Can Nokia's Newest Phone Change Its Fortunes?

Great hardware just isn't enough to maintain mobile dominance. That was true last decade, when Motorola (NYSE: MOT  ) climbed to the top of the mobile pile on the back of its svelte RAZR phone, only to fall back when phones with more impressive software hit the scene. Now with the release of its new flagship N8 smartphone, struggling Nokia (NYSE: NOK  ) is hoping to turn its fortunes around, but in spite of some great hardware features, the N8 probably won't enjoy a breakout success, with a software experience that still trails Apple's (Nasdaq: AAPL  ) iPhone and Google's (Nasdaq: GOOG  ) Android.

A great camera ... but …
One factor that's come up repeatedly in reviews of the N8 is some of the novel hardware and media software it packs. The phone contains an imposing 12-megapixel camera. That's good enough to replace almost any point-and-shoot camera you're toting around. The phone also has other features that should keep gadget-heads happy, such as an HDMI-out port. However, the hardware would have been more impressive if the phone hadn't suffered from numerous software-related delays that allowed other phones with more impressive specs to hit the market in the meantime.

But all things considered, the real factor holding the N8 back is its operating system. The N8 is the first Nokia phone to run the company's new Symbian^3 operating system, but reviews have been skeptical about just how large a step forward the new Symbian is. To quote CNET Asia:

While it's easy to get carried away with the enhancements of Symbian 3, it also serves as a reminder that nothing else has changed fundamentally. We are still looking for an overhaul in the Symbian user interface, and that's still many months away. Symbian 3 is a stop-gap solution, just as Windows Mobile 6.5 was for Windows Phone 7. It may be better, but meanwhile, competing software [is] also improving at the same time.

The bottom line is that Symbian still lags its key competitors in the smartphone game. Its user interface is lacking, the browser feels archaic, and Nokia's need to support a long legacy of differing phones keeps its app selection well behind what its competitors offer. Although Symbian^3 is a step forward, it's still not ready for prime time.

High-end smartphones, high-end profits
One of the interesting trends in the mobile revolution is how little market share has mattered. Although Nokia still controls a 41% market share on smartphones, its profits are nowhere near Apple's. According to estimates from Canaccord Genuity, in the first half of the year, Nokia, LG, and Samsung combined to sell more than 400 million phones but made only 32% of the mobile industry's profits. In that same period, Apple sold only 17 million phones but made 39% of the industry's profit!

That's because Nokia's phones sold for just $85 on average last quarter, a level that leaves little room for profits. Compare that with Apple, which enjoys an average $600 selling price, despite researcher iSuppli's estimate that the components inside it cost only $187. Those kinds of margins are the envy of the mobile industry, and the N8 isn't far behind. iSuppli estimates that the N8 also has $187 in component costs and sells for $549 without contracts.

Say it with me, Nokia shareholders: If you want Nokia to stem its rapid losses in market value, it needs to be relevant in high-end smartphones.

Unfortunately, the N8 phone won't bring about the hoped-for resurgence.

Chips: another way to profit
Another way to look at the mobile boom is to consider companies vying for space inside all those smartphones. Tearing open the N8 shows the big winners to be Broadcom (Nasdaq: BRCM  ) , Texas Instruments (NYSE: TXN  ) , and Synaptics (Nasdaq: SYNA  ) .

Synaptics supplies the touchscreen controller. Texas Instruments' name isn't a surprise, since it's had a long history with Nokia. However, Broadcom gets a nice win with its media processor. Most of the attention in the mobile-processing space goes to Qualcomm, Texas Instruments, Samsung, and others, but it looks as though Broadcom is managing to carve out its own niche. I don't think the N8 will generate enough sales to move the needle for any of the component suppliers inside, but Broadcom's presence here points to its continuing strength.  

Bottom line
Although Nokia says presale orders have surpassed expectations, the N8 is still behind the current smartphone leaders. Simply put, Symbian still has a lot of work to do, and without a great operating system, Nokia will continue to be a laggard in high-end smartphones. And with high-end smartphones driving the profits in the industry, that means more pain for Nokia shareholders.

Can the next-generation operating systems -- Symbian^4 or the Linux-based MeeGo -- change Nokia's fortunes? Leave a comment with your thoughts on Nokia's future below! And if you haven't had a chance, be sure to read this article detailing how fellow Fool Jeremy Phillips missed out on more than $100,000 in gains through wrong-headed selling.

Want to read more about Nokia? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Eric Bleeker owns shares of no companies listed above. Google and Nokia are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Apple, Google, Qualcomm, and Texas Instruments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2010, at 3:13 PM, techy46 wrote:

    NOK is a bottom up mobile play with great low end market share. Meego (MG) is really an INTC/ NOK version of Linux (Android). It seems that NOK will use S^n as they change over to MG. It will get really interesting if INTC/MSFT/NOK connection bears fruit with an Atom/WPn smartphone for 95% of desktop users running INTC/W7. This will also occur with tablets. APPL and Jobs have enjoyed a nice run but they better listen to Andy and be very paranoid.

