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Nokia's Goal: Cell-Phone Planet

By Andy Reinhardt The biggest-selling electronic product in the world is mobile phones. Analysts estimate that consumers from Canada to China will snap up more than 600 million handsets this year -- five times the number of TVs or personal computers expected to sell. Yet, for all of the mobile phone's success, only about one-fifth of the people on the planet now have one.

Nokia (NOK), the world's top handset seller and a leading provider of the equipment that powers mobile networks, wants to see those numbers rise. The Helsinki-based company has kicked off a campaign to expand the mobile communications market -- and by extension, its own business -- from 1.4 billion users today to 2 billion by 2007. That kind of growth will put mobile well ahead of fixed-line telephony and buttress Nokia's position as one of Europe's top technology companies.

Yet with mobile-phone penetration already above 60% in much of the developed world, most of the growth will have to come from emerging economies. Nokia figures 80% of new mobile customers between now and 2007 will come from Russia, Eastern Europe, China, India, Brazil, Africa, and the Middle East. That translates into the ambitious goal of adding nearly a half-billion new subscribers from such countries in the next three years. "The developing world is a tremendous growth opportunity for both networks and phones," says Jussi W?e, vice-president of global marketing at Nokia.

CUT COSTS IN HALF. To attract those customers -- many of them far less wealthy than North Americans or Western Europeans -- Nokia has to reduce the cost of both mobile phones and service. Subscribers in rich countries pay, on average, $30 per month for mobile service. In poorer countries, operators have to make a profit on monthly revenues as low as $5 to $10 per customer. "It won't be possible for us to reach 2 billion users if we're not able to change the cost structure," W?e says. The goal: to cut it roughly in half, he says.

While Nokia will certainly benefit from dramatic growth in the mobile market, the emerging economies of the countries it's targeting stand to benefit as well. Studies consistently find a strong link between "teledensity" -- the penetration of phone service -- and economic growth. For poor people, especially those in rural areas who are unlikely to get wired anytime soon, mobile service can shorten distances, open up new business opportunities, and even improve health care.

Nokia isn't alone in pursuing opportunities in the developing world. Paris-based Alcatel (ALA) constantly redesigns its mobile equipment to strip out cost and add flexibility -- and as a result, enjoys market share in Africa and Latin America that's considerably higher than in the rest of the world. Ambitious Chinese equipment makers such as Huawei and ZTE also are targeting the developing world with less-expensive network gear. But Nokia has gone further than any company in pulling together a complete package of equipment, software, and services aimed specifically at less-wealthy countries.

STYLE COUNTS. Its first order of business: bringing out a selection of lower-cost handsets. Nokia has delivered four simple voice-and-texting models that retail for $100 or less. In places where operators subsidize the cost of phones in exchange for a service contract, these models are cheap enough to be given away for free to new customers. But despite being simple, they're not bland. For instance, Nokia offers removable faceplates to appeal to a variety of tastes, and the latest models feature color screens.

"Customers in the developing world don't need all the bells and whistles, but at the same time, they don't want phones that are cheap and nasty," says Carolina Milanese, handsets analyst with market researcher Gartner in Egham, England. Indeed, some status-conscious buyers in China, Russia, and elsewhere opt instead for top-of-the-line models with built-in cameras, polyphonic ring tones, and support for downloadable Java software applets.

A bigger challenge, however, is lowering the price of service, according to Matti Alahuhta, chief strategy officer at Nokia. That's why Nokia's Networks division, which represents 20% of the company's $37 billion in annual revenues, has rolled out its "Mobile Entry" program, which delivers cheaper network equipment as well as tools that allow carriers to offer less expensive service.

CUSTOMER SELF-SERVICE. To cut the costs of building a network, Nokia has developed several technologies that reduce the number of transmission towers required, as towers are the biggest expense in a mobile network. For instance, new Adaptive Multi-Rate (AMR) encoding uses sophisticated mathematical algorithms to improve the quality of mobile signals inside buildings and at the outer edges of a cell. That can improve tower range by 30%.

AMR works in conjunction with an even newer technology, Smart Radio, which pumps up the power of outgoing signals from cell towers and increases the radio sensitivity of handsets. With AMR and Smart Radio, operators can deploy up to 70% fewer cell towers, depending on geography.

And to make towers even cheaper, Nokia has developed so-called "shelterless sites," which do away with the Dumpster-sized enclosures that sit next to cell towers and house the electronics connecting antennas to the network. Nokia has shrunk that gear into a box small enough to be mounted directly on the tower. Shelterless sites can cost 40% less than conventional ones.

STREET-VENDOR FILL-UPS. The final frontier: cutting operating costs. Customer service alone can eat up as much as 30% of a carrier's revenues, so anything Nokia does to help carriers cut that expense helps reduce the price of mobile service.

Take one of the simplest and most cost-effective examples: Nokia's "eRefills" technology, which slashes the cost of administering prepaid service and boosts usage among cash-strapped customers. Traditionally, prepaid service is sold on paper or plastic scratch-off cards in denominations from $5 to $50. But even $5 can be a lot for customers in poor countries. And printing and distributing scratch-off cards for anything less than that becomes a profit-killer.

The solution? Letting customers "top up" their accounts electronically by buying airtime from authorized street vendors in increments as small as 50 cents. The eRefills technology is already being used in the Philippines, Indonesia, and India.

VOICE TO TEXT. Nokia also has released cost-cutting technologies that give customers more control over their account, which means less interaction with costly service agents. For instance, it has software that lets users check on their remaining airtime balance using text messages instead of calling a support line. Nokia even has a technology for converting voicemail into multimedia text messages that are delivered directly to a person's phone for a few pennies. That means users don't have to waste expensive airtime listening to voicemail.

Pushing further into the developing world is the only way Nokia can keep sales growing at the pace Wall Street is used to. But doing so exacts a toll: Because so many of the phones Nokia sells are lower-end models, its average revenue per unit is lower than that of rivals such as Samsung Group and Sony Ericsson. On the other hand, those high volumes keep Nokia's factories operating at a well-oiled pitch -- is one reason it still enjoys the highest profit margins in the business.

In Nokia's case, it looks like doing good for the developing world is also pretty good business. Reinhardt is a Paris-based correspondent for BusinessWeek

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