Nokia Is Shopping For A New Number

It needs a big acquisition to develop the mobile Internet

You would think Nokia Corp. CEO Jorma Ollila could loll a few extra minutes in his sauna. His Finnish telecom giant has triumphed beyond analysts' wildest expectations, racing past Motorola Inc. and Ericsson by nearly every measure in the cellular phone business. Last year, Nokia's revenues, powered by booming U.S. sales, grew 51%, to $15.7 billion, with profits up 67%, to $2.1 billion. Its stock price has doubled in the past year. And to crown Ollila's rise, his board in Helsinki just named him chairman, strengthening his grip on the company.

Yet Nokia has a weakness, one Ollila is hurrying to address. While a powerhouse in handsets, Nokia risks becoming an also-ran in the telecom systems business, which represents a third of Nokia's sales. The trouble is that Nokia, like many of its European competitors, is a featherweight in Internet technology. This is a fast-growing field dominated by North American titans Cisco Systems, Lucent Technologies, and Nortel. If Nokia can't match their offerings, it could cede its position, allowing others to build the nerve centers for mobile networks in the coming century. "Poor old Nokia," says Malcolm Collins, managing director of Nortel Networks in Europe. "They've left their future up to companies like ours."

That said, the 48-year-old Ollila is going shopping. His board O.K.'d a plan to issue some $9 billion of new stock, and Ollila now says he plans to use a sizable chunk of that for an acquisition or two. "Watch this space," he says. Ollila vows that Nokia will resist the me-too strategy that has Europeans and Americans alike gulping up U.S. companies that create the largely wired world of Internet plumbing. Instead, even in infrastructure, Nokia officials say they will carve out a wireless niche. "Going head to head in Cisco's market is not the way to do it," Ollila says.

And what will he buy? His likely path will be to build up Nokia's software portfolio in mobile systems. This way, conceivably, Nokia could sidestep the core Internet market--and much of the fixed-line world--and instead build high-tech add-ons that add zip to Ollila's dream: the mobile Internet. For this technology, analysts and competitors expect Ollila to trawl widely, from the labs of titans such as IBM to the tiniest software startups the world over.

Even at today's inflated prices, it doesn't take big money to pick up these kinds of niche technologies. Indeed, in the last 18 months, Ollila bought four small American companies, specializing in E-commerce, Internet routers, and Internet telephony. He got all of them for less than $500 million.

SHELF SPACE. The more expensive purchases, say people close to the company, may involve broadening the range of machines on Nokia's shelves. Ollila could perhaps gobble up the Palm Pilot business of 3Com Corp., or its leading competitor, British computer maker Psion PLC. But there are also plenty of bite-sized options, including startups that make new types of Internet devices. Two-year-old Qubit Technology, of Lakewood, Colo., for example, makes a portable Internet browser the size of a magazine. "Something like Qubit would give Nokia a chance to branch beyond what they're doing with phones," says Thomas B. Rhinelander, an analyst at Forrester Research Inc., a consulting firm in Cambridge, Mass.

Nokia Is Shopping for a New Number (int'l edition)

Already, Nokia's busy turning the mobile phone into a new generation of Internet device. In the last two months, the company unveiled three zippy new models. One, the 7110, includes a tiny Web browser that can receive news bulletins from CNN, as well as weather, sports scores, and airline schedules. Competitors, of course, are rushing similar phones to market. The payoff is a cell-phone market projected by Dataquest Inc. to grow from today's 300 million subscribers to 1 billion by 2005--perhaps 30% of them using Internet phones.

As of now, few companies if any are better positioned than Nokia to dominate the wireless world. The Nokia name, routinely mistaken for a Japanese off-brand as recently as two years ago, is now magical. Throughout Europe, displays of sleek cell phones draw crowds of gawkers to the windows of Nokia's boutiques. But Ollila's goal is to extend Nokia's dominance far beyond handsets to the entire mobile Internet. That's what has him shopping.

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