Apple iPhone Sales Won't Profit from Nokia's Q1 Profit Decline

Some Apple iPhone supporters are rejoicing over Nokia's April 16 earnings announcement. Nokia reported a stunning 90 percent year-over-year decline in profits for first quarter and a first-ever pretax loss.

The world's largest handset maker, along with Research In Motion, stands between iPhone and world dominance. Yesterday, Mac blogger John Gruber (aka Daring Fireball) wrote about Nokia earnings: "That silence you hear is the reaction from the 'market share is all that matters' pundits."

Market share does matter, and Nokia has way more of it than Apple. According to Gartner, iPhone's share of the worldwide handset market was 1.3 percent in fourth quarter and only 0.9 percent for 2008. By comparison, Nokia's worldwide market share grew slightly for the year, to 38.6 percent from 37.8 percent, according to Gartner.

Nokia's problem is short-term, and it's similar to the crisis that gripped the PC ODM market in the fourth quarter: culling inventories. Rather than get stuck with too much inventory during recessionary times, PC manufacturers shipped fewer units, cutting back orders on chip sets and other components. The cell phone market is experiencing a similar phenomenon.

In a sign of the recession era, last month Gartner observed a phenomenon not seen since 2001, during the last economic downturn: Handset shipments into the channel were lower (297.3 million units) than sales out to customers (314.7 million units). That happens when manufacturers seek to lower inventory levels, which they did in reaction to the economy.

"Efforts to reduce inventory will intensify in the first quarter of 2009 and continue into the second quarter of 2009," Carolina Milanesi, Gartner's research director for mobile devices, said in an early March statement. "In the second half of 2009, the channel will have to start restocking, and this will help sell-in volumes. This will not mark the start of a market recovery—we do not expect demand to stabilize before 2010."

For Nokia, the phenomenon led to a surprising decline in handset shipments—unit sales declined 18 percent from the fourth quarter and 19 percent year over year. Nokia shipped 93.2 million handsets; 100 million-plus units are more typical. Nokia is more vulnerable to the effects of inventory culling because it ships so many more handsets than any other mobile device manufacturer.

Nokia is sure to get some relief when carriers begin restocking handsets, a phenomenon already started in the PC channel. "We are seeing some evidence of channel inventory restocking, particularly in the U.S.," George Shiffler, Gartner research director, said in an April 15 statement. "This restocking should not be interpreted as a recovery in PC end-user demand; it's still unclear if the global PC market has hit the bottom."

The impact of this restocking already is rippling through the PC ODM channel. After a disastrous fourth calendar, Intel rebounded during the first quarter by beating Wall Street estimates. But the glow quickly faded because Intel wouldn't offer guidance for upcoming quarters. Meaning: The PC market has yet to recover from slow recessionary sales. Intel got a boost from channel restocking, but future sales remain uncertain.