Well, at least they warned us.
First, Nokia (NYSE: NOK) mentioned that it's unlikely to get into a pricing war to gain market share: "Nokia's strategy is to take market share only when the company believes it to be sustainably profitable in the long term," the company tells us.
Then, just before the company reported earnings Thursday, fellow Fool Anders Bylund reminded us again: "I'd take prudent growth over blind market-share chasing any day, especially in these turbulent times."
How about prudent contraction?
So when Nokia finally confirmed that it gave away about two points of market share, now commanding a mere 38% of the market, well, no surprises there. What did surprise me was that for all of its talk of holding on to margins and letting market share slip, Nokia still lost ground on profitability. Sales fell by 5%. By units, "mobile device" sales rose 5%. But profits per American depositary share were only 0.29 euro, or $0.39.
The reason: Operating margin dropped 240 basis points to 12% in the third quarter, enough to turn a mere 5% slip in sales into a 28% drop in profits.
Dude, where's my margin?
So Nokia lost both market share and margin in Q3. That came as a bit of a shock, but it's not the real story here. The real story is where most of the share got lost, and why that had such an effect on profit margins.
The niche of the cell-phone market for "converged mobile devices" -- a.k.a. smartphones -- expanded by nearly 40% in Q3. However, Nokia's share of that market dropped from 50% to 35%. Worse, the number of Nokia smartphones shipped declined year over year. It seems that the extra smartphone sales globally last quarter went not to Nokia, but rather to rivals such as Apple (Nasdaq: AAPL), Research In Motion (Nasdaq: RIMM), and Motorola (NYSE: MOT).
Thank goodness Google's (Nasdaq: GOOG) not competing in this market. Oh, wait. It is.
So basically, Nokia lost out in the race for high-priced smartphone sales. As a result, the sales it did make last quarter skewed toward "a higher proportion of lower-priced products," and Nokia's average selling price went lower by 12%.
Will that story change in Q4, where Nokia predicts sequential growth in cell-phone sales industrywide, and stable-to-rising market share for itself? Tune in three months down the road to find out.
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