A Dangerous Low-Price Gambit for Nokia

 | Apr 11, 2012 | 10:35 AM EDT
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Nokia (NOK) is plumbing new 52-week lows this morning on a profit warning. What's worse, its high-risk strategy in the smartphone segment could mean even tougher times ahead.

The company just started selling the Lumia 900 phone in the U.S. on Sunday, and it's off to a bit of a rough start with a software glitch. Nokia has offered customers $100 credit in software or apps to ease the pain.

Some of the Nokia bulls (although I don't know many) point to Lumia selling well on Amazon as a good sign. And CEO Stephen Elop said he was pleased with the sales of the phone so far. Of course, what is he going to say?

The Lumia has an average selling price of 220 euro in Europe. In the U.S., they're bringing it to market at $99 -- on a plan. Will it work?

I guess the bigger question is, what can Nokia do to turn itslef around and become an attractive investment again?

Plenty of folks have been negative on Nokia, Research In Motion (RIM), AOL (AOL) and Yahoo! (YHOO) for a while. But there's a big difference among them -- the handset makers are still in a free fall when it comes to their market share in the smartphone and feature phone markets.

Horace Dediu at Asymco tweeted this morning that Nokia's smartphone share has dropped to 8% in Q1, down from 12% in Q4. It was at 24% a year ago and 40% three years ago. RIM has had a similar kind of fall in the smartphone market.

AOL and Yahoo! -- though they're considered old and Web 1.0 -- are still bringing in traffic and making money. There's been a floor for both AOL and Yahoo! in the last year: For AOL, it was $10 last August; for Yahoo!, it's been around these current levels.

With RIM or Nokia, every new floor brings another new floor below it.

So how will RIM and Nokia compete in the smartphone market -- price, or differentiation? Harvard Business School professor Michael Porter says those are the only means to compete in any market. You can do it on price (like Wal-Mart (WMT) and Amazon (AMZN)) or you can do it on differentiation (like Apple (AAPL) in smartphones).

Apple has sought to have the best smartphone and tablets in the market. They've also been pushing the prices down in the tablet space so the cheap Asian manufacturers can't compete.

In smartphones, Apple has maintained high average sale prices. Maybe that's why Nokia decided it would compete on price (with a $99 smartphone). On the surface, it makes sense. After all, Nokia really owned the low-end feature phone and smartphone markets for a long time -- especially in the emerging markets. That's how the company got such high market share in the first place. Maybe it can just pick up the low end of the market. But Apple's there too, despite the high average selling price on the latest iPhone -- you can now get a 3GS iPhone for free on an AT&T contract.

The big question for Nokia: Will people rather own the Lumia 900 at $99 or a 3GS for free? I suspect most will still prefer the two-version-old iPhone.

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