There’s nothing like seeing your closest competitor in a marathon stumble, their footsteps fading as you alone lead with the wind at your back.
That, in essence, is Nokia Corp.’s position in the handset business.
Of course, if a competitor can stumble, so can you. Thus, market leadership can be a high-wire act-there’s no place to go but down.
Today, however, the Finnish vendor’s virtually unimpeded progress is reflected in its recently adjusted forecast that it will gain global market share in the second quarter, lifting it beyond 36% of the world’s handset business. Some of that share will come at Motorola Inc.’s expense, according to analysts; the struggling American vendor is expected to shed several points of share this year as it seeks to maintain margins and return to the black.
With strong positioning in entry-tier handsets in the world’s two hottest emerging markets-India and China-and hot growth in W-CDMA handsets in developed markets, the Finnish handset vendor would appear to be closing in on its stated, long-term goal of 40% global market share.
Nokia seeks another potentially elusive goal: to be “the most loved, admired and iconic brand in the world.” To that end, it is reviewing the creative aspect of its global advertising program and soliciting proposals. A decision is due by mid-year, which could yield a glimpse of how Nokia plans to go about attaining the love of the multitudes, particularly in the United States.
Presented with various competitive scenarios, detailed below, that could cast a cloud over the company’s currently rosy outlook, Bill Plummer, who leads Nokia’s multimedia efforts in the U.S., exuded confidence.
“We welcome competition,” he said. “It keeps us sharp, it keeps us focused. We anticipate we’ll thrive and lead. Nokia has a lot of advantages in the market. We’re comfortable we have a future-proof approach.”
The U.S. and, indeed, all of the Americas, represent an exception to this picture, according to several analysts. Whether the U.S. market matters may be an inherent conceit of the American outlook-that this market really has an outsized importance, despite its relatively small portion of global sales-or it could be crucial to Nokia’s long-term goals.
The AT&T affect
According to new, independent studies from both Strategy Analytics and The NPD Group, Nokia’s share of the U.S. market has plunged to about 10% in the first quarter of 2007, down from about 20% in the year-ago quarter. (Motorola’s share of its home market, in contrast, is set to rise 6 percentage points to nearly 40% this year, according to Strategy Analytics.) That decline roughly matches Nokia’s loss of SKUs (stock keeping units) at GSM carriers here, according to Compete Inc. Compete reported that mid-tier, thin clamshells from various vendors have supplanted Nokia’s entry-tier bar phones at AT&T, the nation’s largest carrier, hastening this decline.
Nokia doesn’t issue regional market sales figures, nor does it comment on others’ numbers, Plummer said. He insisted that Nokia was gaining “traction” in the U.S., which he said is awakening to the mobile Internet.
Global strength
Chris Ambrosio, analyst at Strategy Analytics, said that in his view the global picture favors Nokia’s continued dominance of the handset space. With overall growth in handset sales slowing this year to about 12% (down from last year’s 23%), a reflection of a maturing market, vendors with volume, revenue and scale should prevail, Ambrosio said. Nokia has all three elements in spades. And it can afford, in the short run, to cut prices in emerging markets to shake off the burgeoning competition. Motorola’s new focus on profit margins, for example, leaves it unable to respond, Ambrosio said.
Nokia’s lack of a halo product-one instantly recognizable handset, inextricably linked to its brand-is actually a good thing, according to Ambrosio. Motorola’s rise and fall, fueled by the Razr’s massive volumes but dwindling profits, provided a cautionary tale. For Nokia’s global fortunes, however, maintaining its somewhat staid design elements is an advantage, the analyst said.
“They need to maintain their design familiarity,” Ambrosio said. “Overseas their designs are hot. And they will not risk straying too far from them for two reasons. One is that using existing platforms helps manufacturing efficiencies and thus profits. The other is that these design elements are clearly tied to their brand message, which is quality and usability. Design leadership isn’t a worthwhile risk for Nokia.”
Miro Kazakoff, analyst at Compete, concurred.
“Blockbusters are powerful and that’s why they’re dangerous,” Kazakoff said. “It’s difficult to move beyond a popular product that drives your profit.”
Further, Ambrosio said, no other handset vendor has the positioning in emerging markets and long-term vision for upgrading those users to handsets that can browse the Web and provide entertainment and information, services wired societies take for granted. As India and China reach saturation, Africa will take their place as a rapid-growth market. Meanwhile, the rest of the world will be upgrading to more expensive, more profitable handsets. If Nokia doesn’t stumble, more than one-third of worldwide sales will land in its coffers.
Bit by bit
In the States, Nokia recently told analysts it will adopt a carrier-by-carrier approach. Where in the past the vendor has been reluctant to undertake expensive customization requests by carriers, it may well develop handset platforms specifically for the U.S. market, then take them worldwide for economies of scale, Ambrosio said. Plummer acknowledged that, radio frequency banding differences aside, such a plan is being explored by Nokia.
Such a strategy could work at GSM carrier AT&T, according to Pyramid Research, which sent its analysts to the vendor’s “Nokia Talks Vision and Strategy” event at its North American headquarters in White Plains, N.Y., earlier this month. Existing GSM global products may be delivered to T-Mobile USA Inc. Nokia will continue to provide CDMA phones to Verizon Wireless through an original device manufacturer (ODM) relationship in which Nokia takes a strong role in design. For Sprint Nextel Corp., Nokia will pursue WiMAX network and handset business.
Ambrosio finds this scenario plausible, though this is an expensive undertaking that could eat into the vendor’s enviable profits. This mid-term approach could help the company survive here until the market embraces the advanced functionality that is the vendor’s emerging hallmark elsewhere.
That’s “a big maybe,” the analyst said, adding: “I’m struggling to find something positive to say about Nokia in the U.S., where its global advantages don’t translate. Users here just don’t care enough about functionality to use Nokia’s chunkier form factor.”
To Tero Kuittinen, analyst at Avian Securities L.L.C., Nokia’s recent flush of success may well mask vulnerabilities that crop up in the handset business with sometimes alarming speed.
Growth challenges
The extraordinary growth Nokia has enjoyed in India and China is obscuring its challenges in the Americas, according to Kuittinen. With a goal of 40% global market share, Nokia simply has to improve sales in North America, where a credible, competitive position would reflect three or four times the volume Nokia managed in the first quarter. The problem, Kuittinen said, is “a half-decade of friction” with domestic carriers, which represent a stumbling block to Nokia’s control over its own destiny.
Globally, Nokia’s current leadership in W-CDMA sales could evaporate as soon as the fourth quarter, as competitors-including Motorola and its new Razr2-field their own offerings.
“By June-July, competitors will have traction with devices that offer better specs on weight, thinness and display quality,” Kuittinen said. “The Razr2’s display, for instance, is best-in-class.”
In the big picture, Kuittinen said that Nokia’s dual strengths in low-tier sales in emerging markets and high-end sales in 3G technology is “a difficult achievement.” Pushing for 40% global market share might prove too much.
“Those last two points are exceptionally difficult to achieve,” the analyst said. “There’s always a worm in the apple.”
