By Michal Lev-Ram
December 28, 2007

By Michal Lev-Ram

Remember when phone companies just made phones? That strategy no longer works in today’s Internet-accessing, mobile-gaming and MP3-playing world – and it definitely won’t work in 2008. That’s why Nokia (NOK), the world’s largest phone manufacturer, is in the midst of a reorganization it says will help the company grow beyond phones and cellular equipment. The new corporate structure, which takes effect January 1, 2008, will divide the Finland-based company into three main units: Devices, services and software and markets. It’s the services and software part that stands out for a phone manufacturer – typically more concerned with churning out devices than with providing services.

But the reorg is just part of newish CEO Olli-Pekka Kallasvuo’s overall strategy of morphing Nokia into a mobile Internet company, not just a phonemaker.

“The convergence of the mobile communications and Internet industries is opening up new growth opportunities for us, both in the devices business as well as in consumer Internet services and enterprise solutions,” Kallasvuo said last June when he first announced the reorg. Since he took on the chief executive role in 2006, Kallasvuo’s already led Nokia through several software and services-related acquisitions – including digital mapmaking giant Navteq, photo-sharing service Twango and Avvenu, a Palo Alto, Calif.-based company that lets users access content on their PC via cell phone. He’s also announced the launch of Ovi (which means “door” in Finnish), a one-stop Web portal which will combine Nokia’s various mapping, music, gaming and other mobile services. Some Ovi offerings are already available to wireless users in the United Kingdom, but recent software delays (welcome to the biz, Nokia) have forced the company to postpone the launch of one of its most anticipated services – a mobile gaming platform called N-Gage.

The shifting focus on software rather than pure hardware is a big step for the wireless industry. What’s more, it’s being pushed forward by many different types of companies (not just mobile operators) and could therefore end up driving competition and, ultimately, improving the consumer experience. But according to iSuppli analyst Tina Teng, the move is nothing new for Nokia.

“Nokia’s been doing this for a long time, and this is just the next step in moving beyond the devices themselves,” says Teng, who adds that the company’s music service in particular could be a game changer and a threat to carrier-operated stores, much like Apple’s (AAPL) iTunes. “Just look at what Apple did with their Wi-Fi enabled iPhones – you don’t have to go through the cellular networks to download music anymore.”

Speaking of Apple – the extension to software and services also means that Nokia’s circle of competitors is also growing. Once restricted to traditional phonemakers like Motorola (MOT) and Samsung, the company could soon find itself neck-and-neck with cellular operators who would rather sell their own branded services, Internet-centric companies like Google (GOOG) and Yahoo (YHOO) and mobile newcomers like, you guessed it, Apple. That’s probably why, as part of Nokia’s upcoming reorg, its new chief technology officer Bob Iannucci will be based in Palo Alto, the heart of Silicon Valley, and not in the company’s Finnish motherland.

Of course, while the demand for rich mobile experiences like location-based navigation applications, mobile Web access and on-the-go gaming is growing in many developed countries, lots of people – about 50 percent of the world’s population – are still just waiting to get their hands on their first cell phone. That means that Nokia still needs to focus on spreading and improving its physical goods. Sure, with an estimated 39 percent global market share the company’s the largest phone manufacturer in the world, but, as Motorola recently demonstrated the tables can turn much faster than you think – one minute you’re riding high on the Razr’s success, the next you’re posting a $138 million quarterly loss on your handset business.

As for Nokia, it will be a while before the results of the company’s reorg can be measured. For now, the Finnish phonemaker just needs to kick the door open – by launching Ovi, that is.

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