Montgomery Tech Week: Time to Cash Out of Nokia?

Cell phones are everywhere, but some fund managers say that may not be enough for the Finnish company anymore.
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SAN FRANCISCO -- In Finland, where cellular phones, like backpacks and textbooks, have become standard issue for high school students, schools have taken to prohibiting their use while classes are in session. So commonplace are the phones that they've become the modern version of notes slipped in class.

Kari Penka Wiska, president of

Nokia's

(NOKA)

mobile phone division recently received a misdirected message that read, "I have math. This is boring. What do you have?" Wiska was tempted to reply, "I have a board meeting. This is boring as well."

The errant message shows just how the ubiquitous cell phone has woven its way into lives that diverge on many other fronts. Here at the

NationsBanc Montgomery Securities Tech Week Conference

, the cell-phone toting crowd came to hear how cell phones are doing -- in particular, how demand for data will drive growth in the industry for years to come.

But the question that seemed to occupy several fund managers was whether it was time to cash in their hefty profits in Nokia and switch into one of its competitors. The company has taken the lead in sales of digital handsets and has been unhampered by restructuring, unlike competitors

Qualcomm

(QCOM) - Get Report

,

Motorola

(MOT)

and

Ericsson

(ERICY)

.

"It's been all Nokia to here," said one West Coast technology fund manager who is long the stock, musing whether it was time to spread his eggs into more baskets. "I'm not that inclined to do that yet."

Last year saw explosive growth in the sale of digital handsets, thanks largely to the introduction in the United States of one-price plans, which made a call from the car no more expensive then one from the home. At the same time, growth in Europe has been driven by the replacement of wire lines with wireless.

Matt Hoffman, a senior analyst with the market research firm

DataQuest

, estimates the sale of digital handsets in the U.S. grew a staggering 280% in 1998.

"The big story is the market's going digital," said Hoffman. "It's creating a tremendous opportunity for the handset makers. It's a growth sector for 1999, and these guys are going to continue to do well."

Wireless executives noted there are considerable barriers to demand for wireless data. Those barriers include transmissions rates that today are too slow, the scarcity of content and restrictions on the length of messages that limit their utility.

But rather than waiting for demand of new digital services to develop organically and drive sales, wireless equipment manufacturers are working to create demand by investing in new services, creating standards for data transmission and developing new means for devices to interact with each other and the Internet.

Examples of this push include Motorola's investment in

broadcast.com

(BCST)

, which provides audio programming over the Internet, and Qualcomm's joint venture with

Microsoft

(MSFT) - Get Report

, called

WirelessKnowledge

, which provides Internet access to mobile users.

"Our main business is equipment," said Anthony Thornley, CFO of Qualcomm. "We get involved in services. It's a seeding of the market to sell more equipment."

In addition, wireless equipment makers are banding together in several projects to foster demand for wireless data services. This includes the development of the Symbian operating system for devices that serve as telephones and PDAs, the Wireless Applications Protocol for reading Web pages and Bluetooth, a low-power, short-range radio link that will allow wireless devices to exchange data.

Though data traffic over land lines is expected to exceed voice traffic by the year 2001, the same won't likely happen until the middle of the next decade for wireless. Despite the current low demand for data, the development of new bells and whistles will be critical for driving replacement sales in the years ahead.

"It's going to take a while," said Mark McKechnie, wireless equipment analyst with Montgomery, who rates Nokia and Motorola buys and Qualcomm and Ericsson holds. "But data uses are necessary to the product innovation cycle and help the market grow."

For now, voice remains the killer app for wireless and there is no data application that's expected to change that soon.

Daniel S. Levine is a freelance writer covering business and Silicon Valley. He is editor of the Web magazine www.disgruntled.com.