Nokia Takes a Big Step on Tip-Toe
By Kenneth Li
Senior Writer
06/04/2002 07:20 AM EDT
There was a time when mobile-handset companies launched new products with the pomp and circumstance of a billionaire mayoral candidate, backed by hefty marketing war chests and a cacophony of public relations squawk. Just not last week.
With very little fanfare, the world's largest handset manufacturer, Nokia (NOK:NYSE ADR - news - commentary - research - analysis), put its latest Nokia 9290 Communicator -- a $600 do-it-all device that early reviewers are hailing as one of the coolest "Swiss army" tech toys in the U.S. -- on sale last week.
For a dazzling new phone that lets users wirelessly surf the Web, stream video, and send and receive email, it's puzzling why the company rolled it out with Kabuki-like subtlety, especially at a time when its Wall Street detractors have criticized it for ceding its high-tech edge.
A raving New York Times review notwithstanding, what the company failed to communicate spoke volumes: The Finnish mobile giant is quietly tip-toeing into new waters. Not only is the Communicator the first of a new generation of devices, it also will be the first time the company sells any of its phones directly to consumers, the company says. In yet another breakthrough, Nokia consequently will be selling its first phone without a carrier contract, or any financial incentives for consumers, known in the industry as a "carrier subsidy."
It's not alone. Motorola (MOT:NYSE - news - commentary - research - analysis) has been selling phones direct to consumers for years, with and without subsidies. Kyocera (KYO:NYSE ADR - news - commentary - research - analysis) also sells direct.
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"It's a very different product than we've done before," explained Nokia spokesman Keith Nowak said. He said that a premium version of an existing phone, the 8890, also is up for sale. "People who are buying it will be more tech-savvy," an audience for which price is not a priority and that is accustomed to paying full price for a PDA-like device.
Most analysts interviewed for the story contended that selling via direct channels will not replace the high-volume business handset makers do through the carriers and retail locations anytime soon.
"Maybe [Nokia] wants to get some experience selling direct," said US Bancorp Piper Jaffray wireless analyst Samuel May. But at this point, "Nokia is not going to change their whole business model and the business model of the entire industry by going to sell direct to subscribers."
Nokia's not the first handset manufacturer to bypass carriers on some level and appeal directly to consumers. In its online sales, Motorola at times has operated as a virtual sales agent for the carriers by hawking both phone and service through its site.
"We can't ignore [online] as a potential channel," said Rocky Daehler, director of strategy at Motorola's personal communications sector, playing down online sales' contribution to net sales. "But our intent [online] is to learn about the channel, and at the same time, our primary concern is we're partnering with the operators and working with them closely."
Daehler's remarks underscore a concern among handset manufacturers of potentially disrupting the symbiotic relationship it has with carriers.
But that careful relationship also may be affected as the staggering downturn continues to force handset makers to get more imaginative to meet its aggressive targets, or risk the consequences.
Wall Street has sent Nokia shares tumbling 75% off their airy heights of 2000. In the past month and a half alone, investors have shaved $7.56, or 36%, off its value, sending shares down to $13.39 at Monday's close, on rumors that it will not meet its revised but still lofty projections.
US Bancorp Piper Jaffray's wireless analyst Samuel May reduced the 12-month target price to $18 on multiple concerns, among them, "to reflect handset competition and potential infrastructure weakness."
A.G. Edwards analyst Mark Jordan downgraded Nokia's rating to buy, from strong buy last month.
Carriers Looking to Cut
At the same time, carriers facing mounting debt loads and hard-to-control fixed costs are trying to trim costs wherever possible. Those efforts include active discussions with handset manufacturers on reducing the subsidies they pay.
"We're always looking to drive cost out of the business," AT&T Wireless (AWE:NYSE - news - commentary - research - analysis) spokesman Ritch Blasi said. "We're all looking at how to reduce the subsidies -- either reduce or completely eliminate."
AT&T Wireless is facing an $11.2 billion debt load, as it continues to spending to upgrade infrastructure for next-generation services, even as growth subsides for now.
Such subsidies have been an effective tool in goosing subscriber additions over the past several years, luring new users with the prospect of purchasing handsets at steep discounts in return for signing one- or two-year service contracts with carriers.
The carrier essentially swallows the difference between what it costs from the vendors and the discounted rates it offers to subscribers. But in chillier economic climes, some carriers are beginning to re-evaluate the strategy, focusing resources on maintaining current subscribers rather than growing.
Reducing the subsidies effectively will slow subscriber growth and drive handset sales down, say analysts, and possibly hurt the manufacturers.
"It's difficult to reduce your fixed cost that quickly, so if you have reduction of volume in the top line, it'll hurt your margins," said W.R. Hambrecht analyst Peter Friedland. "But in a six-competitor environment, it's hard to [reduce subsidies.] " W.R. Hambrecht has no banking relationship with the mobile-eqiupment providers or the wireless carriers.
Sprint PCS (PCS:NYSE - news - commentary - research - analysis) declined to comment. Verizon Wireless (VZ:NYSE - news - commentary - research - analysis) said there were no plans to that effect. Cingular did not return calls.
For the moment, analysts don't believe the subsidies are going away any time soon, at least not in this country.
"Subsidies are like narcotics," said US Bancorp's May. "Yes, [carriers are] interested in reducing subsidies, but subsidies are a powerful form of customer retention." US Bancorp Piper Jaffray has not done any banking for Nokia, Motorola or any of the major wireless carriers.
Voicestream, owned by Deutsche Telekom (DT:NYSE ADR - news - commentary - research - analysis), which has no current plans, offered a less-drastic vision.
"We're absolutely trying to drive costs down," Voicestream spokeswoman Kim Thompson said. "But we're also committed to providing value to our customers. We recognize there's a price point value associated with that."
Thompson said that if the economics improve, subscribers would begin to flock back, helping carriers benefit from a volume discount on the handsets. Theoretically, higher volume discounts from handset manufacturers help carriers price handsets affordably, even without subsidies.
For now, that remains wishful thinking. |
