Nokia’s rivals getting too close for comfort

Last week, US mobile phone company Motorola reported record quarterly handset sales and a trebling of the earnings of its handset division. The news astonished many industry observers, who can barely believe the company has done so well in such a saturated market.

However, behind the headline figures, Motorola’s gains also underscore the shifting balance of power among mobile phone manufacturers.

Nokia, the handset market-leader based in Finland, is coming under increasing pressure from its rivals. Motorola’s unexpectedly good results smashed its sales expectation by &£1bn for the first quarter of this year.

Samsung Electronics has also recently reported a 28 per cent increase in handset sales and a four per cent gain in market share. It has overtaken Nokia in stock market value and has sold a record 20 million handsets in the first quarter of 2004 – representing 14 per cent of the global market.

By contrast, Nokia was forced to issue a warning – a week prior to the announcement of Motorola’s results – that its second-quarter earnings would be below expectations. The news led to a ten per cent fall in its share price. Its first quarter sales results eased two per cent to &£4.38bn.

Figures from the company’s rivals show that the sector’s problems can be overcome. Observers say that Nokia has failed to keep abreast of the trends in style and function that drive consumer demand. It is also criticised for taking its eye off its main business to launch the N-Gage games product.

At its peak, Nokia controlled about 60 per cent of the global handset market. Over the past seven years this figure has been eroded to about 35 per cent. However, the company still commands the top spot, with Motorola second, holding 14 per cent of the market, and Samsung third with ten per cent. It’s a market with a huge value – in the UK alone it’s worth an estimated &£13bn.

Nokia built its success partly on the fashionable design of its handsets – a trait that once helped it overtake Motorola. Its products have also appealed because of the development of a simple-to-use standard for all of its handset keypads. The aesthetics and simplicity of its handsets helped to maintain brand loyalty, but Nokia’s supremacy in these two fields is under threat. Rivals are beginning to design their own handsets with simplicity in mind, and Nokia’s mantle of fashionable trendsetter is beginning to slip.

At the beginning of the year Motorola flooded the market with 25 million phones. There were 25 models made to appeal to every type of market and the designs included clamshell handsets, MP3 music-playing capabilities, colour screens and, most importantly, cameras.

Samsung, too, is hitting the mobile market with a wide range of compact, silver clamshell mobile handsets.

Nokia’s own pride has compounded the problems it faces. Just over a year ago the company dismissed the idea of making clamshell phones and analysts say this was one of its biggest mistakes, as clamshells are considered one of the main reasons for Motorola’s success. Nokia loves to differentiate itself from rivals and following the lead set by Motorola will be a galling admission of defeat.

However, designers at Nokia are being forced to introduce a range of clamshell models. Critics say this plan to launch six clamshell handsets in time for Christmas could be “a bit late in the day”.

Nokia has also come under fire for turning its attention to the games console market with the launch last year of its N-Gage “game deck”. The company has admitted that its N-Gage sales have been “disappointing”, despite running a hard-hitting, multi-million pound campaign, created by Grey London.

The campaign itself stumbled when elements had to be scrapped because of complaints about the ads encouraging sexual violence towards women.

A Nokia insider says that the company’s decision to launch N-Gage was defensive and revealed the company’s anxieties regarding the future of electronic media. “The big paranoia at Nokia is that one day in the near future consumers are going to own one device,” he says, “which means that Nokia will have to compete with companies such as Sony, Samsung, Microsoft and possibly even Apple.”

This same insider says that standard voice-data communication has become less of a core interest for companies such as Nokia and adds: “Last year in the US, 110 million handsets were sold, of which 90 million were replacements. This means in the West we are pretty well at saturation point.”

The rise of competitor handset manufacturers, such as Samsung and Sony Ericsson, has been helped by the demand for camera phones above all else. According to research from Strategy Analytics, only six per of Nokia phones sold last year had a camera, compared with 30 per cent of Sony Ericsson phones.

Industry experts claim that a built-in camera is still the biggest application driving phone sales and this is unlikely to change in the near future.

“The ability to be able to take a picture at any given time has marked a powerful and fundamental change in terms of communications between people,” says Bartle Bogle Hegarty global planning director Heather Alderson.

Alderson, who works on the agency’s Sony Ericsson business, says she believes changes in the quality of the camera phones will continue to help the market remain buoyant.

Phones that can take short video clips or feature digital zoom technology already exist, and Alderson adds that Sony Ericsson is developing phones that enable users to take photographs at night and to manipulate photographs. Some insiders say that MP3 will drive the market once the excitement of cameras phones dies down, but Alderson disagrees, saying: “The I-pod has taken this market.”

Nokia has led the way in mobile phone technology, but the evolution of handsets into devices which also combine music players, digital cameras and even video recorders opens the market to more competitors – particularly Far Eastern manufacturers who are dominant in these new applications.

Asia is also already embracing third generation (3G) mobile technology. Some commentators say that these factors mean Nokia’s day of reckoning is already here and it can expect to see its share of the market plummet over the next few years.