Nokia Must Be Discounting Like Crazy. Without a Miracle, Disaster To Come?

Nokia (NOK) announced its results and the results aren't pretty. Quarterly operating profit was down year over year by 23 percent -- even though sales were up by 6 percent. The company blames it on tough competition in the mobile phone market.

No duh. The problem is that Apple (AAPL) and Google (GOOG) have rocketed ahead in smartphones. Nokia, in contrast, has nothing remotely competitive. Its numbers also suggest that the company has heavily discounted its smartphones business to try and keep market share. Unless CEO Stephen Elop reveals a brilliant new strategy next month, this company is going to take a tumble.

Nokia's earnings release suggests how difficult handset sales have become. Net sales for the devices and services division, which markets handsets, services, and accessories, increased 4 percent over last year to €8.499 billion. In constant currency, there was actually a 3 percent drop. But operating profit for that division took a far bigger tumble: 26 percent.

Even more interesting is the split in Nokia's handset sales. It has "converged devices" (includes both smartphones and mobile computers) and lower-end feature phones. The total number of phones that sold in the quarter was down by 3 percent. The mix of phone types, on the other hand, changed significantly. In the fourth quarter of 2009, 16.4 percent of all units sold were converged devices. In 2010, however, it was 22.9 percent. That's a big sales jump in a category that you might might reasonably expect to offer higher margins.

Clearly prices are dropping, but by how much? We can see by calculating the average sales price (ASP) for each quarter by device category. A caveat: because the dollar sales numbers include services and accessories, we can't get a pure number for the hardware itself. However, Apple does something similar when calculating ASPs (most recently, the iPhone was at $625 a unit), so we'll do the same here. Here are Nokia's tables showing net sales and then unit sales by hardware category:

In Q4 2009, lower-end phones had an ASP of €40.47. The ASP of converged devices was €186.78 ($256.42). In 2010, the lower-end ASP was €42.89, while the converged devices ASP was €155.74 ($213.80).

Wow. The regular handsets actually gained in average price, but the smartphones and mobile computers were down by 16.6 percent. This happened as Apple maintained or even increased the iPhone ASP at amazing levels.

So how does it compare to Research in Motion (RIMM)? According to RIM, in its 2010 Q3 (the quarter that ended in November 2009), 10.1 million devices sold represented 82 percent of the company's revenue, or $3.21 billion. That's an ASP of $317.82. In the quarter that ended last November, 14.2 million devices represented 82 percent of the company's $5.495 billion, or an ASP of $317.32. RIM saw a slight drop of 0.15 percent.

This suggests that Nokia has gained volume in smartphones only by heavy discounting to retain its carrier clients. So what happens when many smartphones get cheap? Nokia becomes far less an important company than today, unless Elop's strategy is very, very smart.

Related:

• iPhones Make Far More Margin -- 70% -- Than Analysts and Apple Watchers Think
• Verizon iPhone: Will It Really Hurt AT&T? Maybe Not
• Competition Begins To Drive Down iPhone Prices
• Apple iOS Leads in the U.S., but Google Android Hits the Passing Lane
• Cheap Smartphones Will Reshape Mobile -- for Better and Worse