Yesterday

Nokia

(NOK) - Get Report

had its biggest product launch since 1997. The much-acclaimed 7650 is an attempt to short-circuit the high-end GPRS phone sales of rival vendors by jumping directly to the second product generation of 2.5G phones.

The product is a radical departure from old design approaches and is packed with features. But the launch date of second quarter 2002 is likely to dismay and alarm investors.

Spec Attack

Nokia spurned the GPRS market in 2001 and decided to wait for new hardware and software features before making the big push for a 2.5G phone. The big push is the 7650, which is loaded with features such as a built-in camera, high-quality display, etc. The risk here is what I like to call the Sony Syndrome, in which a vendor launches too many features simultaneously and slams into quality issues. Nokia has presumably gotten some experience from combining a hi-resolution color display with Symbian OS from revisions of the 9210 smartphone, which was launched last summer. The cautious launch schedule of the 7650 is meant to ensure that volume ramp-up can happen without the mishaps that have plagued the Japanese Java phone launches.

In retrospect, Nokia's decision to pull back and avoid the early GPRS market makes sense. Phone margins rose to 19% during the third quarter on the back of what was essentially a 2-year-old product lineup. So the approach of squeezing the old gear until it squeaks has worked so far. The question here is whether the second-quarter 2002 launch of the 7650 will be three to five months too late -- creating a first-quarter slump for the phone unit.

The 7650 is a pivotal phone for various reasons. It's the first genuine 2.5G phone, designed from the ground up to support mobile-data features. It's priced aggressively and could become the first Symbian model to ship more than 10 million units; this would boost the operating system a lot.

And most important, it's the first serious attempt to revamp the messaging market of mobile telephony. SMS has become the runaway success of the telecom sector in recent years. Monthly global SMS volume is poised to hit 30 billion messages in December, up from 4 billion in January 2000.

Multimedia messaging is the first update for SMS since the standard debuted in mid-'90s. If the consumer hunger for messaging can be harnessed to new forms such as photo-messaging, the entire phone and operator markets are poised for long-needed rejuvenation. MMS might also flatfoot

Microsoft

and PDA vendors, which seem slow to grasp its market potential. MMS will extend messaging by enabling consumers to combine pictures with text and audio files in crafting messages -- adding both a visual component and sound clips to current text-messaging.

The centerpiece of the 7650 is the color display that features 176 by 208 pixels. The quality rivals the best high-end PDAs around. Another key feature is the embedded camera. These give MMS and specifically photo-messaging the launch pad they need. It's probably crucial to have the camera as an embedded component to help MMS take off. The trade-off resulting from the camera, display quality and wide standard support involves the weight, which tops 150 grams. Another minus is the shipment schedule.

Ericsson's

(ERICY)

color-model rival weighs far less and is already shipping in small volumes -- so the first major battle in the new product segment involves a choice of two contradictory approaches: Get out early or maximize the impact of design and features?

Shock the Monkey

Designwise, Nokia has taken the same approach as with 9210 and 5510 -- products that are radically different from competition in their product segments. The 7650 has again a hallucinatory touch of the weird -- this time the effect comes from the way the phone splits to the top-level display unit and the hidden keypad unit.

This is both shrewd and necessary. Consumers need strong visual cues of the new technological transition period. Many companies tried selling GPRS phones that look like old GSM phones during 2001 -- and they failed. Nokia's approach externalizes the technology shifts -- the looks of the new models are twisted enough to jolt consumers out of their current bovine stupor.

Nokia's new upgrade phones operate by distancing themselves vigorously from the previous phone generations. In 5510, the horizontal QWERTY board worked as a representation of the internal MP3/radio feature -- a concrete signal that the phone has broken out of its role as a mere conduit for voice traffic. Hidden changes resonate on an external level; structural design shifts hint at the internal turmoil of a newly convergent device.

In the 7650, the main technology features are nearly as invisible as MP3 is for the 5510 -- the camera at the back and plenty of new, sophisticated software. Thus the new display becomes the main attraction, a manifestation of the camera and software features. Nokia's approach is to lower the display to the middle of the plate, and place only a joystick and few hot buttons underneath. Because the keypad is hidden beneath the phone, the eye is drawn to the display; the effect is both souped-up and pared-down. The 176-by-208 pixel density gives the display the sort of sharpness that's missing from compact phones entirely at the moment. Stripping out everything but the display from the front of the phone lends it an iconic status and works as a lavish visual cue about the absorbed camera module.

Drawing Contrasts

The contrast with the new Ericsson T-68 is obvious. The new Ericsson flagship product is a highly accomplished color-display phone -- but little more. The model is basically a second-generation GSM phone with add-ons. The color display quality is inferior to Nokia's, and the camera module is a detachable lump. Ericsson grabbed the brass ring of getting the first color-display phone to the market, but it ignored the chance to rethink the form and function of a new product category.

Nokia made a very clear design statement this week. Its low-end models have garish teen gimmicks, but the high-end models will possess a totally separate product identity. And it's the polar opposite of the cluttered Tokyo kitsch pushed by Japanese vendors. Nokia's concept of the future is quintessentially Finnish -- icy, Nordic modernism rooted in the architecture of Alvar Aalto and Eero Saarinen. The Finnish future is detached, streamlined and minimalistic, avoiding the button-happy mayhem of the current NEC and Panasonic concept phones.

The conceptual battle here is the melancholy functionalism of

Solaris

vs. the cheap retro futurism of

Battlestar Galactica.

I have a feeling that most adult consumers would prefer the former.

The main problem for Nokia is the shipping schedule, which gives Ericsson an opening to get plenty of mileage out of its T-68. Nokia is focusing on making the 7650 the mass-market hit of the second half of 2002 -- and if operators take until March or April to get multimedia messaging support up and running, the approach could make sense. T-68 is currently shipping without MMS. In any case, there's a creeping sense that the phone sales revival is once again slipping into the future.

Tero Kuittinen wears several hats. He is vice president of wireless communications at investment firm Halsey Advisory and Management of New York; tech adviser to Opstock Investment Banking of Helsinki and Wharton Equity Partners of New York; and senior strategist to SpringToys of Helsinki. At time of publication, Halsey was long Nokia and Ericsson, 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.