Nokia's success highlights Motorola's woes

Nokia, the No. 1 cell phone maker in the world, reported another strong quarter of growth, as it capitalizes on poor sales from one of its main competitors, Motorola.

Nokia said Thursday that it shipped 100.8 million handsets during the quarter, an increase of 29 percent compared with the previous year. The company now boasts that it has roughly 38 percent of the worldwide handset market. Meanwhile, Motorola's market share has slipped in the second quarter, placing it in third place behind rival Samsung Electronics.

Nokia's success was driven mostly by sales in Europe, the Middle East and Africa, which offset a decline in share in North America. Nokia also managed to lift the average selling price of its handsets to 90 euros ($123.04) from 89 euros, thanks in large part to new high-end phones, such as the Nokia N95.

Along with increased handset volumes, the company also reported that its profit more than doubled, and sales rose to their highest level in five quarters. By contrast, Motorola, which reported its earnings last month, lost $28 million during the quarter compared with the same quarter a year ago.

What's more, Nokia CEO Olli-Pekka Kallasvuo said the handset market is growing faster than the company had anticipated, and he expects the market to grow 10 percent or more in 2007.

So how in the world could Motorola, which had been the No. 2 handset maker in the world, be performing so poorly when Nokia and others, like LG, Samsung and Sony Ericsson, are seeing high growth? It's a good question and certainly one that Motorola's management team, including CEO Ed Zander, will have to answer. One major issue for Motorola has been the fact that it hasn't had a hit product since the Razr. Without new, popular products, Motorola will likely continue to struggle, especially as Nokia continues to gain momentum.

One thing that has always intrigued me about Nokia's success is that the company has grown market share and profits despite having low market share penetration in the U.S. It's able to get high-volume sales on low-end products in the emerging markets. And it's also able to offset that lower-margin business by successfully selling high-end smart phones like the N95, which includes GPS navigation, in Europe and Asia.

But in the U.S., where at least 220 million people subscribe to cell phone service, Nokia only sells a handful of midrange phones through operators. Consumers can get some of the company's high-end phones directly through the Nokia Web site or retail stores. These phones can be used on AT&T's and T-Mobile's GSM networks. But because these phones aren't subsidized, and they aren't sold through the operators themselves, they don't sell as strongly as they do in other countries.

But that could change. All the hype surrounding Apple's iPhone could help draw comparisons to Nokia's high-end phones. And this interest could help lift sales. If Nokia is able to capitalize on a shift in consumer behavior in the U.S., Motorola may have an even harder time catching up to Nokia.

One thing is clear, Nokia is on a roll, and Motorola better act quickly to regain its footing or it could slip even further.