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Global Economics

Nokia and Motorola on Earnings Seesaw?

For weeks, analysts have been bracing themselves for bad news from Nokia (NOK) when the mobile phone titan reports third-quarter results on Oct. 19. At least three components suppliers issued profit warnings in recent weeks, triggering fears of slowing handset sales. Reports last week that the No. 1 cell phone maker trimmed prices on some of its multimedia models didn't bode well, either.

But archrival Motorola (MOT) just made life a whole lot easier for Finland's Nokia. The Schaumberg (Ill.)-based company said on Oct. 17 that its third-quarter revenues rose 17%??ell short of expectations??nd earnings fell 45% year-over-year.

Motorola says its handset market share has now reached 22.4%, up from 22% the previous quarter. But that fractional gain was well below the company's stated goal to grow share by one percentage point, according to analyst Richard Windsor of Nomura Securities in London.

The RAZR's Edge Motorola's surprising shortfall, which caused its shares to sag more than 5% on Oct. 18, has taken some pressure off Nokia. Analysts figure it will meet or possibly beat consensus forecasts for an 18% sales increase, to ??9.87 billion ($12.4 billion) in the third quarter, with profits up 11.7% to $1.24 billion.

That should come as a relief to investors, who have long worried about Nokia's eroding average selling price and the prospect of sliding profit margins. What's more, Motorola has been on a tear under new CEO Ed Zander, racking up market-share gains for seven consecutive quarters thanks largely to the runaway success of its hip, ultra-thin RAZR phones.

Now, as "RAZR-mania" tapers off, "the momentum is swinging back toward Nokia," says Neil Mawston, associate director at market researcher Strategy Analytics in Milton Keynes, England. Nokia hasn't yet released a phone with a similar cool quotient, but by focusing on fast-growing emerging economies and rolling out a range of feature-rich smartphones, the company appears likely to have held onto its 34% market share in the quarter, analysts say.

Triple-Strength Rivals Still, Nokia can't rest just yet. For one thing, Motorola continues to grow faster. Its handset unit sales grew 39% in the third quarter from a year earlier, to 53.7 million units. Nokia's are expected to grow around 24%, to around 82.5 million units, figures Mawston. Motorola also has managed to top Nokia in gross margins, which were 31.8% in the third quarter, higher than the 29% Nokia managed three months earlier.

Motorola isn't Nokia's only concern. Rivals that could have been dubbed also-rans just a few years ago are making their presence felt through snazzy design and marketing. Sony Ericsson Mobile Communications, for instance, reported last week that its third-quarter profits tripled from a year earlier. Thanks to strong demand for its Walkman music phones and Cybershot camera phones, the 50-50 Sony (SNE) and Ericsson (ERIC) joint venture sold 19.8 million units in the quarter, well above analyst predictions of 16.7 million.

The success of Sony Ericsson and the popular "Chocolate" phone from Korea's LG Electronics are one reason Nokia may show third-quarter weakness in its traditional European stronghold. Nokia won't comment on reports that it has cut prices by as much to 10% in Europe for its N-series multimedia phones, which feature cameras and music applications.

Emerging Market Bonanza Of course, design trends and buzz can be ephemeral, as Motorola may be learning with the RAZR. After misjudging interest in the flip-phone two years ago??n incident analysts refer to as the "clamshell crisis"??okia drafted a slew of top designers to stay on top of trends. So far, it still hasn't introduced a new mid-range model that has caught on like the RAZR. But Jussi Hy??ty, an analyst with Helsinki-based FIM Securities, says an expected launch of a range of ultra-thin phones early next year could do the trick.

At the same time, Nokia is still pushing hard into emerging markets, where it has built up a vast distribution network and introduced phones that sell for less than $50. Greater China is now its single biggest market, accounting for 11% of global revenues last year, and all signs indicate growth stayed on track in the third quarter. In India, Nokia boasts an eyebrow-raising 60% market share, and the company said this week that it expects India to become its No. 2 market by 2008, two years earlier than previously expected.

The shift to emerging markets, though, is coming at a cost. The average selling price of Nokia phones continues to drift down. Analysts figure it could be around ??100 ($126) for the third quarter, down from ??102 the quarter before. Motorola, which is also targeting emerging economies, still has a higher ASP of $130. But its prices are falling, too. The average was $136 a quarter earlier.

No Rest for the Weary As a counterbalance, Nokia is redoubling efforts to develop its higher-margin smartphone and multimedia ranges. This summer it snapped up U.S.-based online music distributor Loudeye in a bid to offer more downloadable music choices for Nokia phones. It also recently purchased German mapping and navigation software company gate5, which will help broaden its range of location-based services in future smartphones.

It's a balancing act that may take some time to get right. The company's Enterprise division, which flogs mobile e-mail devices and other corporate networking products, has lost money for years, showing just how hard it is to branch out into new business areas. It may have been a tough quarter for Motorola, but that doesn't mean Nokia can sit back and relax.

Norton is a correspondent in London.

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