Nokia and Ericsson have long been leaders in mobile media, but both companies lost their momentum last year and continue to report earnings that fall short of expectations, according to Business Week's Andy Reinhardt. But Reinhardt sees the two "Nordic giants" as heading in different directions at the moment. Nokia, he writes, has a problem with a "perceptual gap" among investors:
Nokia, whose shares have fallen 1.4% this year against a backdrop of generally rising telecom stocks, can’t seem to catch a break these days. Long the leader in mobile handsets, and still hanging on to one-third of the overall market, Nokia has been sent reeling by the success of the Apple iPhone. Sure, Nokia sold 21.5 million “converged mobile devices,” or smartphones and mobile computers, in the first quarter, up 57% from a year earlier. Apple, by comparison, sold just 8.75 million iPhones. But Apple snagged an average of $622 in product and service revenue for each iPhone, whereas Nokia’s devices sold for an average price of $207 (€155). Translation: Apple made 22% more revenue on fewer units—and its profit margins were even more dominant.
It's not as if the Finnish giant hadn't been developing smartphones for years, or hadn't spotted the trend towards mobile services. Indeed, it was ahead of the rest of the industry for many years in both areas. Recall that the original palm-top Communicator with a QWERTY keyboard came out in 1996(!), and Nokia made waves—and annoyed jealous mobile operators—almost a decade ago with its Club Nokia download center for ringtones, screen savers, and other phone enhancements. But Apple, with its snazzy design, great timing, and unparalleled ability to rally software developers, has walked away with the market buzz in state-of-the-art smartphones and downloadable (and revenue-producing) apps.
But, Reinhardt argues, the same iElephant in the room that is causing problems for Nokia is a boost for Ericsson:
Ericsson has bulked up by buying other companies, including some of the assets of failed Canadian telco gear-maker Nortel. It was the addition of those assets, plus a well-timed deal with AT&T, that helped Ericsson lift its North American sales 99% in the first quarter, to $1.3 billion, making the region now its largest in the world.
The proximate reason investors bid up the shares of Ericsson even as they hammered Nokia is, ironically, the same: the iPhone. In his conference call with analysts after the earnings announcement, Ericsson CEO Hans Vestberg pointed to the rapid growth in mobile data services in the U.S.—a phenomenon largely driven by Apple's popular device and the voracious wireless bandwidth consumption of its users. Investors see huge opportunity for Ericsson to sell equipment that serves that growing demand, which in some cities has already lead to network saturation. Credit Suisse figures Ericsson could be 20% undervalued at its current price.
Read Nokia and Ericsson: A Tale of Two Telcos here.