Subject: [NEXTEL-1] Will New Phones Boost Nokia's Signal?

From: Marcel <[email-masked]>
Date: Fri, 13 Dec 2002 18:03:59 -0500

DECEMBER 11, 2002

 STREET WISE
 By Olga Kharif

 Will New Phones Boost Nokia's Signal?

 The Finnish giant is hanging next year's fortunes on a big product launch. But gaining
market share in a crowded field
 won't be easy

 After the telecom sector's two years of woe, Nokia sees some sunshine. At its analysts'
conference on Dec. 2, the world's
 largest cell-phone maker said it expects worldwide demand to pick up 10% next year, to
440 million units. While some
 analysts found that estimate disheartening after the 35% annual growth rates of the go-go
'90s, Nokia execs said their outfit
 should grow faster than rivals. The reason: It'll get a boost from its lineup of new
phones, some of which will debut in the
 U.S. on January 1, 2003. They'll carry state-of-the-art features, such as color screens
and embedded cameras.

 Nokia (NOK ) plans to release more new models next year than in any in its history. Last
spring, the Finnish giant broke up
 its mobile-phone business, which contributes 78% of total revenues, into nine divisions.
Now, each unit makes phones for a
 different market segment, similar to what GM does with cars. With its equipment business
likely to have another tough year
 (it contributes the remaining 22% of Nokia's sales), the handset maker still sees
"significant market-share gains" in the fourth
 quarter. By the end of 2003, Nokia hopes to boost its worldwide market share to 40%, from
36% in the third quarter of
 2002.

 REASON TO CHEER?  So far, Nokia's plan has gotten a warm reception on Wall Street.
Several investment banks -- including
 Salomon Smith Barney and Morgan Stanley -- have recently upgraded the stock to buy.
Nokia's shares now trade at $18,
 up 71% from their 52-week low of $10.50 in July. The upgrades were partially based on
Nokia's headway with wireless
 service providers. T-Mobile, which carries the Nokia 3390, will add several other models
next year.

 And on Dec. 2, Sprint PCS (PCS ), the No. 4 U.S. wireless service provider, which hasn't
offered any Nokia phones for
 more than two years, has begun retailing the Nokia 3585, a compact, candy-bar-size phone
that includes games, a calendar,
 and an organizer.

 Still, celebrating Nokia's good fortune might be a bit premature. For one, its investment
in new products designed to grab
 market share might be excessive, worries analyst Richard Windsor at investment bank
Nomura in Britain, and that could eat
 at its margins next year.

 NO SLAM-DUNK.  What's more, some analysts say Nokia's single-digit earnings growth
doesn't warrant the high stock price.
 "There has been a continued trend for missing top line and hitting the bottom line," says
WR Hambrecht analyst Peter
 Friedland. "They've had strong operating margins, but this is going to catch up with
them." Friedland believes that Nokia's
 shares are already fully valued.

 Nokia's quest for more market share isn't a slam-dunk. It's counting heavily on gains in
phones using a new technology called
 code division multiple access (CDMA). The Finnish concern has only a 10% share of this
market now, partly because of
 technological glitches several years ago that caused service providers like Sprint PCS to
dropp Nokia phones altogether.
 The problems have finally been worked out, and Sprint recently announced that it would
carry one Nokia phone.

 However, even Nokia's most up-to-date CDMA phones are behind those from players like
Korea's Samsung, says analyst
 Jay Slattery, with high-tech consultancy Technology Business Research in Hampton, N.H.
"They don't offer the full-featured,
 full-color phones you would expect from Nokia," he notes.

 "MORE COMPETITIVE."  The Nokia phone Sprint is using has a black-and-white screen -- at a
time when the service
 provider is promoting color-screen models that allow multimedia services such as
e-mailing photos. Not to worry, says a
 Nokia spokesperson: "Our phones are very focused on our target market." Although no
announcements have been made,
 Nokia will come out with more advanced products sometime next year, he says.

 Making further inroads in a crowded field will be challenging. Nokia faces rivals like
Samsung, Sanyo (SANYY ), and
 Kyocera (KYO ). And more could show up soon: Some of the 19 cell-phone makers in China
are ramping up their
 production and could start shipping worldwide shortly. That could make it tough for Nokia
to sustain its market share, much
 less increase it. "It's no more competitive than any other market," counters Nokia's Bill
Plummer, a vice-president for
 strategic and external affairs.

