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.
Second Half Rebound for Nokia?
Similarly, Nokia should see a rebound in the second half, from restocking, particularly as the company brings new handsets to market, such as the highly anticipated touch-screen N97 and the N86, which packs an 8-megapixel camera.
As for iPhone competition, the numbers are much better for Nokia than Apple. Nokia’s first response to the iPhone is the touch-screen 5800 XpressMusic. On April 16, the company revealed shipments of 2.5 million units in the first quarter and 3 million since the consumer smartphone’s November launch. By comparison, Piper Jaffray analyst Gene Munster predicts Apple shipped 3.7 million iPhones during the first quarter. Broader Wall Street consensus is closer to Kaufman Bros. analyst Shaw Wu’s estimate of 3.2 million units. Apple will reveal iPhone shipments during its April 22 earnings announcement.
Nokia’s first response to the iPhone is selling quite well. Nokia’s so-called iPhone killer, the N97, is expected by the end of June. There is more punch yet to come.
Nokia has market reach that Apple could only dream of. According to Gartner, Nokia has 37 percent market share in China-the world’s largest cell phone market-where the iPhone has no carrier distribution whatsoever. For perspective on size, one carrier, China Mobile, ended 2008 with more than 630 million subscribers. That number is more than twice the entire U.S. population.
There’s a strange blindness that obscures U.S. blog and news coverage of the iPhone. If the measure was mindshare, the iPhone would be the world’s most important handset. But based on market share, the iPhone is a tiny fish in a pond of larger, wiser fish. Nokia is biggest of them all. Market share matters-and it will matter more as Nokia launches its Ovi Store rival to Apple’s App Store.
On April 6, Barclays Capital’s Ben Reitzes raised his iPhone shipment estimate to 17.4 million for 2009. Even with quarter-on-quarter and year-over-year declines, Nokia shipped more than five times as many handsets in a single quarter than Apple expected to ship for all of 2009. Perhaps the iPhone is more water bug than tiny fish in that big pond.
Joe Wilcox is editor of Microsoft Watch.