RealMoney Silver - Nokia Shows That It's Still Too Thick

Nokia Shows That It's Still Too Thick
By Tero Kuittinen
RealMoney.com Contributor
8/29/2007 2:06 PM EDT

Nokia (NOK) announced a new music service today that is pretty much what everyone expected -- a direct rival to Apple's (AAPL) iTunes.

What interest me more are the new music phones that were announced simultaneously. These handsets confirm what has been suspected for months: The weight and thickness of Nokia's 2008 model range is drifting out of industry parameters.

Many of the new Razr2 models that Motorola (MOT) is rolling out across the globe in August are less than 12mm thick. Samsung's current European blockbuster, the U600, is less than 11mm thick. The biggest Sony Ericsson hit of this autumn, the W580 music phone, is 14mm, and the eagerly anticipated high-end Walkman phone, the W910, is 12mm.

Last week, Nokia announced its latest clamshell phone, the Nokia 6555. It's a slab weighed down by a shocking nearly 20mm thickness. This is something you would have expected in the autumn of 2004, before Razr revolutionized the clamshell niche with its daring 14mm thickness.

Not Playing Catch-Up

Today we got the new music-phone announcements. The N81 is 18mm and weighs in at an elephantine 140 grams. Even the low-end, relatively lightly featured Nokia 5610 is 17mm. The Nokia 5310 is the exception here; at 70 grams and 10mm, it's impressively light and compact.

But this is a bar phone -- Nokia is once again demonstrating it can deliver well-miniaturized bar designs, but it is refusing to slim down models in the important categories of sliders and clamshells. The biggest summer hits in Europe and Asia have been slider or clamshell models -- this is where the upgrade interest is at.

I have been waiting for Nokia to catch up with its smaller rivals in the slider/clamshell miniaturization race as we get the big autumn phone announcements. But the announcements of the last few weeks seem only to verify that Nokia is about to veer radically outside the weight and thickness parameters of its four biggest rivals in the winter of 2007-2008.

Nokia's new high-end music phone is literally more than 50% heavier and 40% thicker than the new high-end Sony Ericsson Walkman W910. This kind of size gap is not acceptable -- not even with superior features.

Not only are LG, Samsung and SE launching exceptionally thin sliders and clamshells in the relatively lightly featured niche of design handsets. LG, Samsung, SE and Motorola are also bringing the weight and thickness of richly featured models featuring advanced 3G technology conspicuously below that of most new Nokias.

This is dangerous. A brief look at the best-seller lists from Europe and Asia tells us that thin is in. In the U.K., the leading phones of the moment are Samsung U600, Sony EricssonW850 and Nokia 6300. The last one is one of the few Nokia models that comes under 12mm thickness -- the new industry size benchmark.

I don't think it's a coincidence that the 6300 is selling so well, even as the sales of the Nokia N95 have started drooping. There are clear signs that consumer upgrade demand is shifting toward thin, light models with selected high-end features and away from heavy models that pack in everything from GPS to WiFi to HSDPA.

The Cost of Pride

Why is Nokia fighting this trend so conspicuously? Partly cost-control, partly pride. Thicker models are cheaper to manufacture. Nokia's handset margins are now phenomenally high. The division selling low-end mass-market models to India and China delivered a scorching 21% operating margin in the 2007 second quarter. The multimedia device margins soared by nearly 5 percentage points year on year.

It's understandable Nokia wants to extend the margin bonanza -- and sticking to thick phones is one way to achieve that. There is also the fact that the thin-phone product category was basically invented by Motorola -- and Nokia seems to have a curious revulsion to jumping on other companies' bandwagons. This kind of pride has a long-term cost.

The stratagem of trying to force consumers into accepting heavier and thicker phones is risky -- history shows pretty harsh reactions to vendors that tried to depend on brand strength at the cost of advanced features.

Nokia tried to stick with the cramped old 128x128 pixel display quality in the first half of 2004. Motorola tried to avoid upgrading to the 240x320 pixel quality in second half of 2006. Both got smacked hard by angry consumers across Asia, the Americas and Europe.

Thickness is arguably a bigger driver now than the new display tech was in 2004 or 2006. And the size disparity between Nokia and smaller rivals in the fourth quarter of 2007 and the first quarter of 2008 will not be trivial -- more than half a dozen major new Nokia models will, literally, be 40%-50% thicker than direct rivals from Samsung, LG, SE and Motorola.

The Stock Effect

Wednesday's share price action after the announcement was fascinating, in that every facet of Nokia's announcement had been anticipated for months: the music store, the song pricing, the new models. All had been either hinted at by the company or leaked out in the past few weeks (such as the 8 MB version of the highly popular N-95 smartphone).

The company said nothing new -- factoids about Nokia shipping more than a million phones a day and the N-95 selling multiple million units were all widely known. So why did Nokia zoom by more than 6% after the music store/phone announcement?

That was actually a major surprise -- usually the Nokia share price dips on big releases or announcements that have been widely anticipated. Nokia is not heavily shorted, so it wasn't short-covering. The expected major operator deals for the music store did not materialize -- Orange actually leaked a hostile memo about Nokia's music distribution software it sees as a threat to its business model.

Nokia's share price spike to new multiyear highs is one of the many surprises the volatile markets have served up this week. It happened just as several of Nokia's new model announcements (from last week's 6555 to this week's N-81) continue coming in well above the size/weight class of key rivals from LG to Sony Ericsson. I would treat today's spike with extreme caution -- it reminds me of the exuberance around Motorola last summer.

Any way you slice it, Nokia has grown too smug and fat for its own good.