1. Will Rewiring Nokia Spark Growth?
CEO Ollila's plan for the phone giant: Go after both economies of scale and
innovation
Tero Naumi has a job any couch potato would love. The 40-year-old Nokia
Corp. (NOK ) engineer watches television eight hours a day. As product
manager for Nokia's mobile-TV technology, which will let handsets receive
a dozen channels of digital TV on the go starting next year, Naumi spends
workdays in his cubicle viewing the news and soap operas on a specially
equipped Nokia 7710 phone, which features a 3-inch wide screen and sells
for $650 before subsidies from phone carriers. Sometimes he tools around
Turku, some 145 kilometers west of Helsinki, in a van to test reception in
hard-to-reach places. It may sound like kid's stuff, but Naumi's work is
deadly serious. Nokia hopes mobile TV will become a multibillion-dollar
business by the end of the decade.
Digital television on handsets is just one of the far-out schemes the world's
largest mobile-phone maker is hatching to resurrect flagging growth. At a
Nokia development lab near Vancouver, programmers are writing new
video games that let thousands of players battle each other over the
airwaves using Nokia's N-Gage wireless game console. Engineers in
Boston and Tampere, Finland, are busy weaving new e-mail readers and
security software into Nokia's handheld Communicators -- pint-sized hybrid
phone-organizers aimed at corporate customers. And in factories from
Germany to China, assembly-line workers are churning out millions of sleek
camera phones that work on new third-generation mobile networks. "Nokia
is a beehive of experiments these days," says John Jackson, senior
wireless analyst for telecom market researcher Yankee Group (RTRSY ) in
Boston.
BATTLE STATIONS
The Finnish phone giant has little choice but to wade into new waters.
Although the company sold an amazing 208 million handsets last year, up
16% from 2003, fierce competition and sagging prices pushed mobile-
phone revenues down 3%, to $30 billion. It's not just that garden-variety
handsets are becoming commodities. Nokia also had a wretched first half
in 2004, when a stale product portfolio and strained relationships with
mobile operators cost it nearly a fifth of its hard-won 35% global market

2. share and pushed revenue growth into reverse. As the company's
prospects dimmed and analysts cut their ratings, dismayed investors
pounded Nokia's stock down to a 12-month low of $11.03 in New York on
Aug. 13 -- 52% off its March peak. Customers weren't surprised. "Their
attitude was that, given their size, they didn't need to listen to us," says an
executive at a European mobile operator.
To get Nokia back on track, chief executive Jorma Ollila has cranked up the
introduction of new phones, especially "clamshell" models that hinge at the
top -- a popular category where the Finns were missing in action. He has
also wooed operators, agreeing to tailor phones to their specifications as
never before. And to regain lost share, Nokia slashed prices on certain
models by up to 25%, at the expense of operating earnings, which fell 15%
in 2004, to $5.6 billion. By yearend, Nokia had managed to claw back
nearly all its lost market share, according to market researcher Strategy
Analytics. The company turned in fourth-quarter sales and earnings that
beat Wall Street estimates. And its stock recovered to finish 2004 down just
7%.
Nokia has climbed out of its hole. But the company still faces a
fundamental problem -- no growth. Its top line has drifted down by an
average of around 1% annually since 2000, hitting $38 billion last year,
while net profits have fallen 18.6% in the same period. By comparison, rival
Samsung Electronics has seen mobile phone sales and profits triple over
the last five years, while Motorola endured plunging revenues and deep
losses before a turnaround last year.
To get Nokia's engines revving again, Ollila is halfway through a two-year
makeover that he's convinced will launch the company into a new growth
era. He's redirecting research and development to areas where Nokia
stands apart, especially radio technology and mobile-phone software, not
wasting it on reinventing things the company can buy elsewhere. Nokia
spent more than $4.8 billion last year on R&D, 60% of that for software. At
12.8% of revenues, Nokia's R&D spending was three points higher than
Motorola and about twice the R&D ratio of Sony Corp. "Nokia can only
retain its current position and grow through innovation," says Declan
Lonergan, a Yankee Group telecom analyst in London.
But the scramble to find growth through innovation carries huge risks.
Nokia is racing into unfamiliar markets, where it faces competitors ranging

