They Built the First Phone You Loved. Where in the World Is Nokia Now?

Nokia has arguably been in the communications technology business for a century and a half. “Arguably” because, for that to be true, one needs to consider the company’s original product, paper pulp, a communications technology. Also, one has to know that Nokia Corp. is still in business.

To those who think nostalgically of mobile phones when they hear Nokia, that may not be obvious. For 14 years the tech giant reigned as the world’s biggest handset maker and, while it was at it, a primary engine of Finland’s economy. The company’s fall, however, was swift. In 2012 it lost $4 billion. In 2013 it agreed to sell off its phone business, which employed 32,000, to Microsoft Corp. “It’s evident Nokia doesn’t have the resources to fund the required acceleration across mobile phones and smart devices,” said the company’s chairman, Risto Siilasmaa, in announcing the sale.

But while Nokia has gotten smaller, it remains a big company, with net sales of $26.1 billion last year. It’s a very different company, though, than it was in the heyday of its simple, durable, adorably chunky phones. By and large, it no longer makes things consumers can buy. Today, its familiar all-caps logo is mostly found on network processors, routers, base station radio access units, and other components of the largely invisible infrastructure that undergirds the mobile internet.

The problems Nokia has to solve to meet the world’s constantly growing demand for data are devilishly complex. Along with rivals including Sweden’s Ericsson (another faded leader in mobile phones) and China’s Huawei Technologies Co. (a more recent contender), the company has reinvented the humble cell tower with sophisticated software that aims beams of data at individual users as they move through the world.

The next two years are going to be a particularly important time for Nokia, as the industry begins rolling out the next generation of wireless networks. So-called 5G will bring faster and richer data. According to Nokia and its rivals—the developers of the underlying equipment—those changes will enable a whole new set of mobile-dependent technologies: driverless cars, telemedicine, more fully automated workplaces, and other changes we’ve yet to imagine. “I want to be a company that helps large enterprises digitize,” says Nokia Chief Executive Officer Rajeev Suri. The company’s bet on 5G is its biggest one since it got out of the phone business. If it fails, it will need to radically reinvent itself once again.

Nokia is older than Finland. The groundwood pulp mill with which the company got its start was built in 1865 near the town of Tampere, in the southwest of what was at the time a grand duchy of Russia. And though Finland gained its independence in 1917, the Nordic nation’s economic history continued to be shaped by its proximity to Russia. Finland allied with Nazi Germany against the Soviet Union during World War II and afterward had to pay crippling war reparations to Joseph Stalin’s USSR. As Finns today are quick to remind you, only their country paid the entire sum the Allies assessed it—$300 million in 1938 dollars—and Stalin’s demands for trucks and trains forced Finland, a largely agrarian economy, to become an industrial one.

Nokia was at the center of that transformation. By the beginning of the 20th century, the company had already branched into electricity generation and wiring, phone cables, and rubber tires and boots. By the second half of the century, it was a conglomerate making everything from TVs to gas masks. In the early 1960s, Nokia started producing police and military radios. In 1982 it came out with a carphone and got into the networking business with a digital switch for phone exchanges. In the late 1980s the company began putting more and more resources into the burgeoning business of mobile phones.

Its success there can be traced in part to the development of something called the Nordic Mobile Telephone system. The government agencies responsible for regulating communications in each of the Nordic countries coordinated with one another to design a common platform so early-adopting citizens could travel between neighboring countries without losing service. It was an analog system, not digital, but it was able to solve the problems of how to locate subscribers as they moved and how to hand them off from one cell tower to the next. Every G since then, including 5G, is a descendant of NMT.

At first, Motorola dominated the nascent global industry, but Nokia overtook them in 1999, partly by switching to a faster and more secure digital system while its American rival clung to analog. “Nokia has had this streak of extreme risk-taking for decades,” says Tero Kuittinen, co-founder and chief strategist of Finnish mobile app investment firm Kuuhubb. “When Nokia moved heavily into mobile phones in the early ’90s, a lot of people said that’s completely crazy, because this was a cable manufacturer. And then when they decided to move into digital from analog in the mid-’90s, many people thought it was way too aggressive.”

