How Nokia got bamboozled by Hollywood

Now that it seems fairly certain that Nokia is dead, or at the very least, dead as a stand-alone company, it’s easy to wonder what it was exactly they were up to over the past few years. How bad did things have to get for Nokia to flush every piece of software they have ever built down the toilet and adopt Windows Phone across the board?

There were many disastrous projects that Nokia embarked upon to counter the existential iPhone threat, but I would like to talk about one part of Nokia that I had constant exposure to: Comes With Music.

(Note: I should mention that I was running an ill-fated music startup when Comes With Music was rolled out, so I spent a fair amount of time trying to figure out what the competitive threat was, listening to music industry gossip, and having direct conversations with Nokia to see if there were ways we could work together. This experience provided my “insider” view of this stuff.)

At any rate, here is Wikipedia’s description of Comes With Music:

In 2007 Nokia set up their “Nokia Comes With Music” service, in partnership with Universal Music Group International, Sony BMG, Warner Music Group, EMI, and hundreds of independent labels and music aggregators, to allow 12, 18, or 24 months of unlimited free-of-charge music downloads with the purchase of a Nokia Comes With Music edition phone. Files could be downloaded on mobile devices or personal computers, and kept permanently.

In January 2011 Nokia withdrew this program in 27 countries, due to its failure to gain traction with customers or mobile network operators; existing subscribers could continue to download until their contracts ended.

From a fascinating June 2008 Fast Company article:

The last comment elicits snickers from every table. Ojanperä waits for the last chuckle to die. “You can laugh and say, ‘What is the point? Nokia is a cell-phone company; it will never get into the entertainment business.’ That’s okay. Laugh. That’s what people did when we said we were going to be the biggest cell-phone company in the world – back when we were making car tires and rubber boots.”

Before being named executive vice president for entertainment and communities in January — a job created specifically for him — Mr. Ojanpera held a number of senior management positions, including chief technology officer, chief strategy officer and head of the Nokia Research Center, where he and his colleagues studied consumer behavior and design.

But he does not perceive his lack of media experience as a hindrance. “This, to me, is about curiosity and the willingness to learn something new,” he said. “You can have really smart people, but things don’t necessarily change. The challenge is who can translate those ideas into practice.”

So why was Comes With Music the path to Nokia’s salvation?

Picture this: Nokia was #1 and was by far the largest volume handset manufacturer. However, margins were being driven lower and lower by commodification. What could Nokia do to escape the race-to-zero in handset margins as time marches on? Their answer: stop worrying about hardware margins, and turn Nokia into a full-fledged media company.

Not only could Comes With Music be their answer to iTunes, it would be better. One Nokia executive explained to me how amazing it would be to buy a new Nokia phone that was stocked full of (DRM-crippled) music the moment you bought it, vs iPhones which have blank harddrives. They were able to do this because of their deep (aka expensive) relationships with the content industry. Sure, all of these tethered downloads evaporate after 18 months, forcing the user to pay out-of-pocket so that their music doesn’t evaporate, but wow, FREE* MUSIC!

In addition to this, Nokia would be embarking towards a future business where they could directly produce, create and license content that would be exclusively available to Nokia customers. Want to hear the new Justin Bieber album, or see the new Tyler Perry movie? You better own a Nokia phone.

In this vision, Nokia hardware is simply a low-margin transmission of their new media company ambitions. Future Nokia would only need to worry about hardware and software as much as Comcast currently worries about the hardware and software comprising my cable box. Access to exclusive, high-quality content seemed like Nokia’s perfect Deus Ex Machina.

The music industry loved this ridiculous vision because they could publicly and privately vilify Apple as cheapskates that don’t want to “innovate” in licensing and consumer music experiences.

Despite the obvious brain damage inherent in this strategy, Hollywood functioned as enablers for Nokia’s pipe-dream. As long as the checks kept clearing, Hollywood was happy to provide A-list access to Nokia, publicly treat them like kings, and provide constant assurances that a transformation into a new-media empire combined with “deep relationships” with the content industry would undoubtedly unseat that cheapskate bully, Apple.

Apple won, and continues to win, because it has the best product. The entire Comes With Music disaster was Nokia spending precious money, time and effort building a cargo-cult version of Apple’s content ecosystem. Apple has a vibrant content ecosystem because they have the best consumer product, not the other way around.

I originally wrote a draft of this post that pointed out the similarity of this Nokia strategy with MySpace’s “but, but, we have content” competitive position vs Facebook, and Yahoo’s “premium content” angle vs Google. But there is just too much to talk about here, I think each of those cases deserve thoughtful analysis.

The takeaway is this: if you are running a tech company that is successfully dominating a space, and then find yourself making defensive moves because your product is getting beaten in the marketplace, DON’T roll out a hot new strategy that entails dropping >$1B in Hollywood “to become a media company.” History would suggest this probably won’t work.

If it’s any consolation, however, your “media company” initiatives will ensure your executives will get to go to some really fun parties.