Nokia World: Old Wine in New Bottle

Yesterday, Nokia Corp. (NOK) inaugurated its annual Nokia World 2010 conference in London showcasing three new smartphones namely, E7, C7, and C6 that will join its flagship N8 smartphone portfolio. All these devices are based on the company’s upgraded Symbian 3 operating system (OS), which also runs N8. Nokia enriched the new Symbian platform with 250 new features and all its smartphones will be closely integrated with its Ovi services and applications supplied by its Navteq division.

Where is Product Differentiation

The latest four Symbian 3-based smartphones are no doubt a huge improvement over the company’s existing devices, but none of these phones contain any feature, which is unique in the market. Multi-touch screen, social networking facility, and Internet widgets are all common. As a result, there is a very low probability that any of these devices will outperform the market. In fact, many analysts have opined that in the lucrative North American market, none of these phones will generate any consumer hype.

The Symbian platform has gradually lost charm among mobile phone users and is recognized as an out-of-date technology. Even the upgrade may not be a fitting reply from Nokia compared with the smoothness of Apple Inc.’s (AAPL) iOS, Google Inc.’s (GOOG) Andriod OS, and robustness of Research In Motion Ltd’s (RIMM) BlackBerry OS. Symbian is yet to create any powerful application developer community like iOS or Andriod. Interestingly, in last June, Nokia announced that the upgraded Symbian 3 software will be used for low-end phones mainly targeting the retail consumer segment in the emerging markets.

The key growth area of Nokia is the emerging markets. However, price elasticity of demand is very high in these markets due to low per capita income and the existence of several low-cost Asian phone manufacturers like Samsung, LG Electronics, HTC to name a few. The price range of Nokia new smartphones is $338 – $645. They are too expensive and may not find the required momentum.

Indecision for OS Selection

Nokia World 2010 remains completely silent about its next-generation Linux-based MeeGo operating system. MeeGo has been jointly developed by Nokia and Intel Inc. (INTC). This OS is basically a combination of Nokia’s Meamo 5 and Intel’s Moblin. More than 6 months after the announcement of this collaboration, Nokia is yet to provide any expected launch date for its first smartphone based on MeeGo. Nokia’s earlier venture with its proprietary Linux-based Maemo 5 open-source software failed when its N900 smartphone did not find any meaningful market traction.

Lack of a firm decision by management is only delaying Nokia’s smartphone turnaround strategy since third party application developers are reluctant to develop application for Nokia smartphones. This is the primary reason that Nokia is performing so poorly. At the time when Apple, Research In Motion, and Motorola are making their software user interface more easily accessible to outside application developers, and enriching their respective application stores, Nokia remains undecided on the use of software and the device that will use the same.

Positive Factors

Despite the above-mentioned negatives, Nokia still enjoys several leading edges over its peers. Firstly, the company has established itself as one of the cost-effective producers in the world, which enjoys significant economies of scale. Secondly, “NOKIA” itself is a very strong brand name (a household name in India and China ) that can produce wonders if management can introduce appropriate products suitable for the next-generation. Thirdly, a strong balance sheet of nearly $10 billion of cash and investments will sustain the company’s long-term R&D activities.

Our Recommendation

Smartphones are expected to become the next-generation choice, taking over market share from basic mobile handsets. Feature rich software and services are the main characteristics of any smartphone, which Nokia seriously lacks. We believe Nokia’s inability in the high-margin lucrative smartphone market will put more pressure on its earnings going forward.

Nevertheless, the recent top management overhauls mainly in the Mobile Device segment may turn the company’s future around. Stock price has fallen nearly 38% in the last one year and we believe this level provides a cushion for further downward movement. We maintain our long-term Neutral recommendation for Nokia. Currently it is a Zacks #3 Rank (Hold) stock.

NOKIA CP-ADR A (NOK): Free Stock Analysis Report

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