Global demand for smart phones has never been stronger, but for some of the biggest handset makers times have rarely been tougher.
Shares of Nokia Corp. tumbled more than 18 per cent over two days this week after the world's largest maker of mobile phones warned it would miss its financial targets this quarter. The situation is so uncertain for the company that it said it would no longer provide forecasts to investors.
Shares of Research In Motion Ltd., meanwhile, trade at a deep discount. Investors value RIM at less than seven times estimated 2012 earnings, even though the BlackBerry maker grew by 33 per cent in its last fiscal year. And Motorola Mobility Holdings, which makes mobile devices and set-top boxes, has yet to show a profit since splitting from the rest of Motorola in January.
Many investors are learning the hard way that the speed with which the market for smart phones is developing leaves little room for error. During the last 18 months, two related events have disrupted the business models of both Nokia and RIM. Google Inc.'s Android software platform began to gain traction with handset manufacturers, and inexpensive handsets from Asia began to hit the market.
Apple Inc.'s game-changing iPhone, launched in June, 2007, intensified competition for both RIM and Nokia. But it's the free Android operating system and the commoditization of hardware that are making it so hard for both companies to maintain margins.
Android has made rapid inroads to become the world's best-selling smart phone platform. It commanded a 36-per-cent market share in the first quarter, up from just 11 per cent a year earlier, according to the marketing and consulting firm Strategy Analytics.
Google gives its Android software to handset manufacturers without charge, making money instead by taking a small percentage of revenues from independent application-sellers as well as from advertisements that run inside some apps. Google also benefits by using Android as a platform for its mobile search engine, map software and other products.
Google is able to target all segments of the market with its Android software, which can run on a range of handsets at a variety of prices. Three Chinese manufacturers – HTC Corp., ZTE and Huawei – have brought low-cost smart phones to market, some selling for less than $150. Sony Ericsson, Samsung Electronics Co. Ltd. and Motorola Mobility have delivered more-expensive products.
Gains by Android and the iPhone have been crushing Nokia's own smart phone platform called Symbian, forcing the Finnish company to take dramatic steps. In February, chief executive officer Stephen Elop announced that the platform would be phased out and Nokia would rely on Microsoft Corp.'s Windows mobile operating system.
'Becoming Unglued'
Investors and analysts, however, are skeptical about the plan, citing among other things lukewarm support among wireless carriers for the new Nokia/Windows devices, which are scheduled to arrive in the fourth quarter.
"The business is becoming unglued," says Stephen Patel, an analyst with Gleacher & Co. He rates Nokia's shares "neutral" and lowered his price target to $6.50 (U.S.). "Symbian smart phone sales are falling off faster than expected and we are skeptical that the new Windows phone models will be able to replace lost profits," he wrote in a report this week.
Pierre Ferragu, of Sanford C. Bernstein & Co., says the launch of Windows-based phones will be challenging for Nokia as "precipitous market-share losses will take Nokia's brand visibility to all-time low levels and potentially create negative brand equity amongst consumers."
Apple, Android and BlackBerry are rapidly becoming the three brands consumers want and the window of opportunity for Nokia is "vanishing rapidly," he says.
Similar to Nokia, RIM is also rushing to get a more competitive smart phone platform to market. Although the company hasn't given a launch date for its QNX smart phone, expectations are that it won't arrive until 2012.
T. Michael Walkley, of Canaccord Genuity, thinks RIM will struggle with the transition and that the Nokia-Microsoft partnership has the best chance at creating "a third viable ecosystem" to compete against Apple and Google.
Mike Abramsky, of RBC Dominion Securities Inc., agrees that both Nokia and RIM face the risk that wireless companies will reduce inventories of their devices during the transition process. But he thinks RIM is better positioned because he says the BlackBerry has a more loyal fan base than Nokia.