Have time for a quick quiz? An exploding phone is:
(a) A popular gag gift.
(b) An industry term for fancy new smartphones from palmOne (Nasdaq: PLMO ) and Research In Motion (Nasdaq: RIMM ) .
(c) A big and growing problem for mobile-phone market leader Nokia (NYSE: NOK ) .
Time's up. The answer is (c). Since the summer of 2003, there have been at least 20 incidents of Nokia phones that have literally exploded. A few of the cases resulted in serious injuries and hospitalization. Poorly built third-party batteries have been cited time and again as the cause for these explosions, and that leads the blame away from Nokia. But now, the situation could change.
Last year, a Thai man working close to some power lines fell victim to an exploding phone. He lost his right leg and all five toes on his left foot. Now he's suing for the equivalent of $26,000 with the help of the Thai government.
Forget for a minute how crazy it sounds to bring a cell phone anywhere near live power lines. Also forget the financial pittance being contested. What's really important here is that the suit doesn't specifically call out a faulty battery from a third-party manufacturer. Instead, the action hinges on an allegation from Thailand's Consumer Protection Board that defective parts in the phone caused the incident, according to a story in a Bangkok newspaper. That's a dangerously broad charge that could have sweeping effects down the road, if the court rules against Nokia.
Investors needn't be worried. yet. Should major flaws be found in Nokia phones, a flood of lawsuits will ensue. From there, you can expect increased costs for R&D, quality control, and manufacturing, not to mention the payouts the company would incur for legal settlements. Nokia's $15 billion cash reserve should easily cover any of these troubles, of course. But the Finnish phone maker, desperately in need of real earnings growth, would again have to use its bank account to boost the price of its shares. And that might provide the clearest signal yet that Nokia's days of explosive growth are finally well behind it.
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Fool contributor Tim Beyers is partial to palmOne's Treo, but his wife uses a Nokia phone. Neither he nor his wife, however, owns stock in either company, or any other firm mentioned in this story. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has a disclosure policy.