Nokia's Results Sag Amid Faint Hope

By most measures, the world’s largest maker of mobile phones delivered disappointing second-quarter results on July 22. Revenues grew less than 1 percent from the same quarter a year earlier, to €10 billion ($12.89 billion), and profits plummeted 40 percent, to €227 million ($292.5 million), below consensus analyst estimates of €285 million.

Nokia held onto 33 percent of the mobile phone market, but the average selling price for the 111.1 million phones it shipped in the quarter fell to €61 ($78.60) from €64 ($82.46) a year earlier. That helped pull down its operating margins on handsets and services to 9.5 percent, from 11.6 percent a year earlier.

Was there any good news? You have to dig down a bit to find it, but Nokia reported a few bright spots. The market for smartphones—higher-priced devices that typically support e-mail, multimedia, wireless browsing, and downloadable apps—is where Nokia’s shortcomings vs. rivals Apple and Research In Motion has been most evident. But in the second quarter, the Finnish company sold 24 million such devices, up 42 percent from a year earlier, according to market researcher Strategy Analytics. The overall smartphone market grew at about the same rate, so Nokia held its share from a year ago, at 40.3 percent, and actually grew share slightly from 38.8 percent in the first quarter of this year.

This seems an astonishing idea, given the rise of the Apple iPhone and continued high visibility for RIM’s BlackBerry devices. What accounts for Nokia’s relatively strong showing (RIM had 18.8 percent of the market in the second quarter and Apple had 14.1 percent, both slightly down from the first quarter, according to Strategy Analytics) is Nokia’s vast powers of global distribution and a preponderance of lower-end models in its lineup that appeal to aspirational buyers in emerging markets.

The result, of course, is that Nokia smartphones sell for a lot less, on average, than those from rivals. Average prices in the second quarter fell to €143 ($184) from €181 ($233) a year earlier. By comparison, Apple’s smartphones generate $635 each in hardware and services revenues—which helps give Apple far better margins. Still, it’s arguable that selling nearly 4.4 million more devices than your next two rivals combined gives Nokia a certain pride of place.

Whether that will translate into a better array of online services and wider range of downloadable apps remains very much in doubt. Apple claims to offer more than 250,000 iPhone software programs now in its App Store, whereas the number of apps available for Nokia's Symbian operating system through the company's Ovi portal, though undisclosed, is thought to be only a fraction as many. For now, Nokia and Symbian are losing the battle for developer mindshare in creating the sexiest and best-selling smartphone apps.

Underscoring that point, Technology Business Research in Hampton, New Hampshire notes that many of the models counted as "smartphones" in Nokia's results, "lack the capabilities of modern smartphones from competitors." In a research note entitled Nokia's Results Demonstrate a Failure to Innovate, TBR analyst Ken Hyers argues that non-competitive low-end models have "led directly to [Nokia's] share declines in the U.S.," where the company sold just 2.6 million phones of all kinds in the second quarter, down 19% from a year earlier. Without an improved U.S. presence, the company stands little chance of recapturing momentum among software developers.

Nokia has a plan to fight back, which rests largely on two new software environments. The first is an overdue third-generation version of Symbian, called Symbian^3, that adds new features and will ship inside a new smartphone, called the N8, by the end of the third quarter. TBR is dismissive of the software, saying it "lags capabilities offered by the Android and Apple iPhone OS." And Strategy Analytics warns that limited distribution of the N8 in the U.S. means it "may not achieve its full sales potential." But Nokia chief executive officer Olli-Pekka Kallasvuo said July 22 in a statement that the N8 "will have a user experience superior to that of any smartphone Nokia has created," and promised that it and subsequent Symbian^3 devices will "kick-start Nokia's fight back at the higher end of the market."

Further down the road, Nokia will introduce a more powerful Linux-based operating system called MeeGo that it is creating with Intel. In development for years under the name Maemo, the software is meant to be powerful enough to drive sophisticated next-generation smartphones as well as other wireless-connected devices such as netbooks and tablets. Question is, will it be too late?

Nokia is still a giant in mobile phones and it has so far staved off disaster in smartphones, though the drumbeats of doom are growing louder. More quarters like the one reported on July 22 might shorten the company's horizons or provoke a further management shakeup. Stay tuned.

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