Nokia Warning Puts Rivals on Notice

Some bulls believe the handset king's margin pressure will hurt the likes of Motorola much more.
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Though Nokia's (NOK) - Get Report sales warning caused most Wall Streeters to duck and run, some steadfast observers see Thursday's comments as a shot across the bow of its rivals.

The Finnish handset king

delivered a disappointing outlook, saying a weak dollar will make third-quarter sales stagnant at best. But the key issue for wireless watchers -- and the one that sparked avid dissent in some camps -- was the prediction that Nokia's lush 23% operating margin could drop some 3 points as the launch of new phones rings up larger marketing and research costs.

Critics were quick to point to the coming margin weakness as a clear sign that the world's top handset maker is suffering under competitive pressure. With



launching more than 30 new phones by year-end and Korean rival


set to unveil 20 new phones in the coming months, the bears hailed Nokia's adjustment as the beginning of a long-predicted slide in handset prices.

Investors were running with that theme Thursday. Nokia shares fell $3.54, or 20%, to $14.41 in midday trading.


However outnumbered, bulls stormed to the company's defense, saying that if there's any suffering to be felt, it will be experienced by rivals at the hands of another determined effort by Nokia to gain market share.

In fact, fans say Nokia is rehearsing for its upcoming role as the Grinch who stole the other cellphone maker's Christmas.

Samsung, Motorola and the cellphone joint venture


have all predicted phone prices will rise, notes Sanford Bernstein analyst Paul Sagawa, who has a buy rating on Nokia and a sell on Motorola.

"All of these competitors are counting on their new model introductions in the holiday season," says Sagawa. But "Nokia is planning to spoil the party."

Industry watchers point out that Nokia was willing to let its operating margins dip below 20% a couple years ago as it battled Motorola in a European turf war. Nokia went on to take a commanding lead in handset sales, while Motorola swooned close to bankruptcy.

Because Nokia handsets tend to fetch the highest prices in the market, competitors typically see lower pricing as one of their best weapons. But Nokia doesn't seem ready to concede on that front right now.

"We will be competitive, we will be very competitive in trying to gain share," said Nokia CEO Jorma Ollila on a conference call with analysts Thursday.

The new meaner strategy seems to have worked a bit already. Nokia managed to gain a percentage point in the market share race, claiming 39% of the world's handset market in the second quarter.

"If Nokia's tactic works, they are going to force further share consolidation and drop some marginal brands out of the race," says Sagawa.

Bumper Crop

While the gearmakers will loathe a cutthroat environment, the wireless service providers will likely rejoice. A bumper crop of new camera and color screen phones combined with a handset price war is great news for the wireless telcos looking to sign up new subscribers to more expensive data services.

No. 5 wireless service provider



was one of the sector's bright spots Thursday, as the company

beat earnings expectations and added more than half a million new subscribers.

Nextel raised its full-year earnings target to $1 per share from the 93 cents analysts polled by Multex were expecting. But given the stock's recent climb to a 52-week high Wednesday, the numbers seemed to have fallen below Wall Street's sky-high expections.

As the first of the wireless companies to report earnings, investors took its lukewarm revenue number as an omen for the sector.

Nextel dropped 2% Thursday, while peers like

AT&T Wireless



Sprint PCS


slid 5% and 2%, respectively.

The telcos could use the sales boost from a hot holiday handset season, and even though Nokia is paying more for marketing, the tidings may be richer than expected.

As optimists will point out, Nokia's frosty third-quarter sales guidance was based on weak U.S. dollar assumptions from the second quarter. And though it is still early, the dollar has been strengthening since then.