At its midquarter presentation Tuesday,

Nokia

(NOK) - Get Report

is widely expected to stick by its 25% quarter-on-quarter revenue-growth estimate for its phone unit. Actually, Nokia will likely give somewhat softer guidance -- perhaps around 15% to 20% phone revenue growth. The first-quarter guidance for 2002 will probably be vague to the point of nonexistent. For the phone industry, the next two quarters may reflect a continuing drought in upgrade sales.

Nokia's specific problems for the next two quarters involve a cluster of product delays, and the resulting impact is now ricocheting across its product lines. The first-generation GPRS phone 8310 is going on sale just now, and its sister model 6310 is expected to arrive in around two to three weeks. GPRS is the most widely adopted mobile data upgrade globally; in the medium term, GPRS phone sales are essential for the revival of GSM upgrade sales

Not Happy Together?

However, Nokia's second-generation GPRS model 6510 is slated to arrive during the first quarter of 2002, meaning that the 6310's delay has caused it to arrive nearly simultaneously with its supposedly upgraded model. What further blurs the distinction between the 6310 and 6510 models is that the latter won't feature Java support, as was widely expected back in November. A likely result is cannibalization of one of these two very similar business models; the most likely outcome is that the more compact 6510 will drain the 6310 sales.

Compounding Nokia's winter model-launch challenges are the surprisingly weak December launch numbers of the youth phone 5510 and the likely arrival of the 7650 camera model in June. The earliest price point for the 5510 is probably too high: MP3 is still a relatively obscure selling point for phones, and its ability to command a 40% to 50% price premium over rival teen models is an enigma. Finding the right price level for a hybrid model is tough, and the first stab Nokia made at pricing the 5510 apparently missed the mark.

Nobody knows when and how much the 7650 will cannibalize the sales of high-end monochrome models, but the spring arrival of a color-display photo phone will clearly damage current sales. Surveys in Europe show strong early awareness and demand for camera phones; the consumer interest outpaces demand for GPRS phones by a mile (probably because mainstream consumers don't associate GPRS itself with any notable new features; data speed alone is perking up consumers). The operator inability to offer solid GPRS billing solutions or support for the new messaging service, MMS, is adding to high-end phone launch problems. MMS is a crucially important new service because it adds new audio and graphical features to plain text-messaging; it can also act as an anchor for photo-messaging. Operators are basically loath to invest much in GPRS or MMS before their commercial potential is proven. But phone vendors aren't finding much success in launching GPRS models before the operator support for services like MMS is solid. Features such as premium pricing for individual messaging services are important, but their implementation in major markets is agonizingly slow.

Misery & Company

Moreover,

Ericsson

(ERICY)

evidently hasn't been able to ramp up its key phones, the T-65 and the T-68, to satisfying volumes during the fourth quarter.

Flextronics

(FLEX) - Get Report

doesn't seem to have gotten a grip on the specific challenges of phone manufacturing; the high-precision techniques involved in this area are a whole lot different than cranking out laptops or game consoles. (Flextronics is basically taking over the manufacturing of all Ericsson phones.) Flextronics has likely been recently forced to outsource some of the T-65 cover manufacturing to keep its commitments. When the key contractor needs to contract manufacturing further, things aren't going exactly according to plan.

A bigger headache is the color model T-68, which has apparently been plagued by extremely low initial production volumes. The phone could sell a lot -- but that's academic as long as the production isn't on a real volume level. This creates flashbacks to the days of the T-29 launch -- another ultra-lightweight luxury model that Ericsson introduced with much fanfare. That model was destroyed commercially by an excruciating, 12-month volume ramp-up.

The problems involved in making the transition from basic phones to complex gizmos radiate more or less across the sector. Last February,

Microsoft

(MSFT) - Get Report

announced a glamorous smart-phone debut model, to be manufactured by U.K.-based

Sendo

and launched in retail during "autumn of 2001." A few weeks ago, Microsoft announced

again

the debut of this model -- apparently for 2002. The original plan was that the Sendo announcement would send scores of jealous phone vendors to Redmond, Wash., to sign license deals and trigger a wave of new phones using Microsoft's mobile software platforms.

Nothing like that happened. Microsoft's "phantom launch" approach may work like a charm in the PC sector, but it isn't getting much traction in the phone industry. Why not? Well, the phone vendors know a thing or two about this strategy themselves.

Tero Kuittinen wears several hats. He is vice president of wireless communications at investment firm Halsey Advisory & Management of New York; tech adviser to Opstock Investment Banking of Helsinki; and senior strategist to SpringToys of Helsinki. At time of publication, Halsey had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback and invites you to send it to

Tero Kuittinen.