Nokia Needs To Raise Its Game

If Nokia isn't going to match its competitors by slashing costs, it's got work to do to hold onto market share. Nokia (nyse: NOK - news - people ) blamed the price-cutting barbarians at the gate for a 2.0 percentage point drop in its market share in the third quarter to 38.0%, and for a decline in earnings and sales over the year. The cell phone maker said it had decided not to match "aggressive" pricing from some competitors, and bemoaned competition overall--even in entry-level markets, where it has seen homegrown rivals eat into its power base. "We said we would not participate in the aggressive pricing competition in the third quarter and I believe that the decision was correct and will repay us in the long run," Nokia CEO Olli-Pekka Kallasvuo said. Nokia said third-quarter sales had fallen by 5.4% to 12.2 billion euros ($16.5 billion), with earnings down 30.5%, to 1.1 billion euros ($1.5 billion). The company said it would preserve or slightly increase its market share in the fourth quarter, and guided toward a slight annual increase for the industry's unit sales in 2008. Its shares fell 2.0% to 11.55 euros ($15.48), at the close in Helsinki on Thursday, improving on the 5.2% drop posted by the Dow Jones Euro Stoxx 50 index. Over in New York, the Finnish firm's U.S.-listed shares were up 9.7%, or $1.46, to close at $16.57. "Nokia's unit volumes and average-selling price disappointed," said Tero Kuittinen, an analyst with Global Crown Capital. "But it's an oddly triumphant moment, because the handset operating margins were rock solid at 18.6%." He said that Nokia would overall be more resistant to profitability pressures during the upcoming recession than its main rivals. Part of the positive reaction was due to Nokia managing expectations with last month's warning. But even taking into account the global economic slowdown, Nokia is failing to defend its market share on all fronts, as competitors slash prices and look for chinks in the global leader's armor. Although analysts didn't think Nokia was in danger of losing its crown as the No. 1 manufacturer in the industry, it clearly has work to do to try and recapture lost ground. According to Mats Nystrom, an analyst with SEB Enskilda, Nokia will have to improve its high-end smart phone offerings in order to drive sales and earnings growth. Nystrom told Forbes.com that in 2009, the smart phone segment would represent well over half the total handset market in dollar value. That means coming up with snazzy new models with touch-screen technology, an area sorely lacking in Nokia's portfolio. Meanwhile, Samsung, LG and Apple (nasdaq: AAPL - news - people ) have seized the opportunity to capture more sales, even as the whole industry suffers from a spending slowdown in developed markets. Gartner Research analyst Carolina Milanesi said that even Sony (nyse: SNE - news - people ) and Ericsson's joint venture had benefited from price tweaks, despite suffering from its exposure to a softening.