Nokia's warning is wake-up call for rivals

LONDON (Reuters) - Nokia (NOK1V.HE) blamed price-cutting by rivals for its loss of market share this quarter, but its warning may be a sign that profitable growth at the rates the industry has been enjoying is nearing its limit.

Coming at the end of a week in which the world's top wireless chip maker said it was seeing signs that consumer demand for phones was slowing, the news from Nokia, the world's biggest cellphone maker, sent out waves of alarm to investors primed to flee at the first sign of trouble.

Nokia has lost more than 18 percent of its value since August 29, including an 8 percent plunge for its U.S. shares on the New York Stock Exchange on Friday.

Although most analysts agreed the market reaction was overdone -- Nokia shares fell to their lowest level in nearly three years -- there was bad news for the wider industry in the company's short statement and later conference call.

Nokia cited weaker consumer confidence in several markets after bearish comments from chip makers Qualcomm (QCOM.O) and Texas Instruments TXN.N earlier in the week. The phone maker said it was facing tougher competition in entry markets, its powerhouse in recent years.

"It took time for Nokia to feel the pain because they are in a better place. Motorola MOT.N, Sony Ericsson (6758.T)(ERICb.ST) and LG (066570.KS) already started feeling it in Q1 and Q2," said Gartner analyst Carolina Milanesi.

"I think the bottom line is that if even Nokia is feeling the pain, then the market is really in trouble," added Milanesi, the research firm's chief handsets analyst.

Nokia said it was protecting its profit at the price of losing market share if necessary, saying it had made a tactical decision not to be drawn into a price war.

But several sources told Reuters that rivals such as Samsung (005930.KS), Sony Ericsson and LG as well as a host of smaller phone makers had likely been responding to price cuts from Nokia, which commands a 40 percent share of the market.

Nokia, which said on Friday that phone and services margins would likely dip below 20 percent this quarter from just over 20 percent last quarter, may simply have reached its limit.

"Nokia, as far as we can make out, has been slashing prices quite a lot over the last few months or so," said Neil Mawston, chief wireless analyst with research firm Strategy Analytics.

"It's the first time I can recall such a bearish comment since shipments of their iconic 3310/3330 candybar phones collapsed overnight in first quarter of 2004."

Nomura analyst Richard Windsor said it could take a quarter or two "before normality resumes" for Nokia.

CHRONIC OVERSUPPLY

Nokia stuck to its forecast, raised two months ago, for the overall handset market to grow at least 10 percent in volume this year from the 1.14 billion phones that were sold last year -- although it has said the market will shrink in euro terms.

But many question if the industry can afford to continue cutting prices at such a rate that a billion-plus new phones are sold every year.

Growth is already slowing from the 16 percent increase seen in 2007 as mature markets such as western Europe and the United States become saturated.

And Qualcomm Chief Executive Paul Jacobs told CNBC television earlier this week that he was seeing signs that consumers in developed markets were taking longer to upgrade their phones to new models. Analysts say consumers have tended to replace handsets every 18 months on average.

Texas Instruments called the wireless market "uninspiring," which JPMorgan analyst Ehud Gelblum cut his forecast for this quarter's cellphone sales for this year and next year.

Gartner estimated earlier this year that just 30 percent of mobile devices sold in 2008 would be bought by consumers in mature markets, with growth coming from emerging markets, where many consumers would be buying their first phone.

Until now, much of these markets have been served by Nokia, whose size has allowed it to sell phones for under $30. Nokia's admission that it is coming under pressure in emerging markets is extremely worrying, says Strategy Analytics' Mawston.

"Most alarming for me is that they're saying they're seeing more pressure in the entry tier. That really defines their profits and volumes. They get a lot of their economies of scale out of it. They really dominate that area," he says.

"There's been chronic oversupply in the market for the last couple of years now. If Nokia can't weather the competition then it does raise question marks over the other vendors in the market as well."

(Additional reporting by Sinead Carew in New York and Tarmo

Virki in Helsinki; Editing by Erica Billingham)