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A Happy Call from Nokia

By Andy Reinhardt and Roger Crockett Investors in handset-making giant Nokia (NOK) got a lot to cheer about on Sept. 13, when it raised sales and profit forecasts for the third quarter and introduced a new product for mobile e-mail called Nokia Business Center that's aimed right at Research in Motion's (RIMM) popular BlackBerry wireless paging service.

What's behind the rosier outlook? Nokia is benefiting from rising global demand, especially in the developing world, and prices aren't dipping as much as the Finnish phone maker previously feared. Average prices will still be down from a year ago (when they averaged $140, according to Nomura Securities), but they'll drop less than Nokia earlier warned, thanks to "relatively firm pricing," Nokia says, and a geographical mix that favors higher-price models.

Third-quarter sales will be 8.4 billion euros to 8.5 billion euros ($10.3 billion to $10.5 billion), compared with a prior forecast of 7.9 billion euros to 8.2 billion euros, Nokia says. Earnings will be 18 euro cents to 19 euro cents a share, up from a prior estimate of 14 euro cents to 17 euro cents. In net profit terms, that equates to $1.07 billion, up 31% from the same quarter a year earlier.

A RISING TIDE. As demand in less-developed markets surges, and more young people jump on the wireless-calling bandwagon, the number of new mobile-phone users is on track to set a record this year, says London-based researcher Informa Telecoms & Media. Net additions will leap to 380 million this year from last year's record of 335 million, Informa says. However, access fees are tumbling in fast-growing markets, such as Nigeria and Mexico. But in other markets, where a higher percentage of the population already owns cell phones, carriers are succeeding in getting more devices into the hands of the under-14 set, according to Informa.

Nokia isn't the only handset maker benefiting from higher demand. Motorola (MOT), the No. 2 cell-phone maker, is also getting a lift. Both companies nabbed market share from smaller operators such as Samsung in the second quarter and are likely to keep up the pressure in the second half, say analysts and company executives alike. Nokia says it expects volumes "to grow somewhat faster than the overall market during the quarter."

For Motorola, the secret is in the handset lineup, and lately it's all about music and sleek styles. While it doesn't have all the capacity for storing songs as a comparable model from Nokia, Motorola's just-released Rokr phone featuring Apple (AAPL) iTunes is expected to grab a fair chunk of sales, especially in the U.S., this fall. According to JP Morgan, Motorola believes fourth-quarter Rokr shipments could be in line with year-earlier figures for the half-inch thick Razr, Motorola's it-phone for 2004, which shipped about 750,000 units in the period. Motorola's music-playing phone is being carried by Cingular Wireless, the largest U.S. wireless-service provider.

TRENDY APPEAL. And that's just the beginning, says Motorola CEO Ed Zander. A whole family of music phones is on the way -- some might hold more than 100 songs, he told BusinessWeek Online in a phone interview. "I think the Rokr merges some of the very best music software and hardware in mobile audio," he says. "There will be follow-ons to Rokr -- not only in the U.S. but in other countries."

Still, the real stimulus for Motorola's near-term sales growth continues to be the Razr. JP Morgan has bumped estimates for fourth-quarter phone sales to $6.02 billion, up $624 million over its previous estimates. Razr sales are expected to hit 6 million units by the end of September and 10 million before yearend. Demand for high-end phones, such as the $199 Razr and the $250 Rokr, are buoying Motorola's average sale price, currently about $145.

While Nokia's average selling price tends to be lower owing to sales in developing markets, the company hasn't taken its eye off higher-end phones. After a stumble in the first half of last year, Nokia has moved quickly to bring out more models that appeal to status- or trend-conscious buyers. Its new N-Series devices, which include a camera phone with a Karl Zeiss lens and a music phone, are starting to ship and should help results in the fourth quarter.

BUSINESS BOOST? Nokia is also getting a bit of a boost from 3G phones, now that the speedy next-generation wireless networks are finally up and running in scores of countries around the world. Nokia's 6630 is the best-selling 3G phone around, and its market share in 3G, after lagging badly behind its overall share, jumped smartly in the last quarter.

Now, with the Nokia Business Center mobile e-mail software, Nokia aims to enhance its appeal to business users. And analysts say it may be stepping up pressure on Research in Motion. While Nokia still has to prove it can erode the BlackBerry's popularity, rising demand in developing markets and heavy buying by younger users suits the Finnish phone maker -- and its shareholders -- just fine.

Reinhardt is a correspondent in BusinessWeek's Paris bureau, and Crockett is deputy bureau chief in Chicago

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