Nokia’s value to Finland’s economy and national psyche is hard to overstate. The company’s rise helped lead the country out of a crippling depression caused partly by the collapse of the Soviet Union, its largest trading partner. In 2000, Nokia accounted for a third of gross domestic product growth, according to research by ETLA, a think tank in Helsinki. The taxes paid by the company and its numerous local component suppliers supported Finland’s generous welfare state and world-beating education system. Nokia alone accounted for almost a third of the country’s research and development funding, public and private. At the time, Finland was spending more of its GDP on R&D than almost any country on earth, says Jari Gustafsson, permanent secretary of Finland’s ministry of economic affairs and employment.

But Nokia, which had been quick to see the benefits of digital networks, was too slow to react to the promise of the smartphone. The high cost of iPhone-style touchscreens made the company opt for cheaper versions or skip them entirely. Even in Finland, customers complained about having to hammer at their Nokia screens to get the phones to work. Their complex menus seemed needlessly baroque compared with the elegance of the iPhone’s touch controls and, later, its apps. Apple Inc. and the Korean phone makers Samsung Electronics Co. and LG Electronics Inc. left Nokia far behind.

Nokia’s troubles became Finland’s. The contraction of the country’s biggest company and its dependent suppliers added drag to an economy already struggling with high labor costs and public spending. As part of the euro zone, Finland was also unable to devalue its currency to stimulate spending. The country fell into a period of stubborn stagnation from which it has only now begun to recover.

When Siilasmaa was appointed head of Nokia’s board in 2012, he recalls, “we were in a really difficult spot in multiple ways.” He’s sitting in a ground-floor room at the company’s headquarters in Espoo, Finland’s second-largest city after nearby Helsinki. It’s early June and the kind of weather Finns wait for all through their long, dark winter.

Siilasmaa founded local cybersecurity company F-Secure Corp., and when he was brought on at Nokia, the phone maker was listing dangerously. Device sales were down 26 percent in the second quarter of 2012 from a year before, to $4.5 billion. “Our employees were quite demotivated from all the bad news around us. The press was speculating when our bankruptcy will happen, not if,” he says. Siilasmaa helped lead the company through the sale to Microsoft, which was already providing the operating systems for Nokia’s phones. Nokia CEO Stephen Elop, who had come from Microsoft, went back with the phone business, and Siilasmaa took over as interim CEO.

The deal was a minor national trauma in Finland. It was also a way to make the best of a bad and rapidly deteriorating situation, freeing the company to concentrate on profitably selling equipment to wireless providers. Until then, Suri had run that business as a joint venture with Siemens AG. Since assuming control in 2009, he had lifted it from losses to 12 percent operating margins by cutting costs and focusing on the U.S., Japan, South Korea, and other wealthier markets. By mid-2013, Nokia had bought out all of Siemens’s share. “With the devices business sold, that became the core of the new Nokia,” Suri says. At the time, Siilasmaa says, the board was also weighing whether to buy a slice of a smaller French competitor, Alcatel-Lucent SA. Last year, Nokia bought the entire company.

Nokia phones haven’t entirely vanished. Last year, Microsoft, faring no better than Nokia with the handset business, sold it to a subsidiary of Chinese phone maker Foxconn Technology Group. In partnership with Finnish company HMD Global Oy, Foxconn is creating a line of entry- to mid-level Nokia-branded phones and tablets. The first of the phones, which run Google Inc.’s Android OS, began shipping earlier this year. More materially for Nokia, the company has held on to its phone-related intellectual property, which has proved a source of considerable income—and some friction. The company has clashed repeatedly with Apple over those patents, resolving the most recent battle in May. The companies also announced that Nokia will provide networking services to Apple, while Apple stores will carry some Nokia items.

The majority of Nokia’s revenue, however, comes from selling wireless service providers such as Verizon, AT&T, T-Mobile, Korea Telecom, and Deutsche Telekom everything they need to connect their customers: radio transmitters, switches, servers, antennas, and the software that makes them all work. The company sets up the networks, tests them, and, for a fee, will even run them. With the Alcatel-Lucent acquisition, Nokia now also sells the so-called fixed systems that cable companies use to bring data into homes.

And although mobile providers must constantly replace and update parts of their infrastructure, the real bonanza is when everyone can be persuaded to upgrade to the newest-generation platform. Each “generation” is simply a set of technical requirements hashed out in a series of international meetings to ensure that all the equipment—servers and switches, transmitters and phones—can communicate. The requirements for 5G, expected to be finalized within a year, will include significant improvements in download speeds, reliability, the number of devices that can be supported in any given area, and latency (the delay between when information is requested and when it’s received). Verizon, AT&T, and T-Mobile have all announced trials in select U.S. cities, and South Korea Telecom has promised to put a system in place by the time it hosts the Winter Olympics in February.

