Wounded, Nokia Comes Back Firing


By Andy Reinhardt Nokia is bruised but not beaten. At its Nokia Connection, annual show-and-tell for press and industry analysts on June 14 in Helsinki, the world's largest mobile-phone maker kicked off an aggressive bid to restore some of its lost luster, unveiling five new handsets and a host of subtle strategic shifts. Since announcing disappointing results for this year's first quarter and warning that the second wouldn't be much better, Nokia's (NOK) stock has plunged 35% -- and critics have circled like hawks.

The weather outside was blustery and gray, but inside a former 1950s-era Nokia cable factory converted to meeting space and artist lofts, CEO Jorma Ollila turned up the heat on the mobile industry with an impressive new lineup and a show of confidence.

Ollila now expects the global handset business to hit 600 million units this year, up 20% from 2003. That should provide plenty of growth opportunity, but Nokia has suffered recently from weakness in the mid-range of its portfolio, costing it market share against rivals such as Motorola (MOT) and Sony Ericsson. Market researcher Gartner said last week that Nokia's share dropped five points, to 29%, in the first quarter, although the phone maker's own calculations show a more modest drop, to 32%. In any event, Ollila said at the meeting, Nokia is still committed to a long-term goal of 40% market share, and he insists that its vision is "more valid than ever."

FINALLY, CLAMSHELLS. To get there, Nokia unveiled a range of new phones that plug some holes in its current lineup, including the smallest handset ever made for the new third-generation (3G) networks sprouting around Europe and Asia. The model 6630, which has a built-in 1.3-megapixel camera and supports wireless videoconferencing, will be available in the fourth quarter for an unsubsidized price of $600. It works on both 3G and existing GSM networks around the world.

A roster of top-tier mobile operators, including Vodafone (VOD), Orange, O2, Telecom Italian Mobile, and T-Mobile, are testing it for introduction late this year. Compared to the bulky and expensive 3G phones now available, the 6630 could do very well.

Nokia also has moved quickly to address perhaps its most worrisome gap -- an almost total lack of phones using the folding "clamshell" design. It announced three clamshells: a basic voice phone (the 2650, expected to cost about $150) aimed at budget buyers; a mid-range stainless-steel camera phone (the 6170, priced at $300); and a top-of-the-line camera phone (the 6260, for $480) whose clamshell top not only hinges but swivels. That lets you turn the screen all the way around and fold it back over, so the screen winds up on the outside. Or you can twist it around and watch yourself on the screen if you're taking a picture of yourself.

NEW PRAGMATISM. The mere announcement of these new models is almost less important than the tactical shifts behind them. Nokia said it will lower the number of new phones it introduces this year from 40 to 35. In response to the first-quarter downturn, said Matti Alahuhta, Nokia's executive vice president and chief strategy officer, Nokia has "taken actions" to alter its product roadmap. "There are models we have accelerated, others we have delayed, and some we have killed off."

In a later interview with BusinessWeek Online, Alahuhta wouldn't describe the canceled phones but said they were ones where Nokia didn't feel it could achieve sufficient differentiation from competitors. Instead, he said, Nokia wants to redeploy resources to models sure to grab customers.

One of the big surprises of the day -- typical of Nokia's increased pragmatism -- was the revelation that it will postpone until 2005 the introduction of the high-profile model 7700 "media device" announced last October. The phone-cum-media-player, which features a wide color screen and is shaped somewhat like a jukebox, is intended to play not just FM radio and MP3 music files but also digital videos and digital broadcast TV.

"THE ONLY WAY." Alahuhta says the 7700 was too early for the market and that Nokia wants more time to develop the business ecosystem -- operator services, choice of content, and payment schemes -- to support such a device. But it could be that mobile-phone operators have simply turned up their noses at the gizmo.

It wouldn't be the first time that has happened, but Nokia now sees taking such risks -- and suffering occasional setbacks -- as an integral part of its growth strategy. "Maybe in some cases we push too far," admits Chief Technology Officer Pertti Korhonen. "But that's the only way to find out what the limits are. If one or two models out of every hundred don't succeed, it's still the right thing to do."

That's certainly a lesson Nokia has applied in its nascent game-console business, where the first release of the N-Gage handheld gaming phone in 2003 was badly received. A quickly revamped model introduced in March, the N-Gage QD, is getting warmer reviews and is already taking off in Europe and Asia.

CATHARTIC? Perhaps the strongest takeaway from the dog-and-pony show was that Nokia isn't slinking into its corner and putting up a screen of defensiveness. It clearly has been stung not only by its sudden change in fortunes but also by the powerfully critical reaction unleashed in the market. Yet one executive conceded privately that he thinks such setbacks can be very cathartic for a company -- especially one that may have gotten a bit too comfortable with its dominant market position.

Nokia is indeed taking a hard look at itself and has redoubled its efforts to prove that it can remain relevant in the midst of a fast-changing market. Investors will want to wait to see real results from all the posturing, but they can take comfort from the fact that Nokia isn't making the fatal mistake of failing to listen.

In other news from the June 14 Nokia Connection conference:

The latest version of Nokia's Communicator line of phone/PDA hybrids is the first to support both traditional mobile networks and Wi-Fi wireless Internet access. Alahuhta said Nokia will now start expanding Wi-Fi support to other phones in its portfolio, starting with the "multimedia" line of camera and audio/video phones, and eventually spreading perhaps to conventional phones. He says mobile-phone operators "don't have a problem with this," because they, too, are moving to offer customers access through both traditional and Wi-Fi wireless networks.

Alahuhta also said Nokia's Series-60 user interface software -- which features color icons and allows for installation of third-party software applications on a phone -- will propagate throughout Nokia's lineup in the future. The software, which runs on top of the Symbian operating system and competes head-on with a mobile version of Microsoft Windows, now dominates the market for "smartphones" and has been licensed by seven other mobile-phone makers including Siemens, Samsung, Panasonic, LG Electronics, and Sendo.

Nokia announced a second release of Series-60 at the conference that adds better support for dual-mode (e.g. GSM and 3G) phones, improved screen rendering capabilities, and additional tools for operator customization.

The head of Nokia's networks division, Sari Baldauf, revealed that Nokia has rejoined the WiMax forum, which it left only a few months ago. The industry group, spearheaded by Intel (INTC), Alvarion, and a host of other companies, is working on standards for low-cost wireless networking based on Internet standards -- a kind of Wi-Fi on steroids.

Analysts had read Nokia's departure from the group as a sign that it was worried WiMax could compete with 3G. But Baldauf said Nokia left because the group was working at the time on areas Nokia wasn't interested in. Now, she says, Nokia wants back in to contribute to the evolution and development of WiMax.

Baldauf also said Nokia is keeping a close eye on developments in the 450-megahertz frequency band, a swath of spectrum that holds the potential for highly efficient, low-cost mobile services in rural areas and developing countries. Some mobile engineers think harnessing this largely unused frequency could be a breakthrough in boosting mobile penetration around the world, but Nokia has until now showed little interest in the spectrum because the company was so focused on established GSM bands and the higher-frequency 3G. Reinhardt is a correspondent in BusinessWeek's Paris bureau


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