Nokia's Profit Drops, Faces Need to Change Faster

Nokia reported an increase in sales for the fourth quarter, but profit declined as the company continues to struggle in the high-end smartphone segment.

Sales for the quarter totalled €12.7 billion (US$17.4 billion as of Dec. 31, the last day of the period reported), up 6 percent compared to a year earlier, helped by favorable exchange rates. However, year-on-year, net profit dropped from €948 million to €745 million.

The company sold 123.7 million units in the fourth quarter of 2010, down 3 percent year-on-year. Nokia was affected by the intensely competitive mobile phone environment as well as certain component shortages, which it also said negatively affected sales in the third quarter. That resulted in Nokia's market share falling to 31 percent, compared to 35 percent a year ago, according to Nokia's estimates.

In addition, the average sale price for its smartphones declined.

The volume of smartphone shipments increased 36 percent to 28.3 million units during the last three months of last year. Nokia sold 5 million units of its Symbian 3-based N8, C7 and C6-01 smartphones, Nokia CEO Stephen Elop said during a conference call. But the overall market is growing faster. Nokia said its smartphone market share, year-on-year, dropped from 40 percent to 31 percent.

The average sale price of Nokia phones was €69, which is €5 more that what buyers paid a year earlier, Nokia said. That's not the whole story, however. The average sale price for smartphones dropped by 17 percent, Nokia said. The decline was mainly caused by general price erosion in the segment, and an increase in the proportion of lower-priced smartphones, the company said.

What Nokia is doing now is trading price for volume, according to Nick Jones, vice president at Gartner. Investors want action, and a new strategy has to include how Nokia is going to compete with Apple and the Android camp in the high end, Jones said.

"Is Nokia able to produce a MeeGo device that can genuinely compete with Apple, or do they need a completely new strategy, abandon MeeGo, and join up with Microsoft on Windows Phone 7," Jones said.

Nokia also needs a tablet strategy, even though it is a difficult market to jump into because it is moving fast, according to Jones. It also needs to make the Symbian user experience better, and since Nokia has taken over development of the operating system it has the mechanism to do that, he said.

"When all is said and done, Nokia is still the world's largest [mobile phone] manufacturer, and they are generating a lot of cash. They have the resources to change, and what we need now is some indication of a credible plan for change," Jones said.

Pressure is now mounting on Elop to announce a strategy that answers some big questions, Jones said.

"Nokia faces some significant challenges in our competitiveness and our execution," Elop acknowledged in a statement. "In short, the industry changed, and now it's time for Nokia to change faster."

Nokia is planning to announce a new strategy on Feb. 11.

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