 Meanwhile, the push for market share might be using up a hefty chunk of Nokia's
resources. Take its new CDMA phones.
 The manufacturer announced that in two years, models based on this technology, which
allows for high-speed Internet
 access, will account for 15% of its advanced phones. Nokia has shipped a few million of
these products so far and plans to
 increase sales next year. But the resources it lavished on the CDMA project makes sense
only if Nokia expects handsets
 with this standard to account for 35% of its product mix, says Windsor. All the
competitors in this market space could make
 that a hard number to hit.

 MARGIN SQUEEZE?  Many analysts also question Nokia's decision to develop its own chips
for its CDMA phones. Some, like
 Windsor, believe that chips from wireless powerhouse Qualcomm (QCOM ), which supplies the
rest of the players, would
 have come cheaper, simply because Qualcomm's volume is so high. Others worry whether
Nokia's chips can match the
 performance of those from Qualcomm, which invented CDMA and has been in the business for
years.

 Nokia says it's confident that its products are as good. And Sprint PCS, which has tested
Nokia's CDMA phone, seems to
 think so as well. Still, like the rest of the handset makers, Nokia will likely see its
margins squeezed next year as component
 suppliers raise prices and competition intensifies, says Windsor.

 Lehman Brothers analyst Tim Luke agrees, predicting that Nokia's operating margins --
earnings before taxes and various
 charges -- will slip from around 25% today to around 21% next year. And they could get
squeezed further in the long term
 as carriers migrate to new technologies, where Nokia is either behind its rivals or on
par with them. "Fundamentally, we're
 not convinced that they're going to continue to enjoy the same cost advantage [they've
enjoyed before]," says John Bucher, a
 Gerard Klauer Mattison analyst.

 ANTI-MOTOROLA.  Moreover, Nokia will likely incur extra costs from managing its inventory
of more phones and helping its
 telecom customers sort through the growing variety of models, says analyst Bryan Prohm,
with market consultancy
 Dataquest. The Finnish outfit's strategy is the reverse of No. 2 mobile-phone maker
Motorola (MOT ), which is to slim
 down its product line. "Most customers simply want a phone that makes a good phone call,"
says Greg Santoro,
 vice-president for Internet and wireless services at carrier Nextel (NXTL ). Still,
T-Mobile and Sprint PCS believe that
 variety offers them a competitive advantage.

 Nokia has much work ahead of it. U.S. carriers have to be persuaded to carry more of its
phones. Today, many go for the
 funky looks of models from rivals such as Samsung and Sanyo. The Finnish company also
wants to make headway in the
 corporate cell-phone market with its new Nokia 6800, a flip phone with a full keyboard,
replacing the bulky and less stylish
 Nokia Communicator.

 However, this new product alone won't win the battle for Nokia, says Technology Business
Research's Slattery. Increasingly,
 corporations turn to tech consultancies and services firms for all of their technology
needs. And Nokia distributes its phones
 only through consultancies IBM Global Services (IBM ) and Cap Gemini Ernst & Young.
That's not enough to get big deals
 with businesses, Slattery figures.

 PAST GLORY.  Despite these challenges, Nokia remains highly profitable, recording $959
million in income in its third and
 latest quarter. Its sales then grew 2%, to $7.2 billion. In the fourth quarter, Nokia
expects sales of $8.9 billion to $9 billion.
 And many on the Street are betting that Nokia will navigate many of these difficulties.
The $800 million Dreyfus Premier
 Technology Growth Fund (DTGRX ), which has held the stock for five years, will stick with
it, though it's not a top holding.
 Says portfolio manager Mark Herskovitz: "They're at the beginning of a new product cycle,
which is often followed by a
 strong period of growth."

 Still, Herskovitz admits, "You're not going to get the same kind of growth [as before]."
And that's the sad truth. Investors
 need to decide whether they're in with Nokia for the long term, growing pains and all.

http://www.businessweek.com/technology/content/dec2002/tc20021211_2648.htm

Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/