Is Nokia Missing an Important Call?

While the No. 1 wireless handset maker dawdles, its rivals are rolling out advanced models in the U.S.

Early last year, Nokia phones were the hottest wireless products on U.S. soil. Like USA caps at the Winter Olympics, the phones were must-haves for wireless users.

By redefining user-friendliness with compact devices easily navigated by a single finger, Nokia soared to a commanding 32% share of the U.S. market. The Finnish phone giant's connection to customers was leaving rivals like Motorola, with 20% of the market, and Sony-Ericsson, with 12%, in the dust.

Given that track record, critics are befuddled by Nokia's sluggish rollout of new products this year. Motorola, Sony-Ericsson, and Samsung were first to offer phones with color screens, high-speed data capability, digital music players, and the ability to send and receive photos. Nokia still doesn't sell color-screen phones in the U.S. Two new models it has scheduled for release this year feature color screens, but they won't hit stores until the summer and this fall.


 That frustrates consumers like Alok Jha of Chicago, a finance consultant and cell-phone aficionado. "Nokia is running out of innovation. I'm looking at a next-generation phone from Samsung," he says.

The $28 billion-a-year Finnish giant runs the risk of missing the next market shift. As wireless-phone penetration approaches 50% in the U.S., subscriber growth is beginning to slow. Phone sales rose just 6.4% last year, to 83 million units (see BW Special Report, 4/1/02, "What Ails Wireless?").

To spark interest among subscribers and drive revenue growth, service providers such as AT&T Wireless, Cingular Wireless, and Sprint PCS want new Net phones that play music and take photos. "We're in touch with what consumers want from a handset," says Frank C. Boyer, vice-president of Cingular's supply chain. "So we've taken a far more aggressive role with manufacturers to drive more functionality into handsets."


 Like Boyer, most manufacturers understand that new feature-packed phones are what consumers want as replacements for their older phones. Replacement phones, which accounted for 23% of the market in 2001, will make up 29% of sales this year and 38% by 2004, according to Deutsche Banc Alex. Brown.

So where is Nokia? It's "playing catch-up with its nearest competitors in putting emerging features into its portfolio," says Dataquest analyst Bryan Prohm. "That's risky."

Nokia doesn't apologize for holding back fancy data-equipped phones in the U.S., where carriers have been slower than their European counterparts to roll out services that handle text messages, games, and photo clips, says Larry Paulson, a vice-president for its U.S. phone business. Why take risks that could be costly? Yes, Nokia has a reputation for expertly gauging market shifts, but it's "not always on the bleeding edge," he says.


  Some analysts believe Nokia is making a mistake. Samsung, Motorola, and Sony-Ericsson all beat it by introducing color screens in late 2001 and early 2002. The screens have the most near-term potential to drive the handset replacement market, according to W.R. Hambrecht & Co. analyst Peter Friedland. "We believe the limited number of commercially available [Nokia] color handsets could have negative implications," he says.

The lack of new features may be taking a toll. No. 3-ranked Sprint PCS, the nation's fastest-growing carrier, doesn't do any business with Nokia. It prefers working with Korean manufacturers such as Samsung and Kyocera. "We have focused on manufacturers that are willing to provide unique phones," says Sprint President Charles E. Levine. That's why some analysts think Nokia's product strategy might be a lost call.

By Roger O. Crockett in Chicago

Edited by Douglas Harbrecht

Before it's here, it's on the Bloomberg Terminal.