Nokia (NOK) has long been the leading player in the mobile-phone market. Investors, though, would have been better served in recent years by focusing on smaller rivals, from a volume perspective, that have staked out lucrative niches in the upscale segment of the market.
Over the past decade, the company has aggressively, and to a large extent successfully, defended its top spot, with a market share typically ranging between 35% and 40%. In doing so, Nokia has generally enjoyed strong profitability, while many rivals such as Motorola (MOT) and Ericsson (ERIC) have struggled with financial woes.
The company’s recent results, though, have been less than stellar. The number of handsets sold by the company has increased about 25% in total over the past three years, from roughly 350 million to north of 425 million, but the rising volumes have failed to expand Nokia’s profit base, with earnings declining almost 30% over this stretch.
The recent recession has no doubt contributed greatly to the bottom-line woes, but other factors seem to be at play, as well. Investors, for instance, are likely concerned that the company is ceding the most lucrative turf in the cellphone market to rivals. In particular, some competitors appear to be reaping significant profit gains from their popular smartphone models. Nokia’s share of this segment is roughly equal to its two nearest competitors, combined. From an earnings perspective, though, these rivals, Research in Motion (RIMM) and Apple (AAPL), appear to be getting a much greater bang for their buck. Apple’s profits, for instance, have nearly tripled since 2006 (the iPhone was released in early 2007), and the California technology icon seems poised for big gains this year. At Research in Motion, profits have nearly quadrupled over roughly the same stretch, backed by rising demand for Blackberry devices.
For consumers, the allure of smartphones is their ability to complete numerous tasks beyond voice conversations: reading email, surfing the web, downloading music, or figuring out where you are (i.e., navigation services). Nokia’s portfolio of phones includes devices for these purposes, but none seems to have captured the imagination of the public to the degree of the iPhone or Blackberry.
The playing field, though, is likely to remain unsettled, with the ongoing evolution of mobile phones creating new opportunities, as well as risks, for market participants, such as Nokia. As illustrated by Apple’s seeming overnight emergence as a leading rival in the field, a company can quickly shift the competitive balance in its favor with a well-timed product introduction or the development of a must-have feature. The iPhone’s touch screen, a shortcoming of Nokia’s line-up at the time, was likely one of the factors driving its popularity.
Nokia, like its rivals, is working on a number of initiatives to put itself in the driver’s seat when the next “must-have” feature or device emerges. In March, for instance, the company made a Skype application available for download free at its online store. Among other features, this application allows users to make free Skype-to-Skype calls anywhere in the world, which should help cement the company’s strong position in emerging markets. The equity markets will also no doubt be keeping a close watch on developments surrounding Nokia’s newest smartphone model, the N8, which will be available to consumers in select markets beginning this summer. This device, which runs on the latest iteration of Nokia’s smartphone software, has a touch screen, 12-megapixel camera, and other high-end phone features.
For now at least, we think the market’s current skepticism toward Nokia shares is appropriate. The company has a number of factors working in its favor, not the least of which is its strong presence in rapidly growing emerging markets. With each passing day, however, mobile phones, particularly smartphones, take on more computer-like qualities. On this particular battlefield, some of Nokia’s newer rivals, such as Apple and, more recently, Google, are likely on more familiar terrain.