Behind the latest job cuts, software outsourcing and R&D budget slashing at Nokia lurks a potentially explosive issue: a dependence on US operating systems and confrontation with differing data privacy practices.
Nokia is trying to get a handle on its mobile phone business
As Apple and Google of the US continue to win market share in the market for smartphones, Finland's Nokia has reacted by axing 7,000 jobs, outsourcing its Symbian operating system unit and slashing its research and development (R&D) budget by 1 billion euros ($1.46 billion).
The move, while expected by analysts, is nevertheless draconian for a company that has dominated the mobile phone scene for years and taken huge pride in hiring top talent and pioneering cutting-edge cellular technology.
The manufacturer will lay off 4,000 staff in Finland, Denmark and Britain, and transfer another 3,000 from its Symbian software division to US information technology company Accenture. Those numbers represent about 12 percent of its phone unit workforce.
Calls for change
At the same time, the company aims to cut R&D costs by 1 billion euros, or 18 percent, by 2013 from 5.65 billion euros in 2010.
Apple has shown how to make money with iPhones and iPads
While Nokia is still the world's largest mobile phone maker by volume, Apple is making more money from its pricier phones. And this development has led to calls for change at the Finnish handset maker.
In February, Nokia chief executive Stephen Elop - the first non-Finn to run the company - sent a memo to employees comparing the company to a man on a "burning platform" and prescribed big changes, which he has been delivering ever since.
Among the first: Elop announced a strategic partnership with Microsoft. Under the agreement, Nokia will begin either late this year or early next year to ship phones using the US software giant's Windows Mobile operating system.
The tie-up with Microsoft has more or less signaled the beginning of the end for the rival Symbian operating system used in Nokia phones. Most analysts give Symbian little chance of survival without a full commitment from the Finnish vendor.
Bye bye Symbian
And if Symbian disappears, so would Europe's last operating system, which is essentially the heart of a mobile phone. It is packed with stacks of software protocols that control not only how voice and data connections are made but also how applications like location tracking and mobile advertising function.
German data protection commissioner Peter Schaar is keeping a close eye on US software vendors
Many of those applications require collecting data on users' location or browsing habits and thus raise privacy issues.
"Whoever makes the outer shell is not as important as who makes the operating system," said Emma Mohr-McClune, a wireless specialist with Current Analysis. "We're going to have only American operating systems whose applications will be regulated in their home market first. Europe won't have much to say. There will be a political dimension to this."
And it's already brewing. Regulators in Germany, France and Italy are currently checking whether Apple's iPhone and iPad products violate privacy rules by tracking, storing and sharing data about the locations of users. The Apple probes in Europe echo a similar scrutiny of Google over wireless Internet data collected by its Street View service.
Same behavior pattern
Peter Schaar, Germany's federal data protection commissioner, said his agency has been experiencing a similar pattern.
"The vendors collect data for an application and where there is resistance, as was the case with Google's StreetView, they step back," he told Deutsche Welle. "We've observed the same behavior with Apple. When criticism comes, they first say there's nothing to worry about and if they can't convince anyone, they say it's a software problem. This behavior hardly strengthens trust among data protection authorities and consumers."
Schaar added that a European vendor can be controlled more closely by European officials. "When a European company gives up its operating system business, this increases dependency on using these services from abroad," he said.
Peter Cunningham, an analyst with Canalys in London, points out that many popular smartphone functions like street navigation require personal data and many free services are financed by targeted advertising.
"Users need to accept a level of data collection if they want to use these services," he told Deutsche Welle. "But data security is definitely an issue and will play an increasingly important role as Internet-enabled services grow, and they're growing steadily."
Author: John Blau
Editor: Nicole Goebel