Opportunity Knocks at Nokia

Growth in mobile-phone sales is starting to cool off as the industry approaches the billion-sold mark.

Worldwide phone sales hit 990 million last year, a 21% increase over the total sold in 2005, according to a tally by Gartner Dataquest.

Looking ahead this year, Gartner predicts 1.2 billion cell phones sold, or another 21% growth year.

While that's still a robust clip, the industry's growth rate has slipped from 29% back in 2004. The flattening trend shows that though mobile phones are more popular than ever, building on a billion-handset base is difficult, say observers.

No. 1 phone maker Nokia (NOK Quote - Cramer on NOK - Stock Picks) easily retained its dominance in 2006, boosting its share of the market to 34.8%.

That's up 2.3 percentage points over 2005. Notably, Nokia's strong performance came without the help of any superthin phones in its lineup and without much of a hand in the U.S. market.

Source: Gartner Dataquest (March 2007)

Observers see 2007 as a potentially strong year for Nokia. The company has finally introduced ultrathin phones, its U.S. business has room for big improvement and its fiercest rival, Motorola (MOT Quote - Cramer on MOT - Stock Picks), has vowed to focus more on profit and less on market share.

Despite problems that led to a disappointing second half financially, Motorola managed to make market share gains in 2006. The Schaumburg, Ill., wireless giant had 21.1% of the total market, up from 17.7% in 2005.

"The year started well for Motorola as it benefited from the success of Razr in most markets in 2005," Gartner says in the report. "Unfortunately, the momentum slowed in the second half of the year."

And if Nokia's outlook is bright, Motorola's is considerably less so, say industry analysts.

Motorola stumbled badly last year, missing sales targets three times as the company slashed prices to fuel its market share objective. The troubles attracted takeover tycoon Carl Icahn, who has acquired a large stake in the company. Icahn has hopes of directing some of the company's $11.2 billion cash toward shareholders through big stock buybacks.

But on the product front, there's not much in the pipeline that looks capable of repeating the success of the Razr phone. And Motorola didn't end the year on a great note.

"In the fourth quarter of 2006, the somewhat cold reception that greeted products such as the Krzr K1 and Motofone, coupled with the late shipping of some products, meant a considerable inventory build-up among distributors," the Gartner report says.

A standout among the pack seems to be Sony Ericsson -- a joint venture of Sony (SNE Quote - Cramer on SNE - Stock Picks) and Ericsson (ERIC Quote - Cramer on ERIC - Stock Picks) -- which managed to leapfrog LG by jumping from sixth place to fourth place last year. Sony Ericsson's Walkman phone has been particularly popular as music becomes a more sought-after feature in new phones.

"We look forward to another exciting year in the mobile-phone industry with more technologies becoming available and new players from other industries entering and adding some spice to an already very highly competitive market," Gartner's Carolina Milanesi said in the report.