I recently took possession of a Nokia E71. Having previously been of the telephones are for telephoning school it has been an eye opener - at last a telephony gadget that is also a genuine productivity helper (or at least it is the way I work) rather than a massive time-sink.

Nokia not only produces such great devices: it is a fine operating company, too, now leveraging a great manufacturing base, supply chain and emerging market position to expand into services (c/f, for example, its acquisition of Navteq for $8.1bn in July 2007).

Not that the services move is necessarily a winning deal. Navteq may generate $450m of revenue this year (at an operating margin of circa 20%) against its hefty price tag; and future analyst projections may be 'J' shaped. But it is still fair to say that service as a company-transformer is unproven: Nokia is hardware (over 38% of the global handset market) with a user base getting on for 450 million.

Unfortunately for its service aspirations, most of that is in India and China where a €30 phone does not run Nokia Maps. Although the firm no doubt plan to leverage the low end base with cheaper email, net access etc offerings that is a way off. Right now the challenge is making the return on acquisitions work on high end smart phones. And here it competes with the iPhone, Blackberry and assorted other contenders.

Anyway, the real point is that alongside the execution challenge consumer demand is withering across all geographies - and faster than most thought. To this even Nokia must bow. Communications Equipment has badly underperformed the broader market (see graph below) and within that Nokia ADRs have lost over 67% year-to-date.


This is better than Motorola but worse than Blackberry maker Research in Motion or Palm - and on that latter count one truly has to wonder why. It is not as though the end of the tunnel is visible.

One explanation is that Palm's R&D is now led by Jon Rubenstein late of Apple (where he came up with the iMac and iPod). Still, finding robust purchase - much less robust growth - in the thin soil of anaemic demand is impossible no matter how near the tree Mr Rubenstein fell. Even the mighty Mother Fruit herself, currently basking in a pe ratio of over 16.5, may well discover the same - apples to oranges it may be yet Nokia's pe is 7.5.

Next year and 2010 eps estimates are comforting for both. But in this sector those contain even more guesswork than usual.


Disclosure: Short Motorola

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