Nokia - the future

An Uncertain Future For Nokia

Lionel Laurent, 04.16.09, 09:45 AM EDT

The handset maker is doing better than rivals, but its lack of strong high-end models may prove dangerous.

It is easy to pick out Nokia's qualities.

Despite the Finnish company's disappointing first-quarter results reported on Thursday, which saw profits fall 90.0% over the year, Nokia ( NOK - news - people ) has a lot going for it. (See "Nokia Averts DIsaster.") Its profit margins are holding up well, a sign that it is holding back from aggressive price-cutting; its new mid-range touch-screen 5800 shipped a healthy 2.6 million units in the quarter; and its global market share is still at 37.0%, well ahead of its rivals.

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Nokia's chief executive, Olli-Pekka Kallasvuo, even said on Thursday that the tough retailer de-stocking of the first quarter would soon be "behind us"--suggesting some sort of recovery in the second quarter. Shares of Nokia jumped 11.6%, or 1.17 euros ($1.55), to 11.30 euros ($14.93), during afternoon trading in Helsinki.

Nokia is also coping better than its competitors in the midst of a deep economic slowdown. It is still profitable, unlike Sony Ericsson--which expects a $500 million loss for the first quarter--or Motorola ( MOT - news - people ), and has a bigger capacity to cut costs. Korean rival Samsung Electronics (SSNLY - news - people ) is doing quite well, with handset sales rising in the fourth quarter, but it has achieved this by drastically slashing prices and hurting profitability.

But the problem for Nokia lies not in its present condition but in how it is preparing for the future. Analysts worry that the company has taken its eye off the ball in the high-end product segment, where premium products like the Apple iPhone and a swathe of luxury touch-screen models from Samsung have left Nokia's relatively clunky N-Series phones in a weak position. Although Nokia is set to release the N97 model this year, which has a touch screen and pull-out keyboard, nobody is expecting wonders.

"Where Nokia is struggling at the moment is in very high-tier, consumer-centric, multimedia-orientated products," said Geoff Blaber, an analyst at CCS Insight. "That's what Nokia needs in order to rebuild margin."

The so-called "smartphone" segment is the only slice of the handset market expected to grow this year. Handset makers like Apple ( AAPL - news - people ) and Blackberry creatorResearch In Motion ( RIMM - news - people ) have gained a lot of ground at Nokia's expense in this space, and even though they cannot hope to ship the kind of global quarterly volumes Nokia deals in--93.2 million units at the last count--they have put some serious pressure on the Finns' profit power.

That means Nokia will have to depend much more on its strength in low-end and mid-range phones, which have helped it gain a dominant position in emerging markets like China and India--despite the rivalry from domestic players keen to wage price wars. The attractively-priced 5800 touch phone, which is effectively a music-focused smartphone on the cheap, may therefore offer more possibilities for Nokia than the tough high-end market, according to GC Research analyst Tero Kuittinen.

"This is where Nokia is on a much stronger footing than Apple, Samsung or other rivals," Kuittinen told Forbes, "connecting with the middle classes of Asia, Latin America, Eastern Europe and the Middle East."

Still, Kuittinen cautioned that now was not the time to turn bullish on Nokia. He warned that the Christmas season would be difficult and that the company's most exciting smartphone projects--including a rumored model only ten millimeters thick with a four-inch screen--would not see the light of day until 2010.

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