This Phone Maker Retreats to Gain Strength As the Smart Phone Wars Continue

February 10th, 2011 | by Jaxon Hewlett |

Unless you’ve been hiding under a rock, you’ve probably heard that smart phones are becoming extremely popular, at least here in North America. It is essentially like having a mini PC in your pocket.

In the space, you have the Apple iPhone, which is arguably the coolest phone out there. The new HTC phones and their Google-made Android operating systems are contesting that title and now Motorola and Microsoft are coming on strong with a new set of smart phones that are sleek, fast and chock full of features. Research in Motion (RIMM:NASDAQ), maker of the (once) venerable BlackBerry is trying to regain its once-leading position, but has yet to deliver on that aspiration.

It’s all about not only creating a balanced, cool product, but branding your device and capturing the eyes and dollars of an ever-growing, increasingly finicky consumer in an ultra-competitive market. As I wrote in early January, there is room at the top (albeit limited) for several key smart phone makers to succeed in the sector, being that they can each cater to different technological and personal tastes. But success comes with a price and today a former market leader is now “on a burning platform.”

The Mobile Phone Players

Apple and BlackBerry are both in the business of making their own phones and using their own proprietary operating systems exclusively; they also do NOT license their OS (operating systems) to any other smart phone makers. This was the case with Palm, although they began integrating Windows mobile OSs into their phones to keep up with the changing times and demands of consumers.

The stock I want to talk about today currently uses the same model as Apple and BlackBerry.

HTC and Motorola Mobile are dedicated phone makers (Samsung, Sony, LG and others also manufacture smart phones, but not as their core business) and do NOT have their own operating systems. All of these phones must run on a non-Apple or BlackBerry OS.

Google’s Android (No. 1-selling OS in 2010 with 18% market share)
Microsoft’s Mobile or Phone 7 (4% market share)
Qualcomm’s Brew MP — which is “re-skinned” by the phone manufacturer or carrier to look like their system (there is a recent push by QCOM to get this system out there — they have minimal market share)
Others — Symbian OS (with about 40% market share) and Linux, others (with 2.5%)
- Apple IOS, which is only used in Apple devices (16.1% market share)
- RIMM, also exclusive, has 19.4% share of the smart phone market

Falling From Grace

If you look at No. 4 on the list above, you are probably thinking, “Wow! Who are these ‘others’ and why haven’t I heard of them?” If the kings of the smart phone OS are Google, RIMM and Apple, all with less than 20% market share and thriving, who is the other OS maker?

What is Symbian? Well, that’s a good question — most people have no idea. When was the last time you watched a commercial or read an advert about Symbian? My guess is probably never, unless you’re a tech geek like me.

Symbian is the exclusive OS for Nokia (NOK:NYSE) phones. Now, I should ask how many of you in America have a new Nokia smart phone (not many, I suppose)? What’s amazing is that there have been over 385 million Symbian devices sold since April 2009, but for many of us, we still don’t recognize it. This compares with about 74 million iPhones sold since June 2007.

Is Nokia doing something wrong? Take a look at its stock price compared with Apple…

Apple (+85%) Versus Nokia (-12%), Jan 2010-Present

The Mistakes and How They Might Fix Them

The fact that Nokia sold 520% more phones than Apple — in half the time, but is down 12% since January 2010, while Apple is up over 85% — is mainly because Nokia lost its identity and subsequently its market share. It rested on its laurels while the industry was changing and let its brand slip away, lost in a sea of hundreds of different phone models, none standing out. Management recently ditched plans to build a phone for AT&T Wireless (but that may have been strategic on their part, in anticipation of a new OS partner).

Stephen Elop, a former Microsoft executive, and now CEO of Nokia, said Wednesday, “[The company] is standing on a burning platform and we must decide how we are going to change our behavior.” His words sounded to me like he is going to do something dramatic to try and turn Nokia around…

According to many experts, the most immediate and effective action would be to align the company with either Google’s Android or Microsoft’s Windows Phone 7 OS. The latter is more probable, because of Mr. Elop’s affiliation with the Seattle software giant, and news just this morning confirmed my suspicions.

From the Associated Press:

This is big news, but I personally feel a partnership with Google would have benefited the company more. Google may not “need” Nokia, but for Android to get easy access to 40% of the smart phone market would be huge. For Nokia, it would be thrust into the super popular and accessible “Android World,” which with the right devices could make it a match made in heaven for both.

Microsoft, on the other hand, has little momentum in the space and really needs Nokia to spark up its engines. They would probably be willing to offer more to Nokia, because for Microsoft, it’s more of a lifeline than a turbocharger as it is in Google’s case.

Either way, Mr. Elop has made some bold statements today and perhaps he or Mr. Ballmer from Microsoft will offer even more information at the Mobile World Congress (MWC) in Barcelona, Feb. 14-17.

With Nokia stock at $10.80, in my mind it might be worth allocating some of your speculation capital, not only for future business prospects, but perhaps even a merger… who knows!

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