Nokia's smartphone gets deadpan debut as carriers skip subsidies

Nokia (NOK) is getting its comeuppance.

While pre-orders for the upcoming Apple (AAPL) iPhone 3G S have already sold out, and Research In Motion (RIMM) has announced its new BlackBerry offering, the Tour 9630, Nokia's new N97 smartphone is barely getting any media attention. U.S. sales of this device are likely to be disappointing.

Yet the lack of attention has nothing to do with the product itself. The N97 smartphone is really a mini computer that lets you make phone calls. It is sleek, comes complete with a five megapixel camera, the latest version of the Symbian operating system and an iPhone-like touchscreen that pivots up to reveal a qwerty keyboard.

It offers up to 37 hours of music and up to 4.5 hours of video -- you can use it to shoot videos at 30 frames per second and upload the video to online sites such as Twitter or Flickr. There are even widgets that provide live information, such as social chatter from Facebook, weather and news, all sent directly to the handset. By many accounts, it is as good – or better – than competing smartphones available today.

So why the deadpan debut? You have to look back to understand. Nokia was a big player in the U.S. market in the late 1990s and early 2000s, but it lost market share to Motorola (MOT) and others when it refused to build a clamshell device and decided not to build phones that would operate on CDMA networks -- the technology used by carriers such as Verizon Wireless (VZ) and Sprint (S).

Nokia also opted not to customize its phones for different carriers by making changes to the user interface and by providing specific carrier applications. Such customization would only rip into margins, it reasoned.

The result: U.S. carriers are stiff-arming Nokia. While AT&T (T) does sell a Nokia phone -- the E71x -- the carriers are overloaded with BlackBerrys, iPhones and Androids.

That's a big problem for Nokia, whose U.S. market share has fallen from nearly 30 percent in 2004 to about 8 percent today. The wireless carriers dominate the cellphone distribution business and subsidize the price.

"Carriers don't need to subsidize a ton of devices and it's not clear that the N97 is vastly better than anything competitors are offering," says Matthew Thornton, Senior Research Analyst at Avian Securities in Boston.

You can still buy an N97 at Nokia's flagship stores in New York and Chicago or online. But it will set you back $700. That compares to about $200 (with a two year contract), for the new BlackBerry Tour, which will be sold through Sprint and Verizon, and $200 for the Palm Pre, sold through Sprint and just $99 for the iPhone 3G S, sold by AT&T.

None of this has stopped Nokia from continuing to woo the wireless operators. It has opened three research labs in the U.S. to help build devices for the U.S. market. It has also created the new Ovi Store which offers downloadable applications such as entertainment apps. AT&T has said that it will be the first U.S. carrier to integrate its service with the Ovi Store later this year.

That's good news for a company that has been through hard times. In its first quarter, Nokia's revenues fell to 9.27 billion Euros from 12.6 billion Euros a year earlier. Net income dropped 90 percent on a year-over-year basis to 122 million Euros and the company posted its first ever pre-tax loss of 12 million Euros. Its global market share has fallen from 40percent in 2008 to about 37percent today.

While sales of cellphones are expected to fall 10 percent this year, sales of smartphones are actually forecasted to grow about 13 percent.

Nokia's got the smartphone. Now it just needs the subsidies.

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