Nokia: Outsmarted on Smartphones

Is Nokia (NOK) losing its mojo? The Finnish company has been the largest mobile-phone maker in the world for more than a decade, and it remains a financial juggernaut with $70 billion in revenue. But Nokia is losing ground in the fast-growing and lucrative smartphone business. Apple (AAPL), Research In Motion (RIMM), and companies such as HTC that use Google's (GOOG) Android operating system have come on strong, creating a serious challenge for the industry leader. "Apple has [created] a superior user experience; Android is also gaining a lot of traction," says Jari Honko, an analyst at eQ Bank in Helsinki. "Yes, Nokia is in trouble in smartphones."

Nokia is unlikely to lose its top spot in mobile phones. But it could see revenues and profits suffer if Apple takes over as the largest player in smartphones, which some analysts believe could happen. Generator Research, a British consulting firm, forecasts that Nokia's share of smartphones will slide from about 40% now to 20% by 2013, while Apple climbs into the top spot. "If Nokia gets dispositioned in the segment and Apple starts calling the shots—which is what's happening now—you are going to start seeing [a larger] impact in three to four years," says Andrew Sheehy, co-founder of Generator.

Nokia is fighting hard to stop that from happening. The company is hoping to regain momentum with a series of initiatives, the most important of which is aimed at making Nokia phones as good as the iPhone at running software programs. The company is trying to attract more independent developers to create applications for Nokia phones, and it's pushing to make Nokia devices vastly easier to use—a key shortcoming today. "We're not happy with the current situation," says Anssi Vanjoki, executive vice-president at Nokia. "But you need to be careful not to focus too much on one slice in time. You will see major improvements."

Nokia is getting some traction with developers. Last year it dropped all licensing fees for the tools people use to create software for Nokia phones. And in July it created a global library of applications so developers can distribute their new apps to any wireless operator Nokia works with. The result? The number of apps in Nokia's Ovi Store has doubled in two months, to 3,500. Still, that remains far behind Apple, which offers 65,000 apps at its store.

Nokia is trying to capture some Silicon Valley magic, too. London-based Symbian Foundation, which builds the operating system used in most Nokia smartphones, has set up an office in the Valley and is recruiting heavily. Symbian expects 30% of its 200-person staff to be in the region eventually. "People say, 'What do you mean—you're hiring?'" says Larry Berkin, Symbian's head of global alliances.

Vanjoki says Nokia won't rely just on Symbian, which some techies view as limited. The company has created an operating system called Maemo for tablet computers, and it could be installed in high-end smartphones. "It will be a key future asset," he says.

Investors are nervous about Nokia's fortunes. The company's stock has slid 16% so far this year, while shares of Apple and Research In Motion have zoomed more than 80%. Apple's market cap is now three times Nokia's, though Nokia has twice Apple's revenues. Still, Vanjoki vows Nokia will come out on top. "I'm confident about the future," he says. "We are going to strike back."

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