Nokia's Warning On Q3 Market Share Is a Blip

Posted by: Jennifer L. Schenker on September 05

It takes a certain amount of courage for companies to leave money on the table—and even more so to admit it publicly. But that’s exactly what Nokia has done.

The company said Sept. 5 that its third quarter mobile device market share will be somewhat smaller than previously predicted (and less than the 40% it hit in the second quarter), likely lowering quarterly profits and margins, in part because of a tactical decision it made not to cut its prices for entry level phones as aggressively as some competitors. Nokia says—and analysts agree—that the negative impact on profits from such price slashing outweighed any short-term benefits in unit sales.

Investors didn’t quite buy the logic, driving Nokia shares down by 10% in Helsinki trading by day’s end. New York shares were down just under 10% at mid-day.

Analysts are taking a longer view. There is a lot of "uneconomic" pricing of low-end phones going on, says Richard Windsor, a mobile analyst at brokerage Nomura Securities. And the companies that are pursuing such a strategy are "hemorrhaging money." Windsor and other analysts say Nokia was smart not to fall into that trap, even if it meant a temporary decline in its market share, likely to somewhere between 37% to 38% in the third quarter. (That's still well within Nokia's historic range in the years since it became the world's No. 1 handset maker.)

Nokia also cites other reasons for the expected decline in market share, including slower-than-expected deliveries of one its mid-range phones. But the company expects other product launches and shipments to be on track for the remainder of the third and fourth quarters.

Analysts accept that projection, too. The anticipated improvement in Nokia's product lineup towards the end of the year, when it introduces new smartphones in its Eseries and Nseries lines, mean the third quarter setback likely will be a blip.

In a show of confidence, Nokia reiterated on Sept. 5 its promise of higher market share for 2008 as a whole. And though there are signs of weakening consumer confidence around the world that could affect the overall mobile device market, the company says it still expects industry-wide unit sales to grow 10% or more from the 1.14 billion units sold last year, according to its own estimates.

At that rate, Nokia is on track to sell more than a half-billion phones this year--and make good profits doing it. That's something investors might want to keep in mind.