Nokia's iPhone Envy—and Comeback Plan

posted May 3, 2010, 5:30 PM by Unknown user   [ updated May 3, 2010, 5:37 PM by Unknown user ]

Two years ago, Nokia (NOK) opened a store on London's Regent Street to showcase its highest-tech handsets. Today, the phones and Nokia logos are gone and the windows on the empty storefront are covered in black plastic. To understand why, look across the street at the Apple Store, where Federico Crosato, 24, is ogling an iPhone. "I'd definitely pay more for Apple than Nokia," he says.

Nokia was once the BMW of mobile, says Gartner researcher Carolina Milanesi (IT). These days, she says, "Ford is what comes to mind. Reliable, not expensive."

In announcing its earnings on Apr. 22, Nokia said operating margins for its handset unit will likely be 11% to 13% for the year, down from 20%-plus for much of the past decade. For the current quarter, they could drop to 9%, as the average price of its smartphones has fallen by 18% over the past six months, to $206. Discounts have taken a toll on profits, which were $467 million for the first quarter. While that number was nearly triple the results of a year earlier, it fell shy of analysts' estimates, sending Nokia shares down 14% on the day of its earnings announcement.

CEO Olli-Pekka Kallasvuo intends to fight back with products that are "more intuitive, fun, and faster," he assured analysts in a conference call on Apr. 22. The problem is, Nokia's attempts at touchscreen phones so far have been underwhelming. The 5800 XpressMusic and N97 have sold reasonably well, but buyers have complained about sluggish response and cluttered, buggy software.

On Apr. 27, Nokia introduced the N8, a touchscreen phone with a new version of its Symbian operating system. The model won't be shipped until this fall, though. "While this is somewhat later than our original internal plan, it is really most important to get the quality and the user experience right," Kallasvuo said on the conference call. Smartphone chief Jo Harlow insists Nokia is doing just that with the N8 and other new models. The devices "will change the perception that people have."

If Harlow is wrong and the new smartphones fail to wow customers, they "will do further damage to a brand that's already weakened," says Ben Wood, an analyst with research house CCS Insight in London. "Another N97...could have a catastrophic impact on Nokia's ability to compete in the higher-value smartphone space."

Nokia is still the world's No. 1 handset manufacturer. It sold 108 million phones in the first quarter, up 16% from a year ago. But investors don't seem to have much faith that it will regain its strength. Since 1999, Nokia's market value has fallen from $208 billion—then Europe's highest—to $45 billion. "They've had product delays across the board, while Apple is stacking up substantial gains," says Alexander Peterc, an analyst at Exane BNP Paribas. "Even if Nokia comes out with some devices in the second half and they're pretty damn revolutionary, it will be hard for them to compete."

The bottom line: Failure to create a top-selling smartphone could "have a catastrophic impact on Nokia's ability" to compete with Apple and RIM.

With Matthew Campbell and Howard Mustoe

Ben-Aaron is a reporter for Bloomberg News.