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TMFEditorsDesk (< 20)

March of the Smartphones

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July 20, 2009 – Comments (4) | RELATED TICKERS: AAPL , BBRY , NOK

We tend to write about smartphones a lot of Fool.com, specifically regarding Research in Motion, Apple, and Nokia. In case anyone was wondering where the fascination on these handy little gadgets comes from, here's some interesting figures to consider:

http://online.wsj.com/article/SB124805149501664033.html (Subscription Required)

Estimates from Deutsche Bank say that Apple and RIM, while only controlling a 3% global market share last year, accounted for 35% of all cell phones operating profit.

As amazing as that figure looks, this year the two are expected to claim a 5% market share and 58% of total operating profits. While commoditized regular cell phones (Think that old RAZR phone you see people carrying around) sell at cutthroat prices, smartphones continue to sell at premium prices and grow market share.

The question becomes, who are these laggards that control most the market, but generate little to no return. Nokia manufactured 46% of industry phones and generated over 55% total operating profits last year. That leaves the rest of the industry (Motorola, Samsung, LG, and Sony Ericcson) controlling about 50% of market share and only generating 20% of all operating profits.

Although, you can probably add Nokia to the laggards pile at the end of this year, Apple and RIM’s increase in operating profits as a percent of the market will most likely come at their expense.

So, what’s the downside in all this? Notably, there’s fairly large growth assumptions built into these companies. Apple sells for about 27 times earnings and RIM sells for about 20. Nokia’s typically seen as the industry “value play,” but still sells for about 16 times earnings despite the struggles it faces.

Even with Apple and RIM moving towards preeminence, cell phones remain a very fluid and fast-moving field. Just years ago Motorola was a telecom darling, but failed to innovate and create a smartphone that had the same appeal as RIM or Apple. Today it trades for about a quarter those prices. The hope for Apple and RIM investors is that their phones have more unique capabilities that keep consumers tied to their products. Think about the difference between swapping out an old flip phone for a new one versus swapping out an iPhone for a different brand.

However, even with the increased brand loyalty, if the industry sees another shift like Intel and Nokia’s plans to build a platform that brings smartphones even closer to the capabilities of full-functioning computers, you could see some of the current high flyers left in the dust. Buyers beware.

4 Comments – Post Your Own

#1) On July 20, 2009 at 12:38 PM, saunafool (98.81) wrote:

I just upgraded to a Blackberry Bold. Very cool device.

I don't think Nokia is far behind on their devices. They have some great phones on the shelves in Europe. In the U.S. they have had 2 problems for a long time. They run Symbian operating system, so your company enterprise email needs to support Symbian. The company we outsource email to (Mailstreet) does not support Symbian. So, no Nokia.

The other thing with Nokia is that they make money on the entry level phones in Africa, India, China. Almost no one else can profit in that space.

Yet, having phones across the full spectrum does leave them in a bit of a quagmire. They have about 15 models in the mid-range phones which all seem to be about the same product--maybe a different camera, different MB of music, different shape... On the high end, Apple and Blackberry can focus on 2 or 3 products. Nokia has to manage about 30 products. Larger market share globally, but probably just too many options.

sf (NOK shareholder)

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#2) On July 20, 2009 at 12:59 PM, UltraContrarian (31.23) wrote:

The other thing with Nokia is that they make money on the entry level phones in Africa, India, China. Almost no one else can profit in that space.

On the other hand, there are several small phone manufacturers in China (CNTF, ORS, QXM, etc.) that sell more phones per year than PALM - at a profit, unlike PALM - while trading for less than 5% of its market cap.

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#3) On July 20, 2009 at 1:03 PM, TMFRhino (97.41) wrote:

I think that's a spot-on analysis of the situation sf. They're actually doing fairly well in emerging markets which provides a relatively stable product line to offset reductions in different segments, but the margins will never be fantastic.

In my opinion, the N97 is a decent looking phone, but has about zero chance of catching up with Apple or RIM in America. Not that Nokia needs America, it's just that Apple/RIM are carving up the high end niche comfortably in America and spreading out across the globe. Meanwhile Nokia has just about lost their shot at the American market and are playing defense everywhere else. Not an enviable position.

-- Eric (Original blog post author)

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#4) On July 20, 2009 at 3:59 PM, TMFEditorsDesk (< 20) wrote:

Here's an article from Fool writer Tim Beyers on the subject:

http://www.fool.com/investing/general/2009/07/20/meet-telecoms-new-kingmakers.aspx

Tim focuses on software being the new key to profits in the telecom sector.

 

-- Eric

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