Nokia: Six Ways to a Comeback

Nokia faces plenty of tough challenges from Apple, RIM, and Google, but with its recent executive change, Nokia can still rebound

(An earlier version of this story incorrectly identified Quattro Wireless.)

Nokia is the world's mobile-phone superpower. It holds roughly 40 percent of the global market. In some countries, the brand is even synonymous with the word "phone." Go anywhere outside the U.S., and you'll probably have to rely on a Nokia (NOK) phone to get around.

Of course, inside the U.S. it's a very different story. And that's the problem.

Over the past two to three years, the mobile-phone giant has become all but obsolete in the U.S. as it failed to develop smartphone devices that could compete with Apple (AAPL), Android, and Research in Motion (RIMM). What worries the company, and many analysts, is that the U.S. revolution could spread globally—gobbling up the rest of its market share. Recent estimates by Gartner predict that by the end of next year, Nokia's Symbian platform (34 percent) could be surpassed by Apple's iOS (17 percent) and Google's Android (22 percent). Sanford C. Bernstein also forecast on Sept. 14 that Android and Apple combined could control 52 percent of the overall smartphone market by the end of 2011.

Over the past 18 months Nokia has been fighting back—just not very effectively. It recently announced the replacement of its chief executive, however, with a former Microsoft (MSFT) executive, Stephen Elop, and this week revealed four new Symbian 3 devices—the N8, E7, C7 and C6—all aimed at the burgeoning smartphone market.

These new smartphones are impressive, but Nokia's problems go further than its devices. If the company is going to defend its position in the global market and gain traction in the U.S., it has to transform radically.

Here's how:

1. Adopt new operating systems. Some analysts suspect that the appointment of Stephen Elop as CEO means the company will end up forming tighter ties with Microsoft and could eventually become a close partner. I can't say I agree with that, but neither do I think it would be such a bad thing. After all, Nokia has never been able to ignite the same level of excitement with its own operating system (OS) that other platforms. such as Apple's iOS and Google's Android, have. Although the Symbian 3 next-generation OS appears to be a vast improvement over the previous version, I remain doubtful whether it will be enough to compete with those other two platforms, both on the technical and emotional level. It's important to remember that both Apple and Android have helped create a lifestyle brand with their products. As a result, consumers have become more personally attached to these products and have also made a significant emotional investment, increasing the challenge to Nokia. Nokia will most likely still have work to do on the OS front, but during that time, it should seek to partner with other platforms—particularly Android, but also Microsoft Windows Mobile—to fill the gap. Just as Android has sought to establish partnerships with as many device manufacturers and mobile network operators as possible, so too should Nokia seek to build its own partnerships.

2. Mobile network operators. It is vital for the company to establish a sustained relationship with AT&T (T) as well as regain momentum with T-Mobile USA. Sprint (S) and Verizon (VZ) remain tough challenges, because Nokia has never been committed to the CDMA radio technology on which those two networks run. Unlike the wireless market in Europe and Asia, consumers in the U.S. have become dependent on the heavy discounts mobile operators provide. Nokia must forge strong partnerships with these operators and heavily subsidize its devices, or it will never make it in the U.S. smartphone market. While Nokia is a strong brand, its previous retail strategy was weak and could not sustain longevity, like a Best Buy Mobile (BBY) or the retail presence provided by a mobile operator. As we saw with Google's Nexus One, even great smartphones do not sell well online—they must have a physical store presence.

3. Handset market segmentation. The mobile-phone market has become too big and too segmented for a one-size-fits-all approach. Nokia might even want to consider segmenting its brand—between smartphone and feature phone—in order to represent itself effectively in these markets. Motorola (MOT), for example, has decided to promote only smartphones, given that market's better profitability.

4. Manage innovation in software. Nokia has made many important software purchases over the years, but it has handled them badly. A few examples: Avvenu, enPocket, Loudeye, and Plazes. These acquisitions have failed to generate significant revenue for the company nor have they been able to compete effectively with other point solutions in the market. (For instance, enPocket is outperformed by Google's AdMob, Apple's iAd (Quattro Wireless), and Millennial Media; Loudeye is no match for Pandora; and Plazes can't compete with Foursquare or Gowalla.) It is critical for the company to manage its software acquisitions better and innovate faster and more dramatically in this field. Software is key. I would like to see clarity and sound execution on the Nokia Software Roadmap in order to improve the public's perception. And don't be afraid to jettison these acquisitions if they would function better as subsidiaries or spinoffs.

5. Think past the iPhone. Each time a new smartphone is unveiled, analysts and the media play the "beat the iPhone" game. While this type of comparison is more entertaining for consumers, it is counterproductive for device manufacturers. Nokia must not let itself get stuck in this mentality. Instead, the company has to become a genuine innovator and learn how to think beyond the iPhone—to the next evolutionary step.

6. Advertise. Marketing and advertising is one area where Nokia has consistently failed to measure up with other companies—particularly Apple, Google, and RIM. The company's mobile division is sitting on enormous cash reserves—$12.3 billion in total cash and liquid assets, according to the second-quarter earnings statement—and it should tap these. At this point, Nokia isn't going to win the U.S. market by hoping for word-of-mouth buzz. It has to pay for it. But it is important that Nokia make an effective presentation to the American market—and therefore its ads must be edgy and clever and be able to compete with the likes of Apple, Google, and Samsung.

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