APRIL 19, 2011 THE WALL STREET JOURNAL
By CHRISTOPHER LAWTON
When Nokia Corp. reports its first-quarter earnings on Thursday, investors will be looking for an update on the company's smartphone business and joint-venture with Microsoft Corp. But increasingly, stakeholders are also eyeing the other half of Nokia's business—basic cellphones.
Struggling to compete with rival Apple Inc. and smartphones that run on Google Inc.'s Android operating system, Nokia in February decided to dump its Symbian operating system and make smartphones based exclusively on Microsoft software. The company has cautioned that the transition will take time, and analysts and investors expect Nokia to suffer steep market share losses.
As Nokia's market share in high-end smartphones continues to slide, investors and analysts are taking a closer look at its basic mobile-phone business, anchored mostly in emerging markets. While smartphones get most of the attention, because they are driving industry sales, most people around the world still use basic phones, which are cheaper than smartphones and come with much more limited Internet functionality. They are primarily used more for voice and texting.
For Nokia, the world's largest handset maker by volume, sales of these phones in the fourth quarter reached €4.09 billion ($5.86 billion), or 48% of its revenue, and even more of its profits, according to some estimates. That low-end business is Nokia's last line of defense for sales, profits and market share, and could help the company better stay afloat as its higher-end smartphone business transitions to Windows, analysts say.
"They do have to rely on their [basic] phone business, not only for the next year, but for the next several years while they ramp up their smartphone business," says Brian Blair, analyst with Wedge Partners Corp. in New York.
Nokia has forecast between €6.8 billion and €7.3 billion in sales for its handset division in the first quarter, a slight increase from the €6.66 billion reported a year earlier. In February, Stephen Elop, Nokia's chief executive, promised to "connect the unconnected" by increasing investment to expand device sales and pushing Internet services further into emerging markets.
Nokia's low-end mobile phones business also runs a version of its Symbian software. The strategy could help Nokia indoctrinate a wave of new smartphone users to help replace those it loses in the transition.
Goldman Sachs says the increased investments combined with cost cuts signal a turnaround opportunity for Nokia. According to estimates from the bank, while basic mobile phones accounted for less than half of Nokia's revenue last year, they accounted for two-thirds of its operating profits.
That is because that Nokia's smartphone business was hampered by €2.37 billion in spending on research and development. By comparison, the company spends only €589 million on research and development for its mobile phones, the bank estimates. Nokia doesn't break out profits between its smartphone and mobile-phone businesses.
Nokia's smartphones are also under increasing pricing pressure due especially to competition from cheap smartphones that run Google's Android. Nokia reported in January that average selling prices for its smartphones fell 17% to €156, while its basic mobile phones saw a 6% increase in average sale prices to €43 in the last three months of the year.
Still Nokia can't survive on its low-end business alone, analysts say. Michiel Plakman, a fund manager with Rotterdam, Netherlands-based asset management firm Robeco NV, says Nokia's low-end business is important, because currently it is the company's "bread and butter," but he cautions that the business faces tremendous challenges from all sides.
Chinese manufacturers are challenging Nokia by pushing out simple, often unbranded cellphones to emerging markets at very low prices, with the help of low-cost chipset maker MediaTek Inc. of Taiwan. Sales of such unbranded handsets reached 360 million in 2010, according to Gartner Inc., a market researcher.
According to market researcher IDC, Nokia's volume share of the global market for feature phones fell to 33% in 2010 from 36% a year earlier. That mirrors its total market share including smartphones, which fell to 33% from 37% in 2009.
However, Nokia's bigger challenge is falling smartphone prices. Thanks to Android, which Google offers to manufacturers at no cost, multiple vendors are rapidly pushing smartphone prices down, and threatening to eclipse the lower-end basic handset market.
While mobile-phones shipments experienced a growth rebound last year, smartphone shipments jumped 75% to 302.6 million, according to IDC.
The ratio of smartphones to feature phones is also rapidly changing. In 2010, smartphones accounted for 22% of global handset shipments, versus 15% in 2009. That percentage is expected to jump to 45% by 2015, IDC says.
"That really is the key question for the next twelve months...What will be left of the low-end part of the business by the time they come out with Windows?" asks Mr. Plakman, who helps Robeco manage over €7 billion including Nokia shares.
"If they can somehow stem the market share loss, then they have a chance," he said.