Nokia's Grand Plans for 2007

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Despite the risks, analysts think Nokia has a good shot at improving its position. The improved product mix and Nokia's efforts to appeal to both first-time users and the replacement segments (which command higher prices) will shore up overall gross margins in 2007, after they fell to 30.9% in the third-quarter from 33.7% the previous year, according to a Bear Stearns report. Those efforts should also help stabilize average selling price per phone, which plunged almost $12 to €93 ($122) in the third quarter.

There are also efforts to branch out from the basic handset business. Nokia's multimedia arm, which came out with a range of new music and camera phones in 2006, will continue to go from strength to strength in the next 12 months, analysts predict. Two purchases this year signified the company's dedication to throwing its weight behind this higher-margin range. Nokia snapped up U.S. online music distributor Loudeye this summer to offer a wider range of downloadable music. It went on to purchase Germany's gate5, which makes mapping and navigation software.

Smoothing the Edges

Nokia's N95 phone, unveiled early next year, will be its first to offer embedded location-based software. Analysts say Nokia has the muscle and the ambition to make more acquisitions to bulk up its stable of mobile services. Gaming is one area where Nokia is keen to strengthen its position.

Yet the company is well aware that it has rough edges. Nokia on Nov. 28 lowered its operating margin target to 15% from the 17% goal it set a year ago, in part because of its plan to merge its telecom's equipment-making unit with Germany's Siemens (SI). The venture, to create the No. 3 industry player, was set to fire up on Jan. 1, but Nokia said Dec. 14 that it will delay closing the deal for several months amid allegations of bribery at the German firm. This won't have much of an impact if the venture is delayed by a quarter, say analysts. If the uncertainty drags on, however, Nokia, which desperately needs scale to compete in this arena, will be in danger of losing out on lucrative contracts to Ericsson (ERIC) and other rivals.

Meanwhile the enterprise unit, which hawks smartphones and other business devices, is also on Nokia's list of challenges for 2007. In the third quarter, its losses nearly doubled to $81.5 million, but Mary McDowell, Nokia's executive vice-president and general manager of Enterprise Solutions, says the goal is for the unit to break even in the first half of 2007. This may be a "stretch" Gartner's Wallin says. The company needs higher penetration of the U.S. market, McDowell admits.

Bad Decisions

In this area, too, design will play a key role. "We're seeing some new form factors," in e-mail-capable handsets, says McDowell. "Everything will be getting sleeker. There will be more color, rather than just basic black." For example there will be a red E61, which is Nokia's BlackBerry-like device. Business phones will be increasingly equipped with more options normally associated with consumer phones, such as MP3 players and cameras.

Rough edges aside, Gartner's Wallin predicts the Finns now have the product portfolio in place to slightly beat the expected growth for the industry. He expects Nokia to boost its 35.1% to almost 36% in 2007. Citigroup figures operating profit will advance 15% from 2006 to $8.1 billion. The past 12 months were "one of those years when bad decisions affected growth, but they've recognized that with the reinvigoration of the design team," Wallin says. It takes time, but "what we've seen so far is promising."

With Jack Ewing in Frankfurt