How Nokia Can Recover

Its a lovely day in Espoo, Finland 64 degrees and breezy, as the region enjoys 19 hours a day of sunshine. The atmosphere is frostier in the HQ of Nokia, though, as the worlds largest maker of mobile devices considers the stunning erosion of its once-dominant position in the cell phone industry.

After announcing a lower-than-expected revenue forecast for the rest of 2010 on June 16, Nokia saw its share price plummet by 10 percent. The stock has lost 44 percent of its value since April 1, causing even previously bullish analysts and investors to head for the exit. This week Charter Equity Research analyst Ed Snyder, long a Nokia optimist, dropped his rating on the stock after the Finnish handset giants revenue warning this week.

We have long maintained that the companys ponderous corporate culture would eventually find its footing, wrote Snyder in a research note, according to Tech Trader Daily, but with competitors attacking fiercely at both the low and high end, deterioration in its core European market, and a lengthening timeline for Symbian 3, which may not live up to expectations anyhow, shares will plunge well below recession lows.

Thats a harsh assessment for a company that once seemed to poised to help lead the mobile and wireless industry into a new future of wireless broadband and powerful multimedia phones. Nokia has been beset by a host of forces that includes the rising popularity of smartphones (where Nokia has been slow off the mark), low-end competition from not only traditional rivals, like LG and Samsung, but also new Chinese vendors, and of course Steve Jobs juju. Ushering in a new era of applications-rich, touch-screen devices the iPhone has made much of Nokias product line look quaint. Research firm IDC released a report last month showing that, even as global smartphone sales rose 57 percent in the first three months of 2010, Nokias market share was flat at 39 percent while the iPhone climbed to 16 percent, from just 11 one year ago. The startling advance orders for the iPhone 4 have caused investors and analysts to wonder if Nokia can recover from its current dilemma.

Theres an irony to this, of course: Nokia pioneered the smartphone category with small, Web-capable devices like the N810 Internet Tablet. Later this year Nokia will release the latest in the N series, the touch-screen N8. The N8 has received mostly favorable, if not dazzled, reviews from the device-geek blogs. Many observers, however, believe that its late in the game to be bringing out an iPhone competitor even as popular devices based on the Android OS, from Google, are filling retail shelves. A single device is not going to save Nokia.

In fact, it may well not save the job of CEO Olli-Pekka Kallasvuo, who so far has survived a series of management shakeups. Still, the company controls a huge share of the device market, and it has inherent strengths that the next leader must build on to enable Nokia to re-find its footing and carve out a place in the emerging mobile economy.

First theres Symbian, still the worlds most dominant mobile operating system. In a dramatic strategic move, the Symbian Foundation earlier this year made the source code for the worlds most widely used mobile OS completely free and completely open. The foundation, which manages the OS for Nokia, which owns it, had previously announced its intention to become the dominant open-source mobile platform but had not made good on that promise a delay that allowed the open-source spotlight to move to Googles Linux-based Android OS, which now powers a raft of advanced, relatively low-cost devices and has gained a significant chunk of developers mindshare. Open-sourcing Symbian was hardly an unalloyed success the move fragmented the companys OS and applications story, and in some ways has contributed to, rather than slowed, Nokias recession. But that genie is out of the bottle, and Android and the iPhone have proven that given the right platform, the right business model, and the right devices, developers will flock to an OS that has the market presence and the flexibility of Symbian.

Second is simple market heft. Particularly in developing countries where most of the growth in the mobile and wireless sector will occur in the next decade Nokia enjoys an even larger majority of phone sales, and its distribution channels are unmatched by competitors making inroads in Western Europe and Asia. Nokias margins have been slashed as it has focused on lower-end models the last couple of years; rising incomes, along with the spread of broadband wireless networks, in places like India, China, and Brazil could help it parlay its market strength into sales of more expensive phones based on the open-source Symbian and supported by a raft of developers hoping to tap the markets that include the worlds newest middle class consumers.

Thats hardly a sure thing.

We want to be community-driven, a meritocracy, said Larry Berkin, head of global alliances at the Symbian Foundation, when Symbian was opened up. We have no profit model, nor any other motivations other than making Symbian succeed.

Wall Street doesnt like meritocracies without profit models. It does, however, like bargains. If the N8 can win over users and developers, if Nokia can assemble a management team capable of building on the companys unquestioned strengths, and if the companys decline in market share can be arrested, or even slowed, then Nokia shares, now floundering in the mid-single digits, may start to look like a bargain.

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