Nokia fights to hold on to smartphone dominance

Nokia is still by far the No. 1 mobile handset maker in the world, but as competition heats up in the smartphone market, Nokia has become increasingly vulnerable to smaller players such as Apple and Research In Motion, which are increasing market share.

New market share figures released by Gartner this week indicate that the mighty Nokia is losing market share at the high end to Apple, RIM, and HTC. No one expects Nokia to tumble out of first place anytime soon, but the new competition is putting more pressure on the company to address some nagging issues like improving its software and finally making its high-end products more available in the North American market.

Nokia has already begun working on each of these issues. In fact, last year it bought out the remaining shares it didn't already own in its operating system provider Symbian and contributed the software and its Series 60 software to a new open-source group known as the Symbian Foundation. The company has also been manufacturing more of its devices for the North American market and promises to strike deals with U.S. operators later this year to carry some of its more advanced phones.

But the big question is whether Nokia's efforts will be enough to stave off further market share erosion or if the company will slowly lose dominance as others, such as Apple, RIM and the upcoming slew of new Google Android phones and updated Windows Mobile phones will surge ahead.

Losing market share
The biggest problem Nokia faces right now is that it's losing market share in the fastest growing mobile handset market, while other players are increasing market share in this category. Market research firms IDC and Gartner have each issued reports noting Nokia's decline. Gartner's smartphone report, which was released on Wednesday, has Nokia's market share dipping from 49.4 percent in 2007 to 43.7 percent in 2008.

The fourth quarter was particularly tough for Nokia, according to Gartner. The firm notes that Nokia's smartphone sales declined by 16.8 per cent compared with the same quarter a year ago. It's share for the fourth quarter dipped to 40.8 percent compared with 50.9 percent for the fourth quarter of 2007.

IDC, which published its market share numbers earlier, also has Nokia dropping market share between 2007 and 2008 by at least 8 percentage points.

Meanwhile, competitors such as Research in Motion, Apple, and HTC, which uses both Google's Android operating system and Microsoft's Windows Mobile operating system, are gaining market share. In fact, RIM has steadily been growing its market share during the past three years. The No. 2 player worldwide in smartphones, RIM, the maker of the popular BlackBerry phones, saw its market share grow from 7.23 percent in 2006 to 9.86 percent in 2007 to a whopping 15.53 percent in 2008, according to IDC.

Apple has similarly impressive growth rates as its product went from zero market share in 2006 (it didn't even go on sale until the middle of 2007) to 9.02 percent market share in 2008. HTC has also had strong growth with its products barely ranking in terms of market share in 2006 to gaining 4.79 percent of the market in 2008, according to IDC.

This growth comes as the entire smartphone market has exploded, especially in the U.S. According to IDC, smartphone sales accounted for 10.3 percent of the total handset market in in the U.S. 2006. In 2008, smartphones made up 22.4 percent of all mobile handset sales sold here.

On a worldwide basis, North American smartphone sales are outpacing sales of these devices in other parts of the world, according to Gartner. Smartphone sales during the fourth quarter of 2008 in North America grew 69 percent. Meanwhile other regions such as Asia/Pacific saw modest growth of about 2.3 percent from the fourth quarter in 2007 to 2008. And Smartphone sales in Europe, the Middle East and Africa were up by only 2 per cent in the fourth quarter of 2008 compared with the same period last year.

Bucking the trends
Even though Nokia outpaces its competitors in terms of total sales volumes, these trends are problematic for Nokia for two reasons. First, it clearly indicates that while the smartphone market is growing in total, Nokia's chunk of the market is shrinking as competitors gobble up more market share. And the second problem is that the market is growing the fastest in North America, where Nokia has the least brand recognition and virtually has no presence as a carrier-subsidized contender.

Nokia has also been somewhat slow in recognizing the importance of software. Apple's iPhone proved that sleek hardware design is important, but that consumers are most interested in the software that allows them to do really cool things on their phone. Apple's successful App Store, which allows application developers to create applications for the iPhone, has been wildly popular, spurring an entire industry devoted to creating iPhone applications.

Every smart phone maker in the industry is following Apple's lead by introducing their own version of an App Store. Nokia announced its application storefront in Barcelona in February at the GSMA Mobile World Congress.

But more importantly Nokia seems to have recognized that the open-source community will be able to develop the software platform much more rapidly. And last year, it bought the remaining shares of Symbian and contributed the software and its Series 60 software to the Symbian Foundation, which is making the software available to the open-source community.

But Ken Delaney, vice president of mobile computer at Gartner in San Jose, Calif., argues that Nokia needs to go one step further and revamp its entire user interface.

"The user interface is a problem for them," he said. "It's a big mess. You go to the second screen and can't find what you're looking for. And I think that will impact the overall usability of the phone and its Ovi services."

The company hasn't announced any grand plans for revising its user interface, but it Kai Oistamo executive Vice President of devices for Nokia, said in a recent interview, that the company is working on making the phones much easier to operate including making applications easier to access.

"The key to success is making devices that are easy to use," he said. "That has a lot to do with the user interface and also making it easy to activate things like e-mail. Complexity is increasing on the devices and we have to keep them simple to use."

The other major hurdle that Nokia faces is the fact that it barely competes in the smartphone market in the U.S. This is a big problem considering that North America, and the U.S. in particular, is the largest market for smartphones in the world, according to IDC analyst Ryan Reith.

Nokia has talked about getting more aggressive in the U.S. market for two years. It opened a development facility in California. And it has been manufacturing phones specifically for the North American market. Nokia currently offers many unlocked versions of its high-end phones, such as the N95 or the recently launched Nokia 5800 XpressMusic, here in the States. But the problem is that none of these phones is offered by any of the four big U.S. mobile operators, which means that they are unsubsidized.

For U.S. consumers, it's hard to justify buying a $400 Nokia phone when they can get the iPhone, a BlackBerry phone, or Google's G1 phone for $200 or less with a two-year contract from a carrier. And experts predict that carriers will soon be subsidizing smartphones even further to entice consumers to spend more on those expensive monthly data services.

" I expected a year ago that we'd see some carrier sponsored Nokia phones here in the U.S.," Reith said. "They've announced North American versions of phones, but they aren't really moving through the channel. The only way that will happen is if they are subsidized by the operators here."

Nokia has been rumored to be working with Verizon to develop a device for its 4G network, which is set to launch commercially in 2010. But even before that, Oistamo of Nokia promises that some of its high-end phones will be carried by U.S. operators this year.

Even without the U.S. market, Reith of IDC believes that Nokia can still maintain a market share position in the 30 percent to 40 percent range by selling devices throughout the world. But the U.S. market represents an untapped market that has massive growth potential for the company. What could be more threatening to Nokia is the emergence of competitors, such as RIM, Apple, and other phone makers using Android or Windows Mobile, in Europe and Asia, says Gartner's Delaney.

RIM has already made significant headway in Europe, nearly doubling its market share in Western Europe. And Apple has made some inroads in parts of Asia.

"If RIM continues to increase market share in Europe and Apple increases market share in parts of Asia, that could be a problem for Nokia," he said. "But realistically, maintaining 60 percent market share in a market with so many competitors is unsustainable."

Indeed, Nokia may have slipped slightly from its lofty perch, but the company is not down and out. And as long as it can improve its software, defend its position throughout the world and even gain share in the U.S., it should be in good shape, regardless of what RIM or Apple or Google throw at it.