Investors have their reservations about Nokia's ( NOK) efforts to peddle cheap phones in poorer countries. Nokia
posted third-quarter earnings Thursday that were in line with expectations, but Wall Street wasn't pleased by its reliance on low-price, low-margin phones. Shares of the Finnish cell phone giant fell 6% Thursday after the company said it sees margins narrowing further in the fourth quarter as its average phone price continues to fall. The problem is that tech investors like their growth stories straight up, unadulterated by things like profit-margin problems. A digression from that plot can anger fans. Nokia is the No. 1 player in an industry on track for yet another year of record growth. Typically, about half of that growth comes from selling fancy phones in affluent countries. But now the curtain is going up on new markets like India, Africa and Latin America, where incomes are smaller and cell phones have to be significantly cheaper. "More units, worse price, lower margins -- that's the worry," says one New York hedge fund manager. Nokia sits in a tricky spot with limited options. Feeling the heat from handset rival Motorola ( MOT), Nokia has to remain strong in every segment of the market or risk losing a hard-won share of the business. And with Motorola batting a thousand with its popular Razr phone, Nokia's game is starting to look a little faded. "Unit volume was the one thing a bit disappointing to me," says Sanford Bernstein analyst Paul Sagawa, who has a buy rating on Nokia and a neutral on Motorola. "The 9.5% sequential growth puts it behind Motorola, Sony Ericsson and LG. I think they likely lost a small bit of share in the quarter, all of that coming in North and South America.
According to Sagawa, Nokia has more than 70% market share in India and Russia, and "more than 45% share of all emerging markets." Nokia has to be in these markets because of the 3 billion potential customers who live there, says ABI Research analyst Alan Varghese. But, says Varghese, Nokia and Motorola are approaching the cheap-phone market from opposing directions. Motorola was already big in the low cost space with pagers and two-way radios, says Varghese. Nokia, on the other hand, has built a reputation for good-quality cell phones -- a reputation that makes its current task more complicated. "Nokia's brand is very important to them," says Varghese. "They want to play in the emerging market, but they also want to be cautious about how many functions and features they will strip out of the phones." Some investors are quick to figure out where this trend might go. "Compaq had 40% margins until the industry matured and then they went to 10%," says the hedge fund manager, who owns Motorola and has no Nokia positions. "Is that what's happening in the cell phone business?"