Cheaper by the globalization

Nokia's phones are getting cheaper. Maybe not in the U.S. or in Western Europe, but in Africa, the Middle East, India and China, Nokia is selling phones at a fraction of what customers are buying them for in Europe and North America. Last quarter it dragged its average sales price per handset down to 93 euros (U.S. $118), dropping from 102 euros in the second quarter.

The phones aren't just getting cheaper, they're getting less profitable. Margins from Nokia's three handset divisions fell from 33% to 29% year over year, showing Nokia is recovering less of the cost it takes to manufacturer each phone. Basically, Nokia is experiencing the downside of its global strategy to be the world's dominant handset maker. Its global handset share rose to 36% in third quarter, putting it well on target of its goal of 40% of the market, but most of that business is now coming from the developing world and emerging markets, where the price of handsets are rapidly falling as penetration grows.

Nokia isn't the only handset maker seeing price declines, though Nokia's is perhaps the most pronounced. According to the Yankee Group, the average cost of a handset fell from $155.45 in the first quarter of 2005 to $149.87 a year later. Motorola saw its average phone sales price drop by more than $12 over same period, though its handsets typically sell for $15 to $20 more than Nokia's.

Although lower prices and margins may seem like a negative pattern, it's in fact a trend that the industry has not only expected, but actively encouraged, said Ben Soppitt, director of strategic initiatives for the GSM Association. With 4 billion people without a mobile phone, the growth potential in wireless is no longer in high-end handsets. If vendors want to grow, they'll have to do it with low-cost, lower-margin devices, he said.

In fact, the GSMA has been working closely with vendors to drive costs down, sponsoring a program to develop a handset that wholesales below $30 last year. Within the next 12 to 18 months, Motorola will likely produce a handset for less than $20, Soppitt said.

“Only because of the emerging markets, vendors have started designing costs out of the phone instead of designing costs in,” Soppitt said. “The low-end has always been considered the dumping grounds for the mobile phone industry, but no longer. It's where the future lies.”

Cheap phones may be the future, but it's not a future the financial community seems to value highly. Nokia has been consistently punished on the financial exchanges as analysts focus on its falling average sales prices (ASPs) and margins. That outlook, however, refuses to take in to account the reality of the global market, said John Jackson, analyst for M:Metrics.

“The market — meaning the financial community — has an unhealthy obsession with ASPs,” Jackson said. “Nokia has an eye for sustainable market share, and it's maintained its strategic goal of 40% market share. If you want that kind of market share, you can't charge $250 for a phone.”

Nokia is focused on a very long-term strategy that can't be factored into any yearly market outlook, Jackson said. It knows if it can sell customers — who are in emerging markets — their first handset, they might have those customers' loyalty locked in for their second, third and fourth handsets, Jackson said. Considering that the potential market is 4 billion customers, the opportunities for growth are staggering, even with out the high margins and ASPs of the Western world.