Nokia's uphill battle to recovery

Nokia's second quarter is expected to be ugly. But what's the future look like for the Finnish handset giant?

Expectations for Nokia's second-quarter earnings couldn't be any lower. But what about the future?

The Finnish company, which is still the No. 1 cell phone manufacturer in the world in terms of volume, has been struggling to keep up with competitors Apple and Google. The company reports its second-quarter earnings tomorrow.

In an effort to jump-start its ailing smartphone business the company announced in February that it will ditch its traditional Symbian operating system for Microsoft's Windows Phone platform . But the transition from Symbian to Windows Phone is proving to be a difficult one. Nokia isn't expected to get the first Windows Phone devices on the market until the end of this year. And it won't ship in volumes until next year. This delay in getting new devices on the market could be the company's downfall.

In the meantime, Nokia is still pushing its Symbian phones, which will account for almost all sales this year. And will continue to account for a hefty chunk of sales next year. It also recently announced the new N9, a touch-screen smartphone based on MeeGo , a mobile version of Linux.

Without any new, cutting-edge products in the immediate pipeline, the company's market share is being gobbled up by competitors. A year ago, Nokia had about 38.8 percent global smartphone market share. In the first quarter of this year, that fell to 24.3 percent market share, according to market research firm IDC.

"The longer they take to re-establish their market position, the harder it will be to come back," said analyst Jack Gold, of J. Gold Associates. "If you're not the Cadillac of phones, it's harder to get a premium price, which makes it hard to make a profit."

Indeed, things are looking bleak for the Finnish phone giant. In May, the company warned that returns on its main cell phone and services division for the current quarter could be around "break-even."

Meanwhile, competition continues to get more intense. In fact, Apple, which hasn't released a new iPhone in a year, reported yesterday that it had sold a whopping 20.34 million iPhones during the last quarter . This figure is up 142 percent compared to the same quarter last year.

And Apple is not standing still. The next version of the iPhone is expected this fall.

Then there is Google Android, which is approaching nearly 50 percent market share in the worldwide smartphone market. As Android manufacturers hit heavy volumes, they're able to get much better pricing on components, which is quickly driving down the cost of Android handsets.

Some handset makers are already making Android smartphones for prepaid service providers that retail for $99 or less. And some analysts expect Android phones overseas to get below $50 a pop over the next year.

This added cost pressure will only hurt Nokia's chances of a comeback. Just as the company starts shipping its Microsoft Windows Phone devices in volume, low-priced Google Android handsets will be attacking the low- to mid-range smartphone market. Apple is also rumored to be releasing a lower-cost device within the next several months to address this market.

"Microsoft has set high specs in terms of the hardware that is needed for WP7 devices, such as Snapdragon processors and lots of memory," said Jonathan Goldberg, an analyst with Deutsche Bank. "The WP7 devices will be aimed at the high end of the market, just as Google Android manufacturers will be able to attack the lower end of the market with cheaper prices on Android smartphones."

Nokia's only defense right now, especially as it lacks compelling products that consumers want to buy, is to slash prices. And that's exactly what the company is expected to announce within the next couple of months. Earlier this week, industry insider and blogger Eldar Murtazin tweeted that he expects Nokia to slash pricing across its entire portfolio by 10 percent in September.

"Consumers know that Symbian is a dead end," Gold said. "So what are you going to do to entice people to buy into a dead-end technology? Cut prices."

The company has already been slashing prices in some markets , according to reports. Earlier this month, industry analysts noted that Nokia has cut the prices of several smartphone models in Europe, according to Reuters. Nokia's N8, C7, and E6 models were a hit with the deepest cuts of around 15 percent, while price cuts on other phones were smaller, according to two analysts, Reuters said.

Nokia has not tipped its hand to any new price cuts. And the company says that "price changes are part of our normal, ongoing business."

Still, Gold said the big question for Nokia is whether the company will be able to continue to leverage its high-volume manufacturing pricing to keep up with competitors.

"They need the high-volume discounts to keep costs down," he said. "If that slides, will they still be able to make decent profit margins on their phones? If they can't, then they're really in trouble."

 

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