3. from Microsoft (MSFT ) and Apple Computer (AAPL ) to Samsung and
Sony (SNE ). Despite its strong brand and global reach, some efforts are
not panning out. Nokia's Communicator, for instance, has never enjoyed
the popular success of Palm and PocketPC PDAs, though the newest
models are getting a warmer response. Nokia's N-Gage wireless game
console has sold 1.3 million units, far below expectations. "Innovation, in
and of itself, isn't the cure," says analyst Per Lindberg of brokerage
Dresdner Kleinwort Wasserstein. "You have to make products people
want."
Misfires are part of the price Nokia must pay to keep ahead. As basic
mobile phones become more cookie-cutter and barriers to entry fall,
particularly for Chinese newcomers such as TCL and ZTE, Nokia and other
established phonemakers have to pile on more features. That's why Ollila
has created two new business units that require higher levels of R&D and
market development. One handles multimedia devices -- camera phones,
game machines, and mobile TVs -- and the other sells devices aimed at
businesses. Ollila has farmed out basic cell phones to a division whose
main job is to deliver mass-market units at the lowest possible price. That
group still represents 63% of revenues and 87% of operating profits, but its
contribution is expected to decline as new initiatives catch on. Another
division, accounting for 22% of revenues, sells wireless networks to
operators.
The new structure better reflects the changing industry. Because of market
saturation in the developed world, analysts expect total handset shipments
to grow only in the single digits for the next few years, reaching about 750
million units in 2006. Meanwhile, price-cutting could keep industry revenues
nearly flat. In search of growth, Nokia is diving deep into developing
countries like China, India, Brazil, and Russia. They demand less-
expensive phones but are growing much faster than Europe or North
America. Equity analyst Jari Honko of Helsinki brokerage eQBank says
Nokia's goal is to profit from the company's huge volumes in purchasing
and manufacturing. "They want a situation where competitors cannot keep
up on price," Honko says.
At the other end of the scale, Ollila is casting a wide net for high-margin
opportunities outside conventional handsets, especially in the hotly
contested "convergence" arena. Nokia's new multimedia group, for
instance, offers gadgets that take pictures, play games and music, and will

4. eventually show digital TV. The group booked revenues of $4.7 billion last
year, up 46%, and earned its first operating profit of $232 million.
To court corporate users, Ollila has also established an "enterprise
solutions" group. The goal: persuading companies to outfit their workers
with voice-and-data gizmos such as the $1000 Nokia Communicator, which
looks like a phone when folded shut but opens up to reveal a keyboard and
wide color screen. The enterprise group topped $1 billion in revenues last
year, up 57%, but will likely continue losing money through 2005.
Brokerage Credit Suisse First Boston (CSR ) figures the new units will
boost Nokia's top line by $2.6 billion this year, enough to make up for a
$1.7 billion decline in conventional handset revenues. "I am more
convinced than ever that the reorganization was right," Ollila says. The next
step in his plan is to exploit Nokia's technology assets to revamp the way it
builds phones. The idea is to turn the handset from hardware into software.
Already, phones can be built by snapping together modules of chips and
radios to accommodate different wireless standards and feature sets. On
top of that Nokia wants to add its secret sauce: flexible, easily customized
software that the company has spent the last decade developing.
The foundation comes from Symbian Ltd., a British consortium Nokia
helped launch with a half-dozen other mobile phonemakers. Symbian's
"smartphone" software is as sophisticated as Microsoft Windows or Linux
but was designed from the beginning for mobile devices. It already
commands 82% market share among smartphones, thanks mostly to the
15 million Symbian-based devices Nokia has already sold. On top of that,
Nokia adds its Series-60 user interface, which it now makes available for
license to other phonemakers. The shift to standard software marks a sea
change for the mobile industry. Until now, Nokia's older phones, as well as
those of rivals, had to be painstakingly reworked to accommodate a
software change as simple as moving the photo messaging feature from
the main menu to a special section devoted to imaging. Now, with Symbian
and Series-60, engineers can make the change in a matter of days -- and
send the modification to the factory floor to be burned into thousands of
customized phones.
HIGH-SPEED CUSTOMIZATION
Such ease of reconfiguration will revolutionize Nokia's production model.
Until last year, it was oriented mostly around building huge runs of mass-

5. produced handsets. To keep costs to a minimum, Nokia held off adding
new features such as better color screens or higher-resolution cameras
until the components were available in big volumes.
Nokia's new modular hardware and flexible software make it easier for the
company to customize products faster. With its new 6630 3G phone, for
instance, Nokia created entirely different menus and screens for Vodafone
Group PLC (VOD ) and Orange (FTE ). Nokia also aims to speed the latest
technology to market by creating smaller batches of some new phones.
That will allow it, for instance, to produce limited numbers of its new 7280
phone, which resembles an Art Deco lipstick case. "We need to take new
features to market more aggressively," says Olli-Pekka Kallasvuo, head of
mobile phones.
Having made its fortune in "candy bar" handsets, Nokia now aims for 50%
of its product line to sport alternative designs -- clamshells, sliders, swivels
-- by the end of this year. Within three years, it figures a quarter of its
models will be smartphones that sport advanced software and run
programs just like a computer. Faster. Smarter. More flexible. It's the new
Nokia. But those gadgets better be what customers want.