  • Report this Comment On October 24, 2010, at 3:56 PM, bsimpsen wrote:

    "The phone contains an imposing 12-megapixel camera. That's good enough to replace almost any point-and-shoot camera you're toting around. "

    Nonsense. The camera has no zoom and the optical system can't deliver anywhere near 12 megapixel resolution. Things are improving, but this phone will not match the performance of a 12 megapixel point and shoot with good optics.

    Physics doesn't yield to marketing.

  • Report this Comment On October 24, 2010, at 4:01 PM, jesterisdead wrote:

    The interface on the previous version of Symbian is certainly better than WinMobile 6.5 - faster, more efficient design and more intuitive. Where it fails is the browser.

    There is alot of talk about "apps," but the utility they add is highly overrated. Look at the top apps for the iPhone - Twitter and Yelp? Come on. Only Paris Hilton cares about this junk.

    http://www.time.com/time/specials/packages/article/0,28804,1...

    The biggest problem with the N8 is the 640 x 360 display, when the standard highend smartphone has a display that is 25% larger than this. Resolution makes a big difference when trying to navigate or watch videos.

    What isn't mentioned is that Nokia is still one of the biggest players internationally where Apple is barely a hiccup. They can charge $600 for the N8 and people will buy it, because the hype for Nokia compared to Apple is reversed in Europe.

  • Report this Comment On October 24, 2010, at 5:31 PM, Henry3Dogg wrote:

    "The phone contains an imposing 12-megapixel camera. That's good enough to replace almost any point-and-shoot camera you're toting around."

    In very bright conditions perhaps. Generally you'd be better off with less, larger pixels.

  • Report this Comment On October 25, 2010, at 3:50 AM, hary536 wrote:

    @bsimpsen and @Henry3Dogg,

    Seems you tend to close your eyes to any good things from Nokia. Learn to give credit where it is due.

    Read this for your camera fantasies and ignorance. Actions speak louder than words.

    http://www.allaboutsymbian.com/reviews/item/12162_Nokia_N8_p...

    http://www.gsmarena.com/nokia_n8_vs_samsung_pixon12_vs_sony_...

    http://www.gsmarena.com/nokia_n8-review-523p6.php

  • Report this Comment On October 25, 2010, at 9:01 AM, Gambrrrr wrote:

    Actually Nokia announced that there will be no Symbian 4 operating system, but Symbian 3 will be constantly evolving. Great news for N8 users :)

    http://www.engadget.com/2010/10/21/nokia-refines-development...

  • Report this Comment On October 25, 2010, at 11:01 AM, Inept wrote:

    With regards the the resolving capabilities of the lens, Dr. Hubert Nasse of Zeiss explains just how capable the lens is:

    http://www.youtube.com/watch?v=WtIFBMbiaPo

    Yeah, you don't have optical zoom and the reality is that there's only so much you can do in such a small package, but the pictures really speak for themselves. The 1/1.83" sensor and Zeiss lens make for an unbeatable combination in a device of this type.

    It's not all about the user interface. The UI grants you access to the things you'd like to do - it's not the end but the means to an end. As such, it's still possible to deliver a killer feature and Nokia has done precisely that. I think they've got a winner on their hands, especially given the UI upgrade path announced on Thursday.

  • Report this Comment On October 25, 2010, at 4:32 PM, stoli89 wrote:

    Nokia's recent announcement to fully leverage Qt as the central tool for User Interface developments, while also keeping it as the central framework for both Meego and Symbian native app development, is very positive. In effect, Nokia has avoided the legacy break required by Symbian^4 and offered its developers a much clearer path to immediately accessing its massive user base while retaining their resp. investments going forward . It is also positive for the N8, C7, C6-01, and E7 launches, where the volume hits the books this quarter. All of these devices have much less obsolescence risk in this new paradigm, removing the "Symbian^4" cloud. In parallel, these new devices will partake of the UI changes previously slated for "Symbian^4". The operational synergies gleaned from this revised strategy include recently redundancies as well as cross platform user experience benefits associated with a more simplified firmware management approach. This should also materially help Nokia accelerate its software and integrated services developments going forward. IMO, Nokia has clearly emphasized Qt and OVI services as central to its strategy going forward, with Operating Systems and Hardware remaining complimentary elements for further product differentiation.

  • Report this Comment On October 25, 2010, at 5:23 PM, TMFRhino wrote:

    Hey Gambrrr,

    Thanks for the link, had written this piece the previous weekend so the announcement came after that. I'll have to read up more on them centralizing around QT, sounds like a positive action from the company.

    Best,

    Eric Bleeker (TMFRhino)

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