Nokia Must Hold the Line on Prices

Embattled Finnish cell-phone giant Nokia (NYS: NOK) , just barely out of the gates with the launch of its new line of smartphones, is already getting pressure from U.K. mobile operators to cut handset pricing. Here's what's going on, and why the company must not give in.

What do you mean it's not free?
Late last year, Nokia launched its flagship smartphone, the Lumia 800, in continental Europe and the U.K. The phone was priced to compete with high-end devices from rivals such as Apple (NAS: AAPL) and Samsung, but it failed to make it into the list of top 10 handsets by sales in the run up to Christmas.

Now mobile operators are already putting pressure on Nokia to lower the price of the Lumia 710, a lower-end smartphone the company is getting ready to launch in the U.K. Operators there reportedly want a budget offering, since many in the U.K. still know the Nokia brand for lower-cost, reliable handsets.

"Feature phones" is the nice way of putting it
You might not think it, but Nokia is the world's largest cell-phone manufacturer by volume, still shipping more than a third of the world's handsets. The problem is, the vast majority of those handsets are "feature phones," i.e., not smartphones.

The Lumia line was designed to get Nokia back in the smartphone game, which is the only real game left in town. It uses the Microsoft (NAS: MSFT) Windows Phone operating system. They're not the first smartphones to do so, but they are the ones both Microsoft and Nokia are betting on to change the game for both companies.

Nokia should hold firm on pricing
Being pressured so soon to back pricing down can't be construed as a good sign for Nokia, or Microsoft for that matter. Both companies need this partnership to work. In a world where, thanks to Google (NAS: GOOG) Android, even smartphones are becoming more and more of a commodity, the two companies need to distinguish their product.

Android is free and can be tweaked to run on just about any smartphone handset. It's the Microsoft Windows of the smartphone world. Nokia instead needs to be Apple, whose iPhone is a highly differentiated product that demands a price premium.

There's room in the smartphone market for a third major player, and Nokia has the size, reach, and financial firepower to pull it off. The Microsoft OS really is different from either Android or iOS, Apple's operating system. And though the stock price is in the basement, Nokia is still a company worth watching. It's starting from scratch in the smartphone market, and it needs to be given more time to get traction. As such, Nokia should hold firm on its handset pricing, lest the brand lose cachet in consumers' eyes and the products do, once again, become commodities.

3 hidden winners of the smartphone revolution
Of course, these big brutes aren't the only smartphone-sector investments out there. Learn about three sleeper stocks perfectly positioned to cash in on the booming smartphone market in this Motley Fool special free report: "3 Hidden Winners of the iPhone, iPad, and Android Revolution. Get your copy while the stocks are hot.

At the time thisarticle was published Fool contributorJohn Grgurichworked in the cell-phone industry when the latest and greatest handheld phone was still lovingly referred to as "the brick," but he owns no shares of any of the companies mentioned in this column. The Motley Fool, however, owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, and Apple and creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has a scintillatingdisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.