Nokia Goes Downmarket

By Rich Smith (TMFDitty) | More Articles
October 20, 2008 | Comments (2)

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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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Fool contributor Rich Smith owns shares of Nokia. The Motley Fool's disclosure policy will gladly trade a smartphone for simple caller ID, so it can avoid this season's political robo-calls.

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

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Report this Comment On October 20, 2008, at 3:43 PM, scorp1us wrote:

Nokia has a secret weapon. They just acquired TrollTech which makes a toolkit called Qt ("cute") for desktop and embedded products. The developers just announced the port to the S60 is under way. When this is complete, users will be able to get advanced apps on the Nokia platform. This toolkit is both commercial and open source. It is up to Nokia on how this plays out, but they could have their own app store. The Qt tool kit is advanced enough to bring iPhone-like experience and graphics to phones while featuring a full web-browser and native speed (non-Java). Qt is well-documented and tested. (It is the heart of the KDE desktop) Development is in C++, so there are plenty of developers that can pick this up and run.
Report this Comment On October 20, 2008, at 3:59 PM, scorp1us wrote:

The biggest problem I see is the ability to compete without a subsidy. This makes the cost of the unit prohibitively expensive to get into. The customer would have to find significant value in the platform itself to get over that. However the unit price can be competitive even without a subsidy, if the plans come cheaper. I still have and old iPhone because the new plan costs $200 more, but I don't get $200 of value from switching.
If Nokia can produce something compelling enough for people to switch, when their existing plan runs out, we could see Nokia get back into the game. They have time before the pre-Iphone3G contracts run out. The iPhone is not perfect. In fact, while the best current device, it is still far from perfect. I think there exists an opportunity to leverage Qt and beat the iPhone. (I don't have copy-paste, search in webpage, MMS, a decent camera, decent auto-correct, etc...)

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