Heavy Reading Research

Analyst: Nokia Faces Low-End Threat

Nokia Corp. (NYSE: NOK) attracted a great deal of attention last week for its poor smartphone sales during the second quarter, with just 16.7 million high-end devices shipped during the three months to the end of June, fewer than the number of iPhones Apple Inc. (Nasdaq: AAPL) sold during the same period. (See Nokia Reports Q2, Apple Posts Strong Q3 on iSales and Nokia Loses To iPhone, Smartphone Sales Down 31%.)

But while getting trashed by Apple in the smartphone segment is enough to keep any established mobile phone company awake at night, Nokia should be more worried about other parts of its business, suggests Pyramid Research senior analyst and device market specialist Stela Bokun, who is just about to complete her latest global smartphone forecast report. (See Smartphones to Account for 53% of Sales.)

"While many people are worried with the decline on the smartphone side, I don't think the results in this segment are surprising or worrisome -- [Nokia is] going through an important transition," notes Bokun.

"Overall, I am much more worried about the decline in Nokia's feature phone and ultra low-cost portfolio," notes Bokun. "The decline in this segment was 16 percent year-on-year and 15 percent quarter-on-quarter. Nokia was a bit too late with its dual SIM phone and did not take timely actions to address the surge of the gray market in the low-end segment," she adds in an email response to Light Reading Mobile questions.

In addition, Nokia is now under attack in this market from the likes of TCT Mobile Ltd. (Alcatel Mobile Phones) and Huawei Technologies Co. Ltd. , believes the analyst. Bokun says she recently spoke with the global vice president of marketing at a smaller (unidentified) handset vendor (not a top 10 player) who said that Nokia had been too big to attack previously, but now it is a prime target in terms of grabbing market share.

"On the low-end side I'm not sure Nokia is cautious enough. It should try to differentiate … I think you’ll see more very, very basic phones that look like smartphones coming from Nokia, though this is where you'll also see Samsung innovating quickly too," notes Bokun.

But Nokia does still have one very significant advantage it can build upon. "In many emerging markets Nokia has a well-defined channel strategy. While many of the newer emerging vendors are struggling on how to frame their channel strategy across, for instance, Africa and the Middle East, Nokia already has partnerships with most large distributors and also has direct deals with power retailers," notes Bokun, who notes that the retailer relationships are "crucial in those countries, such as Egypt, where more than 90 percent of sales go through retailers and not operators."

She adds: "We'll see how quickly some of those competing vendors, which are hoping to grow their low-end further at Nokia's expense, can figure out their distribution channels and whether Nokia will manage to tame the deterioration of its low-end portfolio by further innovation."

And there's some fight left in Nokia's smartphone business too, believes Bokun. "The volumes of Symbian smartphone sales are likely to improve a bit in the third quarter [following] Nokia's recent decline in prices" and rumors that further price cuts are on the way. (See Price Is Right for Nokia's Windows Phone.)

Bokun also believes that lower prices and the recent shake-up in the Android market following the Apple vs High Tech Computer Corp. (HTC) (Taiwan: 2498) ruling will contribute to a significant opportunity for vendors offering Windows Phone-based devices. (See Apple Wins Patent Victory Over HTC and Wireless Competition's Courtside Seats .)

"Nokia will lead this Windows Phone surge and also benefit from the growth of the [Windows Phone] ecosystem … as many more vendors will be considering Windows Phone now, straying from their sole dependence on Android. … Many are becoming very sensitive to Google's growing dominance," predicts Bokun.

Overall, then, "on the smartphones front I still think things are going to be fine for Nokia, and I'm not particularly surprised with the bad second quarter results," concludes Bokun.

— Ray Le Maistre, International Managing Editor, Light Reading

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