Nokia's Precarious Position in the Mobile Phone Industry

by Tony D'Altorio

Nokia's Precarious Position in the Mobile Phone Industry

by Tony D'Altorio, Investment U Research

Wednesday, September 15, 2010

Finnish mobile phone maker, Nokia ADR (NYSE: NOK), can't seem to match the rest of the industry's pace of innovation. Apple (Nasdaq: AAPL), with its iPhone, and Google (Nasdaq: GOOG), with its Android operating system, have sprinted far ahead.

As the Internet becomes more widely available to sophisticated smartphones, making good hardware has become secondary to making good software. The new guys like Apple and Google get that, while established handset makers like Nokia seem incapable of following along.

Stockholders have paid the price for the company's failure to produce an iPhone alternative. Since 2007, Nokia shares have fallen by almost two-thirds, and it has lost over $64 billion in market capitalization.

Now, before you write it off, Nokia has beaten the odds before. It has renovated itself from an unprofitable business into the world's largest mobile phone maker.

But can it do it again? That depends...

Nokia's Incredible Shrinking Mobile Revenue

When it comes to smartphones, Nokia still leads in sheer volume. But its share of the mobile phone industry's revenue continues to shrink.

In the fourth quarter of 2007, Nokia's handset business had an operating profit margin of 22.8%. Their most recent report showed a drop down to 9.5%

That's because industry earnings now center on producing Internet-connected smartphones. Credit Suisse paints Apple as about to overtake Nokia this year in securing the largest total operating profit.

Nokia still technically rules in fast-growing markets like China, India, and Russia. But even there, it has problems.

  • Low-cost Chinese manufacturers have begun attacking the company's position as the biggest supplier of low-end handsets in emerging markets. So Nokia's once-dominant position now faces fire from both the low-end and the high-end.
  • And while it has successfully risen above challenges before, this time is different. Because in order to secure its future, Nokia must somehow transform itself from a hardware maker to a software and services company... products it has struggled to produce in the past.

Sure, Nokia launched the N97 smartphone last June. But that was a disaster, mainly due to the antiquated operating system it ran on: Symbian. It just can't seem to provide a user-friendly, Internet browsing experience.

By contrast, Apple not only combines hardware, software and Internet-connections, but it does it all with flair.

And even HTC and SonyEricsson are now churning out cheaper but still sophisticated, Android-operated smartphones. That operating system has become so popular over the past 18 months that it could even dominate Europe and Asia, where Nokia has long reigned.

Introducing Stephen Elop... Named Nokia's New CEO

Nokia knows what it has to do. And it has named a new CEO, Stephen Elop, in order to do it.

Elop makes for the first non-Finn to lead the company. A Canadian, he used to head up the business division at Microsoft (Nasdaq: MSFT), where he was responsible for the Microsoft Office program, servers and software-based services, and business applications for companies.

Some industry insiders see his strong, computer software track record as crucial to filling Nokia's strategy gaps. Despite his lack of experience dealing with consumer products, Elop has the potential to do very well.

Prior to his stint at Microsoft, he held several senior management positions at Macromedia, best known for its Flash desktop product. That allowed him to work with the company's product for mobile phones.

For now, Elop, like every new CEO, deserves the benefit of the doubt. Nokia could still turn around if he points it into other areas and captures leading positions in markets for newer products like the tablet.

But whatever he decides, he has to do it quickly. Nokia risks increasing pressure with every failed attempt.

Investors could easily demand the company abandon its Symbian operating system altogether. And that, more than likely, would force it to adopt Android for its smartphones.

If so, that would amount to an admission of defeat for Nokia in its quest to transform itself into a software and services company. Instead, it would look like an unprofitable, commoditized hardware seller.

In the end, Mr. Elop faces a daunting challenge with an unclear outcome. But we wish him the best all the same.

Good investing,

Tony Daltorio

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