But one of the mobile world’s most celebrated early stars is fading, and fast – Nokia. The Finnish mega-company traces its roots all the way back to the rubber industry in 1865. But it evolved over nearly a century and a half into the largest mobile phone supplier in the world. At its peak, the company accounted for the majority of all phones in the world. However, lately things have begun to unwind. Market share for the company has slipped from 39% in 2008 to 35% in 2009, and again to 30% in 2010.
Not only is their global market share decreasing, they’re being assaulted from every side and find themselves with shrinking influence, shrinking margins and shrinking options. Apple, RIM, and the contingent of Android phone manufacturers around the world have gulped up the overwhelming majority of the high-end smartphone market, where profit margins are high. On the other end of the spectrum, Chinese technology outfits have begun to lock up the massive lower end of the market, turning out designs and equipment at a breakneck pace.
Desperate to find relevance in a market moving on without the company, last year they appointed former Microsoft executive Stephen Elop to the position of CEO. He has been pretty quiet since he joined the company, taking his time to learn the business and get to the root of the issues that cause the market to value this technology giant at less than the $43 billion in revenue it generated last year. Quiet until now….
And [Elop’s] use of the term “platform,” while symbolic, seems like a calculated choice for a company that staked its future on a failing developer platform known as Symbian, and a long delayed smartphone platform called MeeGo yet to even launch nearly four years after the iPhone was originally released….
The question of the hour is not just whether or not that will happen, but whose platform it will be. Apple doesn’t license. HP has locked up WebOS with its Palm buy. That really only leaves Google, whom Elop cites as a competitor, and Microsoft, his Alma Mater, which goes completely unmentioned in the damning note….
Elop’s failure to mention Microsoft was certainly deliberate, for a few days later he announced a major partnership with Microsoft aimed at saving the company. See “Microsoft, Nokia Agreement Signals New Smartphone Game,” a Feb. 14, 2011 story from EWeek.com.
Microsoft and Nokia announced a wide-ranging partnership Feb. 11, which will include running Windows Phone 7 on Nokia smartphones, in a combined bid to blunt the competitive momentum of Google Android and the Apple iPhone.
“We have a formidable plan to ensure our collective leadership in the smartphone market and in the ecosystem that surrounds it,” Nokia CEO Stephen Elop told a London press conference. “Our long-term strategic alliance will build a global ecosystem that creates opportunities beyond anything that currently exists.”
Now comes the hard part: actually building that ecosystem.
A formidable plan? I’m sorry, but part of me cringes when anyone declares that the plan they created is “formidable.” Too close to “fool-proof.” And we went from desperation on the brink of ruin on a burning platform one day to a formidable plan the next? Eweek mentions some reasons to restrain enthusiasm:
“Microsoft wins big in this arrangement, having gained a partner for an OS that is struggling in the market and losing share even among its current device suppliers (e.g., HTC),” Jack Gold, principal analyst of J. Gold Associates, wrote in a Feb. 14 research note. “Nokia brings huge scale and can dramatically increase WP7 market share beyond its traditional reliance on vendors with much lower market share. And this precludes Microsoft from having to enter the device market directly (as it did with its Kin disaster).”
However, some analysts see the deal as a decidedly negative one for Nokia, particularly in the longer term.
“We think Nokia has created a new set of issues—a lack of ecosystem control, margin decline and a raft of new royalty payouts—in return for a ‘unique relationship,'” Lee Simpson and Andrej Krneta, analysts with Jeffries & Co., wrote in a Feb. 14 research note. “With WP7 as Nokia’s new primary smartphone OS, why would any operator take an end-of-life product (Symbian)? This can only cap the top line for Nokia going through 2011 and much of 2012.”
The analysts believe that Nokia’s first Windows Phone 7 devices will be “hollowed out ‘N8s’ or the like,” referring to one of the manufacturer’s higher-end smartphones. “Despite longer-term assertions of speedy time to market designs, the overhauling of road maps (and cancellations near-term) will likely dent near-term progress and leaving Nokia dangerously exposed to further market-share erosion.”
I wish Nokia success, but feel that it will take more than Microsoft to bring them success. Innovation fatigue needs to be addressed at multiple levels in the company and the culture radically strengthened to reach their destination. Otherwise, further fatigue may stand in the way.