Among CEOs, Jorma Ollila has a reputation for putting his money where his mouth is. So it was no surprise when he ascended the podium for a keynote speech at the COMDEX computer industry trade show on Nov. 12 and dropped a bombshell. Ollila offered to license the software that powers his red-hot Nokia cell phones and other personal communication devices to competing handset manufacturers.
More than that, the unflappable Finn said he was willing to show competitors his source code to help them develop products that are more compatible with Nokia phones. That's akin to Bill Gates agreeing to show the source code of the Windows operating system to archrivals Sun Microsystems and Oracle in the interest of promoting better interoperability in business software.
"BIGGER AND BETTER." True, the bold move wasn't exactly a total leap of faith. Nokia (NOK) had already thrown in with a group of 16 wireless players, including its chief competitors as well as mega-carriers such as Verizon and SBC, that had agreed to push for open standards and enhanced technological transparency in the wireless sector. Their unification aims to foster greater growth for the entire industry by making it easier to build systems that talk to each other.
Still, Nokia took that notion further than anyone else by agreeing to show its crown jewels to competitors. The Finnish phenom believes it can stay ahead of the pack, even if the pack has the latest blueprints from Helsinki. "It's not about us trying get our software on every handset. It's about trying to make the market bigger and better," says Paul Chellgren, vice-president for Nokia Mobile Phones.
Of course, as the market dominator with a 32% share of the global handset business, Nokia can afford to take some risks. The question is, will they pay off for this year, or will investors continue to feel skittish toward the stock, which is 49% off its 52-week high. Analysts overwhelmingly think Nokia is a solid investment play right now. And Ollila's bold moves only bolsters their confidence. "I think these guys have everything clicking," say Paul Sagawa, a senior analyst at investment research firm Sanford C. Bernstein.
FOREBODING. The company comprises two primary business groups. Nokia Mobile Phones makes the handsets and most of the money. That unit, which sold 128 million handsets in 2000, accounted for 72% of Nokia's revenues that year, according to Standard & Poor's, which, like BusinessWeek Online, is a division of The McGraw-Hill Companies. The other big group is Nokia Networks, which builds a wide variety of equipment, including wireless infrastructure gear, digital subscriber line (DSL) networking equipment, and high-capacity Internet security appliances. Nokia Networks accounted for 25% of the company's 2000 revenues, according to S&P.
The remainder came from Nokia Ventures, a small part of the company, which focuses on bleeding-edge technologies for transporting data, plus software and content for mobile devices. Combined, the three groups produced revenues of $30.3 billion in 2000, a 34.4% increase over 1999's $19.9 billion. Net income also increased 34% that year, to $3.9 billion.
This year has been much more traumatic. In the first three quarters of 2001, overall sales growth slowed to only 6%. Worse, net profits plunged 36% for the nine-month period. And sales at Nokia Networks have suffered significantly as European cell-phone operators have slowed infrastructure build-outs partly because of financial troubles resulting from inflated prices they paid for spectrum licenses.
HARDLY STELLAR. The bad news came to a head in early July, when Nokia shocked investors by announcing that it could miss its 2001 earnings targets by as much as 25%. That set off a selling spree that dropped the stock by 23% in the first day of trading after the news and sliced $31 billion off Nokia's market cap. The stock hasn't yet recovered.
And third-quarter earnings, though they met analysts' expectations, were hardly stellar. The company posted a 14% decline in sales at Nokia Networks vs. the same quarter the year before, and operating profit fell 57% in the unit. Nokia Mobile Phones suffered a 3% decline in sales and a 6% decline in operating profit.
So why does the Street still love Nokia? Of the 29 analysts who track the stock, according to S&P, 12 have strong buy ratings on the stock and 14 have buy ratings. The other three rate it a hold. Nokia bulls figure the company has weathered tech downturn far better than most and looks set to soar again in the coming year. Says Bernstein's Sagawa: "They have economies of scale. They are willing to take chances. They are introducing brand-new products to the market, which has always meant share gain and margin expansion for the company."
BAILING OUT. With operating margins in its predominant handset business of 19%, Nokia trounces competitors Ericsson (ERICY) and Motorola (MOT) in terms of profitability. In fact, neither of the other two are making any money on their cell-phone operations. Both have largely abandoned the idea of doing their own production, with Motorola looking at outsourcing all manufacturing to Siemens (SI) and Ericsson striking a deal with consumer electronics wizard Sony to build handsets jointly.
What's more, Nokia has managed to defy logic by keeping margins up in a business many experts say should be headed for the commodity dustbin. Its secret is that it controls both the software and the hardware. "They are like Dell (DELL) and Microsoft (MSFT) rolled into one," enthuses Sagawa. Furthermore, handsets have succeeded in becoming a style accessory, while PCs have, with the exception of Apple's products (APPL), remained boring boxes devoid of sex appeal. And Nokia has proven the most adept at selling handsets customers love. That's why Sagawa believes that anyone who says Nokia will get caught in the commodity trap is "flat-out wrong."
As for Nokia Networks, it won the equivalent of the Powerball Jackpot in the last week of October. No. 2 U.S. wireless carrier Cingular signed up Nokia to provide infrastructure for a planned GSM (global system for mobile communications) network -- which allows for international roaming capability. This means Nokia, which also has built a network for No. 1 U.S. cell-phone provider AT&T Wireless (AWE), has a firm foothold in America with long-term cash cows in terms of service contracts and upgrades.
"They were a nonentity [in the wireless infrastructure sector] in the U.S. and Latin America. Now they are definitely a player," says David Berndt, the director of wireless research at consultancy the Yankee Group. "Over the next three years, as they support Cingular and AT&T Wireless, they will get a significant market share."
"MISSING LINK." The U.S. beachhead also takes Nokia one step closer to its ultimate goal of becoming a vertically integrated business. That means selling complete wireless packages to carriers -- including base stations, software management tools, and the latest handsets, all based on Nokia's GSM technology. That standard already dominates Europe and Asia, but not the U.S. "The missing link has been the critical mass in the U.S.," says Niklas Savander, Nokia's vice-president for mobile Internet applications. "Now we have that, as well."
Not that Nokia's rivals are rolling over. Motorola, the next-closest competitor in terms of global handset market share, has embarked on an aggressive cost-cutting plan that will include using fewer basic platform designs for its phones. "All the indications are that we are gaining share in the market over the last three quarters," says Leif Soderberg, a senior vice-president at Motorola. He also claims that a renewed focus on design, particularly for the company's trademark flip-phones, is winning over carriers and customers alike.
At the same time, a deal between Sony and Ericsson to work together on cell-phone design and production could pit Nokia's product engineers against the formidable Tokyo designers who have cornered the style market in everything from the Walkman to plasma TVs. In the Far East, Samsung, Kyocera, and others have also drawn a bead on Nokia. The Asian players have a reputation for brutal pricing tactics in consumer electronics, which could prove hazardous to Nokia's wealth.
Even so, the game is Nokia's to lose. As the world economy recovers and consumers develop a taste for new and expensive wireless services, Nokia, more than any other company, is positioned to gain from every level of sales in the cell-phone business. That's a nice place to call home, even if the winters are long and dark up around the Arctic Circle. By Alex Salkever in New York