Will Nokia Rise Again?

Finland may have to find another wildly successful company to serve as its national image booster. Nokia Corp. (NYSE: NOK), once the most celebrated corporate champion for tiny Finland (population 5.3 million), is fading fast in the mobile device market, facing the prospect that turning its fortune around may take years... or not happen at all.

In the first quarter of the year, Nokia's mobile handset market share plunged to 29 percent, from as high as 37 percent in 2007 and at its peak slightly above 40 percent. The trend for the company is downward, especially in the smartphone market, and it may be at least two years before Nokia establishes a strong beachhead in the segment. Additionally, while Nokia is struggling to put its house in order, rivals are pulling strongly ahead, paced by Apple Inc. (Nasdaq: AAPL), which today represents one of the most disruptive forces in the mobile devices market.

The decline is reflected in Nokia's market value. As of Monday, April 25, Nokia's market capitalization had fallen to $33 billion, down 41 percent in only the last year and almost 80 percent since 2007, according to Morgan Stanley. The stock still faces pressure in the future as the company transitions products from its in-house operating system to Microsoft Windows OS. Once the undisputed leader, Nokia is now chasing the fleeing tail of a nimbler rival.

"Apple redefined the market in 2007 and now dominates the market. Nokia is still trying to catch up with its answer only due by 2012 if it can execute seamlessly," said Patrick Standaert, an analyst at Morgan Stanley in a report. "However, the risk is that the eco-system may have transformed."

That negative perception about Nokia's ability to improve its fortunes in the near future represents the most challenging problem the company faces. It is still a solid enterprise with billions in sales but is no longer considered one of the most innovative OEMs in the industry. Nokia's growth rate is unremarkable, as rivals like Apple have vaulted ahead. In 2010, for instance, Nokia's sales rose a bit sequentially to €42.5 billion (US$62.2 billion) from €41 billion but were down sharply from as high as €51 billion in 2007.

As sales have declined, though, operating expenses have stayed stubbornly high, rising to 95 percent of revenue in 2010 from 84 percent in 2007. By comparison, Apple's operating expenses as a percentage of sales in its fiscal year ended Sept. 25, 2010, was 72 percent, down from 82 percent three years earlier.

Apple's fiscal 2011 sales are forecast to surge to $103 billion, a staggering 58 percent jump from the prior year and quadruple the $24.5 billion the company reported in fiscal 2007. Nokia, meanwhile, is forecast to report sales of $60.3 billion in 2011, up 7 percent from the preceding year.

A major challenge for Nokia is the nagging investor concern that it may not be able to successfully reorganize operations: In addition to the alliance with Microsoft Corp. (Nasdaq: MSFT), the company must cut costs and roll out winning products. It currently lacks an offering in the tablet computing market and has not announced whether it plans to get into that hot segment.

I am personally intrigued by Nokia's transformation efforts. CEO Stephen Elop believes he made the right call in teaming up with Microsoft and has called it a "win-win" partnership. Transitions, though, are a staple of the electronics industry, and Nokia's story, though fresh, is only a repeat of an old adventure. Many years ago Motorola was riding the crest of the mobile handset wave until a Finnish upstart came along.

Nokia ended Motorola's reign, and, despite years of reorganization and the introduction of somewhat successful products like the Droid phone and the Xoom tablet PC, Motorola Mobility is today a faint shadow of its former parent, with a market value of approximately $7 billion -- compared with Apple's $325 billion.

Is that the future awaiting Nokia? And is there a lesson here for Apple?