When Will Nokia Wake Up?

Back in December of 2008, we posted our conclusions on why Nokia (NOK) would yet again fail to gain any traction in the smartphone market. (See Five Reasons why the new Nokia N97 doesn’t matter.) Since then the mobile Internet has continued to be dominated by Apple (AAPL), Google (GOOG) Android, and Research in Motion (RIMM). Recently we added Motorola (MOT) to our list of winners in this space because their Android-based strategy appears very solid to us. Palm (PALM) continues to be in the group but a high valuation coupled with concerns we have on long-term operating margin push it lower on our priority list.

The meta issue for Nokia seems to be the fact that they see the world through their own lens of “leadership” and believe they are actually ahead of companies like Apple and Research in Motion. Obviously this isn’t a good place to start if you plan on improving. Nokia measures things like their total number of different phones and their rank as a global brand. So they can succeed on their terms and fail on ours at the same time. Recently it came to light that the Nokia “Comes With Music” promotion has garnered just over 100,000 users after nine months in the market. Given the vast resources Nokia can wield, their abject failures in new markets are simply stunning.

We’ve commented here before that Nokia management has been hostile to us in the past if we simply mentioned products like the iPhone or Blackberry during discussions. Based on the uselessness of this “exchange”, we haven’t had a briefing from them in the past 12 months or so, but we haven’t felt that we were missing anything based on the publicly available information.

This month Nokia is launching their “Booklet 3G” in Best Buy stores in the US. It’s a good quality small laptop, falling into the “netbook” category, but it will run Windows 7. It will compare favorably to similar models offered by Asus, Dell (DELL), HP (HPQ), Samsung (SSNLF.PK), MSI, and others. Nokia is offering it both with and without a 2-year data contract with AT&T (T). At the time of this writing, it seems that the price with the data plan will be $299, and the best guess on a price for the system without a data contract is $599.

Nothing about the Booklet or the current plan is going to change anything in the market. (The same can be said of Dell deciding to enter the smartphone market.) Nokia will have a product in the category and can add it to their “unrivaled breadth of devices” slide and draw another “so what” from the user and investment community.

The central problem with Nokia is that they have not aligned themselves to any significant segment of the smartphone market. We hinted at this in our review of the N97 which noted that the devices “was neither sexy nor business like”, which means it has modest appeal to many but great appeal to few. Nokia has been abysmal in the consumer and entertainment space versus a device like the iPhone and has been similarly unable to come close to matching Research in Motion with business features and enterprise appeal.

We haven’t seen any evidence that this identity crisis is going to resolve itself soon. At the same time, Android promises to fill another gap for consumers and carriers looking for a robust but more open and customizable device. Motorola, HTC and many application developers are focused on Android as a platform alternative to the proprietary iPhone. This is yet another segment of the smartphone market that Nokia has not seized.

We have no axe to grind on Nokia and although we haven’t performed a full Intrinsic Value analysis on the company, their valuation probably already reflects a good measure of despair for them. At the same time we wonder if and when this giant might wake up and be felt in the mobile Internet/smart phone segment. Is Nokia really going to leave it all for Apple, Research in Motion, Google and a host of Android suppliers?

Disclosure: Neither the author nor Research 2.0 has any investment position in Nokia at the time of this writing.

Comments

[Yagottabe K...:]

Perhaps Nokia has decided the "smartphone segment" isn't much of a segment relative to their other segments so are participating strictly because they have a need for a presence.

When featurephones have all the capability that smartphones have with, literally, some minor details excluded (in fact, pundits are going through excruciating convolutions to define "featurephone" and "smartphone" now so they don't totally overlap), why produce a smartphone?

Oct 20 06:28 AM

[rich168:]

for all their R&D budget.

they could only come up with a netbook.
its seems they are becoming the dell of the cellular phones.....

Oct 20 07:08 AM

[wobatus:]

Indeed. I think NOK is content with being the top handset maker in the world and staying that way with reams of cash flow. Not everyone can be the Apple. NOK isn't going away.


On Oct 20 06:28 AM Yagottabe Kidding wrote:

> Perhaps Nokia has decided the "smartphone segment" isn't much of
> a segment relative to their other segments so are participating strictly
> because they have a need for a presence.
>
> When featurephones have all the capability that smartphones have
> with, literally, some minor details excluded (in fact, pundits are
> going through excruciating convolutions to define "featurephone"
> and "smartphone" now so they don't totally overlap), why produce
> a smartphone?

Oct 20 09:01 AM

[jack dee:]

It seems the commentators might have a better grasp of the market than the writer.


Nok is going great in most segments of the cell market, they sell phone in locations that apple has never sold a single phone.

If Nok goes really low I see it as a good entry point for a firm that be selling smart phones long after people stop calling them smart phones.

when was the last time you saw a headline with "web 2.0"

Oct 20 12:29 PM

[Ronnie05:]

The last 2 years have not been great music for Nokia. Their devices are lousy, their UIs dont engage consumers and to me the netbook was a wrong choice. However there are three aces up Nokia's sleeve yet and these are the deciding winners:

1. Nokia's distribution might is unparalleled.
2. Platformization: iPhone build the Touch category. Samsung and LG took the entry point below $200 and yet it could be Nokia ho would rope in the volumes (@ lower margins)
3. Nokia has been betting on conumer usage. So instead of betting on "technology per se" they are betting on "accesssibility of service" and "usage". Instances here are its music store, Nokia Money, Life Tools, Social networking through SMS: the plethora of Ovi services.

Inspite of a $832 million loss, dont write Nokia off! Not yet!

Oct 20 11:34 PM

[El Qadi:]

I like my I-mate (Ultimate 8150) than my Nokia mobile, windows mobile is powerful than any mobile operating system.

check this article about windows mobile
www.seaup.com/windows+...

Nov 17 04:02 AM