Nokia Rings in Gains on Motorola News

Shares of the Finnish phonemaker jumped after its archrival's target-miss announcement. Of course, its phones are helping, too

Nokia Chief Executive Officer Olli-Pekka Kallasvuo promised in January that the mobile-phone titan would "turn up the heat" on rivals this year, and so far, he's proving true to his word. On Mar. 21, archrival Motorola slashed its first-quarter sales forecast and said it would post a loss in the period. The second quarter will be little better, the Schaumburg, (Ill.)-based company added.

Investors and industry watchers are clearly expecting the No. 2 cell-phone maker's pain to be Nokia's gain. Nokia shares rose €0.63, or 3.77%, to €17.35 on Mar. 22. Its ADRs closed little changed at $22.96 in New York.

Emerging-Market Foothold

Espoo, Finland-based Nokia (NOK) has moved swiftly to retake the advantage in 2007, after price competition in emerging markets and lack of a trendy "ultra-thin" model kept the Finnish mobile-phone giant running behind for much of last year. At the 3GSM jamboree in Barcelona last month, Nokia unveiled an arsenal of products designed to plug gaps in its portfolio, including gizmos to appeal to the midrange market and new phones for the lower-end sector. "Nokia's in a very, very strong position," says Martin Garner, director of wireless at Ovum, a London-based consultancy. "Motorola's difficulties will benefit them."

Key to Nokia's success has been its push into India, China, and other emerging markets, which accounted for more than half of the 105.5 million mobile devices Nokia sold in the fourth quarter. While that was largely driven by sales of no-nonsense phones, Nokia is also introducing models with more bells and whistles designed to appeal to an emerging middle class with more disposable income in those regions.

It has scored a hit with products such as the 2626, a $98 GSM model that comes in five colors with features that include an FM radio and picture messaging. That's about double what a basic phone tends to cost in India, for example. Such tactics have enabled Nokia, unlike its rivals, to achieve the same margins in their low-end range of phones as in their midrange, notes Ovum's Garner.

Adding to Its Lead

Nokia can also better withstand price declines in commoditized markets because of its sheer size. But Motorola (MOT) hasn't just been rocked by the sharp drop in phone prices in emerging markets, analysts say. Neil Mawston of Strategy Analytics in Milton Keynes, Britain, says the company also "put all its eggs in one basket" with the enormously popular midrange RAZR, and is suffering now as it struggles to find a similar hit. "Nokia spreads its risk more widely, and with the larger market share, its pricing power is very strong," Mawston adds.

As a result of Motorola's woes, Nokia is likely to gain as much as 4% in market share for the full year, to 38.7%, Credit Suisse (CS) analyst Kulbinder Garcha wrote in a note to investors. Motorola could have lost as much as 4.5% market share in the first quarter, to 17.8%, the note said.

Still, the Finnish behemoth is "far from perfect" says Ovum's Garner. In spite of Nokia's efforts, both LG and Samsung have the momentum when it comes to design. In Europe, Nokia's biggest market, Sony Ericsson has stolen a march with its popular line of Walkman phones. Nokia's business sales unit, which hawks such products as smartphones, continues to suffer, and analysts will be watching to see if the division breaks even in the first half, as Nokia has forecast.

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