Telcos hold key to Nokia PC success

HELSINKI, FINLAND: Nokia's success in the fiercely competitive laptop market will depend on telecom operators able to offer the cellphone giant an opening not available to most PC brands.

Nokia will exploit its long ties with operators such as Vodafone and Deutsche Telekom to get into homes at lower cost, with carriers subsidising the price of the netbook in return for revenue from long contracts.

Operators in mature markets are already eagerly offering netbooks, which allow them to sell an additional Internet connection in a market where everybody owns phones, and where buying customers from rivals is expensive.

Carriers shifting money reserved for phone subsidies into netbook sales could have pushed Nokia into making its own PCs.

"Nokia really had little choice but to enter the cellular netbook market," said Neil Mawston, an analyst at Strategy Analytics. "Netbooks are a high-growth category that mobile operators in Western Europe are piling into."

Nokia last week showcased its first netbook -- pitting it against PC giants such as Hewlett-Packard, Dell and Lenovo -- and positioned it at the luxury end of the market with a price of 575 euros ($820), before local taxes.

The move comes as PC firms encroach into its territory, with Dell in a tie-up with China Mobile to launch smartphones in the world's largest mobile phone market, and Acer launching its own line earlier this year.

Netbook PCs, pioneered by Taiwan's Asustek, are low-cost computers optimised for Internet surfing. Their sales are forecast to more than double this year to 26 million, helped by penny-pinching consumers looking to rein in spending.

Despite the fast growth the netbook industry is still small when compared to cellphones -- Nokia alone sold more than 30 million smartphones in January-June.

Nokia's business model for its netbook would be similar to that already in place for its phones on many markets, where operator subsidies allow consumers to buy phones at a much reduced price and often for free.

"Nokia's edge here over the Taiwanese rivals lies in the strong relationships with major European mobile carriers. This kind of luxury device probably does need strong operator support to thrive in the current chilly consumer climate," said Tero Kuittinen, analyst with MKM Partners.

But operator subsidies, which fluctuate wildly by region, remain unreliable as telecom firms are likely to pressure Nokia to lower prices if their own business is affected.

Many telecom operators in mature markets have already indicated that revenue and margins could come under pressure this year as consumers spend less, making it less likely for them to provide heavy subsidies on any products.

Low risks from low-margins?

Nokia has not given any forecast for how many PCs it hopes to sell, but most analysts agree that the firm is likely to remain a small player in an already crowded market.

As a possible indication of demand, wireless data card maker Option said last week Nokia had ordered 100,000 connectivity modules for the netbook.

Analysts also point to the lower profit margins in the PC business, with some Asian producers such as Lenovo and Asustek barely in the black, while Dell's operating profit margin was 5.2 per cent last quarter.

Nokia has been used to around 20 per cent operating profit margins for handsets in recent years and during recession the margin dropped to just 12.2 per cent last quarter.

"These are completely different businesses altogether," said Bob O'Donell, an IDC analyst. "Nokia's got a very tough game to play, and it's going to be very tough for them to compete in a business that already has so many big players."

However, Nokia is entering the business with relatively small financial risk: it has outsourced manufacturing and its core PC team is just some 30 people.

But it ready to scale up fast and to use its own low-cost manufacturing machine -- key to its success in the phone industry.

If the PC move fails the bigger risk could be a damage to its brand -- one of the most valuable in the world.