The general consensus is that the obstacles to 5G are solvable, if tricky. According to Lauri Oksanen, Nokia’s head of R&D, “The real bottleneck is the air, from those antennas to your handset.” His researchers are working on a few interrelated technological fixes to ease that logjam. Part of the solution is to move to untouched higher frequencies on the radio spectrum. Nokia and its competitors are designing antennas to transmit in the part of the spectrum between microwaves and infrared waves, a much higher frequency than the ones used by most mobile phones today. The trade-off: The higher the frequency, the shorter the wavelength, so these so-called millimeter waves can’t travel through walls or trees or people. Even the plastic covering on an antenna can obstruct the signal, Oksanen says. That means service providers will have to set up little antennas all over the place—on light posts and roofs, and throughout the interiors of buildings. That process will require negotiating with property owners, one of the 5G hurdles that isn’t strictly technological.

The key for Oksanen’s team will be making antennas, formerly dumb masts of metal, much smarter and more efficient. Increasingly, the performance of the systems Nokia sells is determined by software that routes signals and data in complex ways. Meeting the 5G requirements is largely a matter of refining techniques Nokia already uses. One of them, massive MIMO—or multiple input, multiple output—involves putting large numbers of very small antennas together in arrays, using software to coordinate them so data transmission and reception can be divvied up faster and more reliably.

Another technique, beam-forming, trains the cellular signal like a spotlight on a particular area—and can even track a single user—rather than radiating out in all directions. It’s achieved by manipulating the timing of transmission from the different antenna elements. “When you feed the signal into the antennas, you can change the phase of the signal for each of them slightly. So without physically turning anything, you can turn the direction of the radio beam by having phase differences between the antennas,” Oksanen says, holding up his hand to mimic an antenna array. “I’m thinking how to make that more visual, but maybe you have to take my word for that.”

It’s unclear whether consumers will be able to notice all the improved capacity Nokia and its rivals are promising. The main topic at the Mobile World Congress in Barcelona this spring was whether 5G is really a revolution or just marketing hype. Suri understands the skepticism. For the typical iPhone or Android user, 4G already has low enough latency. “Today you have 50 milliseconds on the network you’re on. If it goes to 1 millisecond, yeah, fine, you can download a movie in maybe three seconds,” he says. “That would be nice, but I don’t think you and I are ready to pay much more for it.”

The real possibilities of 5G, he argues, lie in other sorts of uses: Going down to 1 millisecond would allow for better coordination of driverless cars and trucks. Factory robots could be untethered from cables, allowing assembly lines to be more fluid. Homes could be connected to the internet wirelessly, introducing competition into the oligopolistic cable market. There’s even talk of remote robotic surgery.

According to some analysts, though, the problem with these tantalizing use cases is not just that they’re conjectural; even if they become reality, they won’t require a leap to 5G and the root-and-branch network upgrades Nokia is counting on. “Saying, ‘Build it and they will come,’ is lovely if you’re building a baseball field in a cornfield,” says Bill Ray, a director at researcher Gartner, “but you’re asking wireless companies to invest millions and millions of dollars.” All the futuristic 5G applications Nokia and its competitors talk about, he says, could work serviceably over existing wireless networks or Wi-Fi.

Of course, a similar skepticism greeted each previous wireless generation, and Nokia’s leadership is adamant that the demand for faster, richer, more ubiquitous wireless data will continue to increase. The company needs it to. Even after the Alcatel-Lucent deal, Nokia still trails Huawei in sales of networking equipment, and business has slowed in recent years as carriers have pared their purchasing in advance of the transition to 5G.

The company is also trying to edge back into the consumer electronics business. Last year, it purchased a French company called Withings, which makes sleek fitness trackers, thermometers, and baby monitors, now under the Nokia brand. The company has just begun selling a $40,000 virtual-reality camera called the Ozo, aimed, for now, at professional filmmakers. VR is the sort of technology that could drive even average users past the limits of 4G’s capabilities because it demands huge data speeds and very low latency to preserve the immersive illusion and keep viewers from feeling nauseous. If Nokia’s growing catalog of tools and toys gets people using and demanding more data, that’s great for the 5G architects. And if the company can create products that ordinary people want to buy again, all the better. —With Kati Pohjanpalo