Nokia Feels Market Share Pinch

Today's unexpected warning of a market share loss from the world's largest mobile phone vendor, Nokia Corp. (NYSE: NOK), is indicative of cutthroat price cutting in the device market as rivals try to keep selling high volumes of handsets in a downbeat economy.

The Finnish phone giant said Friday that it expects to lose market share to smaller rivals because it hasn't followed them down the path of slashing costs on low-end handsets to encourage sales. Thus, Nokia's third-quarter market share is expected to dip below 40 percent.

Previously, Nokia had said it would maintain the 40 percent market share it saw in the second quarter. (See Nokia: High-End Hurt.)

Richard Windsor, an analyst at Nomura Securities , believes Nokia is being hit hard in emerging markets because of tougher competition from domestic vendors. "We think that the majority of this is coming from smaller Asian handset makers who are aggressively trying to gain share," the analyst writes in a research note on the warning.

"Smaller Asian handset makers" might include companies like Ningbo Bird Co. Ltd. and Pantech Co. Ltd. , although Windsor didn't name any specifically.

But he did note that MediaTek Inc. (Taiwan: 2454), which supplies chips to many Asian phone makers, is today increasing its third-quarter revenue predictions to 25 percent growth over the previous quarter. It had been expecting growth of 8 to 10 percent.

Windsor doesn't think the situation is permanent. "We think that these vendors are trying to gain share in China, India, and Africa and are compensating for their poor product quality and lack of differentiation by offering the phones at very low prices," he writes. "We believe that they are hemorrhaging cash to do so."

So, the price pressure on Nokia could be temporary. "We think that balance will be restored, but it could be a quarter or so before this is seen in Nokia’s financials," Windsor writes.

Nokia got spanked on the markets today for the warning. Its shares fell nearly $1.69 (7.6%) to $20.62 on the news.

The pricing pressure may have differing meanings for Nokia's nearest rivals. Samsung Corp. , like Nokia, has a strong presence in emerging markets and may also find itself subject to domestic vendors slashing the sticker price. But the Motorola Inc. (NYSE: MOT) devices unit, while struggling in general, may not be quite as exposed to price competition in China, India, and Africa, since it doesn't have quite the reach into those markets that Nokia has. (See Handsets Hinder as Moto Posts Small Profit and Motorola Eulogy.) — Dan Jones, Site Editor, Unstrung

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