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Apple and Google Put the Squeeze on Nokia

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Nokia (NYSE: NOK  ) has talked a good game about wanting to "democratize" the smartphone market, bringing price points down to levels where less affluent consumers around the world could get one of their own.

This would be a fine strategy if it meant that it turned Nokia into the Wal-Mart of the cell-phone world, a giant able to successfully cater to buyers of nearly all tastes and incomes. But with each passing earnings report, the company is looking more and more like the Dollar General of the space: a company that ships merchandise in large volumes, but with relatively limited profits and demographics, thanks to the price tags attached.

Weak sales, weaker margins
Earlier in the year, Nokia decided to take advantage of what looked like favorable market conditions to enact price cuts of up to 10% across much of its product line, hoping to gain market share while competitors appeared on the defensive. But it looks as if this tactic didn't work as well as it has in the past, with sales and unit shipments during the quarter (not to mention earnings) falling short of analyst estimates, and the company estimating that its handset share fell sequentially from 35% to 33%.

Just as troubling, though, is the geographic and product mix behind Nokia's numbers. With weak annual shipment growth in Europe, North America, and the Asia-Pacific region (excluding China), the company had to rely even more this quarter on sales to developing markets, where sales are skewed toward cheaper models. Combined with a dropping euro, this led Nokia's average selling price (ASP) to fall to a mere $83. Qualcomm (Nasdaq: QCOM  ) may not be thrilled with its own ASP challenges, but I'd say it's in relatively better shape. And with more price cuts recently carried out, Nokia now sees the operating margin for its Devices and Services division in the 9%-12% range next quarter, down from a full-year forecast of 11%-13%.

Smartphone troubles continue
Zeroing in on the smartphone market, you can see just how dependent Nokia has become on cheaper, lower-margin phones. While the company claimed that, on a unit-shipment basis, its smartphone share ticked up a notch to 41%, this was accompanied by a drop in its smartphone ASP to just $208. That's barely a third of the approximate $600 ASP that Apple (Nasdaq: AAPL  ) reported for the iPhone, and also well below the $311 ASP that Research In Motion (Nasdaq: RIMM  ) reported during its last quarter. And based on the unit figures given by each company, this ASP drop means that Apple has now passed Nokia as the world's largest smartphone manufacturer on a revenue basis.

To make matters worse, Nokia has now pushed back the release of a major upgrade to its Symbian operating system to the second half of the year. The longer it takes Nokia to get Symbian's user experience up to par with the iPhone and Google's (Nasdaq: GOOG  ) Android, the harder it will be to challenge their status in the high-end smartphone space. And the harder it might also be to keep Google at bay in the low end, as cheaper Android phones keep arriving.

Nokia has made plenty of turnarounds in the past, addressing market weaknesses with both good products and cost-effective manufacturing. But the high-end smartphone market represents a unique challenge for the company, one that it hasn't had much luck in addressing so far. Investors had better hope that this luck changes, because the market just sent a clear message that Nokia's successes on the low-end just aren't enough to make it happy.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Nokia is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.

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  • Report this Comment On April 23, 2010, at 7:37 PM, ajaykc wrote:

    I do understand that Nokia has not been successful in smartphone market but if you look carefully the market share of smartphones in US alone as compared to normal phones, you would be surprised. Given that smartphones are higher-end phones and useful for business class people and they require expensive data plans, they would not go too far after a few years of market strength. Average Americans don't buy iPhones though they might crave for it and they might buy in excitements but after using a few months/years they will dump it. $600 for a phone and then $80-100 every month for services. US telecom market is already saturated and companies have to give you money back offer to attract new customers. Its not sustainable for long run. Telecom will become like utilities companies and future will prove it. As the emerging economies will strengthen, jobs will keep moving to developing countries and so I don't see American worker's salaries going upwards. How would Americans afford such high bills without having a job? Someone has to open my eyes as I can't see a very bright future unless dramatic social changes happen...

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