Commentary: Can Nokia Keep Outrunning the Pack?

By Stephen Baker and Andy Reinhardt

They used to be the Scandinavian twins. Sure, they tussled, but cell-phone makers Finland's Nokia Corp. and Sweden's Ericsson also worked together on wireless standards to orchestrate a cellular world they could dominate. Through the '90s, they looked poised to turn the rest of the mobile-phone industry into a mere appendage of their wireless northlands. Yet in the past year and a half, these twins have embarked on separate paths. And this fork in the road could take the entire phone industry on a dramatic detour. It could even create a new peril for mighty Nokia.

BIG SHIFT. What happened? In short, Nokia, with its superior skills in brand marketing and customer-friendly technology, kicked the stuffing out of the industry, forcing Ericsson, along with other cell-phone makers, to find powerful partners. In the past two years, Ericsson has teamed up with Microsoft on Web-browsing software and with Sony on multimedia phones.

Most important, Ericsson handed off the task of actually making its phones to contract-manufacturing giant Flextronics International in Singapore. And in early September, Ericsson announced plans to license its cellular technology to virtually all comers. This means that state-of-the-art cellular technology, formerly the domain of a small club, will now be available to any gadget-maker that wants to turn a camera, palm-top computer, or music player into a wireless device. Wireless is becoming a commodity.

These days, Ericsson is a pretty sick company, with billions in losses and no end in sight to its pain. Nokia, too, has suffered plenty from the industry crash. Its shares have fallen from a high of $60 to $13 in the past year and a half. Still, Nokia alone rakes in earnings. And its Sept. 11 announcement that it would meet its third-quarter earnings targets, with margins at a healthy 15%, provided a welcome bit of news that drove a rally in the stock. So why do the Finns need to worry about the desperate moves of the Swedes?

A look at the history of the computing industry provides an inkling. Cell phones, say veterans of Silicon Valley, are following the route of the PC. Instead of one company making the entire machine, specialists such as Intel Corp. and Microsoft Corp. will soon be turning key pieces, such as chips and software, into their own kingdoms, especially as cell phones turn into wireless Internet centers that perform computing and e-mail tasks. "The handset industry is moving toward Intel's strengths: standards, manufacturing, architecture, and design," says Ron Smith, general manager for Intel's wireless communications and computing group.

If mobile phones follow this Wintel model, what happens to the only go-it-alone warrior? "I see Nokia following the path of Apple," says Roel Pieper, a former top executive at Tandem Computers and Royal Philips Electronics. In other words, Nokia, like Apple Computer Inc., could become a technology for connoisseurs--a technology whose influence steadily shrinks.

HOT STUFF? Naturally, Nokia rejects this thesis. "People who compare computers to mobile phones do not understand our industry," says Executive Vice- President Anssi Vanjoki. "We're selling branded consumer goods, not a big box."

But just as the battle for industry dominance is moving into its next stage, the Finns have displayed surprising weaknesses. They built a whole new strategy around a mobile Net technology that stalled: Consumers complain that the first generation of Web phones are balky and awkward. Nokia didn't foresee that the rush to buy licenses to operate the next stage of the wireless Web would send its biggest customers, phone companies, into a morass of debt. Now, these telecoms can't pull off the rapid buildout in wireless Web phone systems Nokia expected.

This all bodes ill. Nokia still has a big lead in a key industry. But if the tumultuous history of high tech proves anything, it's that leaders can turn into losers with one false step.

Baker and Reinhardt cover technology from Paris.

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