Recession hits mobile-phone market

Nokia, the largest handset maker in the world, reports a 69 percent drop in profit and a 19 percent drop in sales. Decline's scale comes as a surprise to most investors.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
3 min read

The global recession is hitting the handset market hard, as the biggest supplier in the market, Nokia, is seeing its sales plunge.

The Finnish handset maker said Thursday that fourth-quarter sales dropped 19 percent to $16.5 billion compared with the same period a year earlier. And its profit fell about 69 percent.

Nokia had warned investors in November and December that sales volumes were going to be lower than expected, but the magnitude of the decline still came as a big surprise to most investors.

Sales were hit not just at the high end, but also at the low end, where Nokia has driven much of its profits the last several quarters.

At the high end, the company lost market share to Apple with its iPhone and Research In Motion with its BlackBerry devices. But the company also felt the slowdown in developing markets, where it has provided low-cost phones. Even in China, Nokia's largest handset market, the company sold 36 percent fewer devices during the fourth quarter than the same period a year ago. And sales were down 23 percent in the Middle East and Africa.

CEO Olli-Pekka Kallasvuo explained that the weak economy forced many distributors and retail outlets to sell excess inventory instead of ordering new devices from the manufacturer. But he said as inventory is sold, he expects sales to pick up later in 2009.

Nokia's dismal earnings are likely a harbinger of problems that face handset markers in 2009. Nokia has for many quarters been the strongest cell phone maker in the market. It has dominated both at the high end and at the low end of the market. But Kallasvuo said the overall market is weak now because of the poor economic conditions around the world. And he expects the overall handset market to be down 10 percent in 2009.

The fact that Nokia is now struggling to get people to buy new phones, means it will likely be even harder for its weaker competitors, such as Motorola and Sony Ericsson. Last week, Sony Ericsson Mobile Communications, a joint venture formed between Sweden's Ericsson and Japan's Sony, reported a loss of $243 million for the fourth quarter. Motorola was already struggling before the economy took a sharp nosedive. And the overall outlook for the industry will certainly hurt it most severely as the company is not expected to come out with any exciting phones until 2010.

Nokia is in far better shape than these other companies. And it will surely weather the current economic storm. But the question is how badly will it get beaten up in the process? The smartphone category of handsets is where most of the growth will likely come from in the coming year. But it is precisely this market, where Nokia faces the stiffest competition from Apple and RIM.

Nokia says it has products in the pipeline that will compete in this category. It has the 5800 Xpress Music phone, which has a touch screen and offers multimedia functionality. It also plans to launch the N97, which will also have a touch screen and a slide-out keypad.

Even with new devices, Kallasvuo acknowledged the company will have to make significant cutbacks. Specifically, it plans to reduce annual costs in its devices and services operations by more than $900 million by the end of 2010. The cost cutting will no doubt result in job cuts, Kallasvuo said. But he didn't say how many jobs would be lost.