nokia (eisha)
TRANSCRIPT
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NOKIA Its tough being #1
HAAS SCHOOL OF BUSINESS, UC BERKELEY
MARKETING FOR HIGH TECH ENTREPRENEURS
FALL2001
ANDREW ISAACS
Prepared by:
Jill Alvidrez, Peimin Chi, Nipul Chokshi
Sarang Dalal, Steve Sinha, Rahul Shah, Nancy Suh
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TABLE OF CONTENTS
INTRODUCTION ................................................ ........................................................ ................... 4
INDUSTRY OVERVIEW........................................................ ........................................................ 5
VALUE CHAIN .................................................................................................................................. 5
PLAYERS .......................................................................................................................................... 5
INDUSTRY GROWTH RATES .............................................................................................................. 6
NOKIA MARKETING STRATEGY..................................................................................... .......... 7
INDUSTRY TRENDS..................................................... ....................................................... ........ 10
KEYDECISIONS FACING NOKIA ..................................................................................................... 12
RECOMMENDATIONS......................................................... ...................................................... 13
RESIST COMMODITIZATION ........................................................................................................... 13
FOCUS ON REPLACEMENT MARKET ............................................................................................... 15
ENABLE DATA-DRIVEN SERVICES .................................................................................................. 16
FOCUS ON THE CDMA MARKET ..................................................................................................... 17
CONCLUSIONS................................................... ........................................................ ................. 19
APPENDIX.................................................. ........................................................ .......................... 20
ADDITIONAL REFERENCES :............................................................................................................ 23
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INTRODUCTION
Nokia is currently the largest mobile phone manufacturer in the world. With sales of $27 bn in
2000, it has about twice the market share of its closest rival, Motorola. While it is in a very
strong leadership position right now, the future of the company is in balance as the industry
matures. The slowdown in the economy has affected new subscriber growth, while handsets are
increasingly becoming a commodity item with little to distinguish between different brands. At
the same time, huge investments need to be made to upgrade to 3G technologies. In the midst of
all this turmoil, it is interesting to see how Nokia will be able to maintain its brand image and
customer loyalty, factors that have traditionally been its strong points.
Headquartered in Finland, Nokias business is divided into four divisions:
Nokia Mobile Phones
Nokia Networks
Nokia Ventures Organizations
Nokia Research Center
In this report, however, we analyze the U.S. mobile phones business of Nokia. The initial
sections of our report focus on the mobile phone industry in general and Nokias market strategy
till now. We then analyze the current industry trends and make recommendations to Nokia about
their future strategy. Briefly, these are to resist commoditization, concentrate on the replacement
market, enable data-driven services and finally to focus on the CDMA market in the longer term.
We believe rethinking their marketing strategy will enable Nokia to remain the dominant playerin the handset market as mobile communications enter the next generation.
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INDUSTRY OVERVIEW
Value Chain
To fully understand Nokias position in the mobile telephony industry, we must first assess the
industry value chain (Fig. 2). Handset end- users do not purchase directly from Nokia instead,
they enroll in cellular calling plans from service providers. Nokia sells its phones to the mobile
service provider after building each handset using many components manufactured by other
vendors. This position puts Nokia at a negotiating disadvantage, where it is constrained by the
costs of the handset components themselves, while it is simultaneously at the mercy of the
service provider when selecting a handset selling price.
Players
According to Goldman Sachs 1, there are currently four tiers of players in the handset market:
Tier 1: Nokia
Tier 2: Motorola and Ericsson
Tier 3: Alcatel, Siemens, Samsung, etc.
Tier 4: the rest
Nokia swept into the market, overtaking both Motorola and Ericsson to achieve the largest
handset sales during 1998. The failure of Motorola to move from analog to digital, and of
Ericsson to pursue fashionable designs enabled Nokias market position to improve. Since then,
both Motorola and Ericsson have been aggressively playing catch-up, attempting to leverage
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their strengths in technology and semiconductors to attack Nokias 35% share in the overall
North American market2 and 64.7% share in the large GSM/TDMA market3.
Tier 3 companies cater to a lower-end, lower-margin market. Relative lack of economies of
scale, product range, and brand equity make market dominance or even parity a very difficult
challenge for these smaller players. However, Samsung with its Sprint alliance is well-
positioned in the emerging CDMA market, and is capable of threatening the larger three
companies.
Industry Growth Rates
The wireless handset industry has grown very rapidly, with a compounded annual growth rate in
handset sales of 57% over the past four years4 and 87 million estimated sales in 2001 in the U.S
(Fig. 1). This trend is not an indicator of future growth, though. Analysts predict a leveling off
of sales rates, with Merrill Lynch predicting 16% growth for 2001 and 24% for 20024, while
Goldman Sachs estimates a 22% growth rate per year over 2000-20055
. They cite Americas
rising handset penetration level, moving to the point of saturation; currently, penetration is at
50%; 70% is predicted by 2003. Also, delays in the adoption of wireless data standards and lack
of other important tangible benefits in new phone technology have slowed the consumers
perceived need for new mobile phones.
1 Goldman Sachs Global Equity Research, Mobile Handsets report, September 5, 2000
2 JP Morgan H&Q, Global Technology & Telecom Weekly, April 26, 2001
3 Info-tech Trends, www.infotechtrends.com
4 Merrill Lynch, Wireless Equipment Report, April 9th, 2001
5 Goldman Sachs Global Equity Research, Telecom Equipment report, October 18, 2000
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NOKIA MARKETING STRATEGY
To provide context to the recommendations discussed in this paper, an analysis of the key
strengths of its current marketing strategy is imperative. Specifically, an understanding of its
recent success provides hints regarding the particular competencies that Nokia should leverage as
it develops a strategy to maintain market leadership and profitable growth.
Nokia is currently the worlds largest mobile phone manufacturer, with 64.4% of the
GSM/TDMA market and 2.9% of the CDMA market6. Despite the argument that the U.S.
handset market is about to follow in the footsteps of the PC industry in which the product is
becoming increasingly commoditized Nokia has thus far managed to establish a powerful
brand that has been widely recognized as the key to its recent successes. It has been ranked as
the worlds fifth most valuable brand, following Coca-Cola, Microsoft, IBM, and Intel7. The
Nokia brand is an asset that has been carefully cultivated during the past ten years, throughout
which the company has managed to predict and satisfy consumers needs and preferences ahead
the competition.
In 1989, Matti Alahuhta developed a new strategy for Nokia that focused on three key points:
the development of a product with global appeal
nimble movement to sell it internationally
6 Infotech Trends7
Financial Times, Inside Track: The Nordic minnow that took over the sea, London Edition, June20,2001.
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most importantly, a commitment to learning what consumers want, without
consideration of the limits of existing technology
By 1990, Nokia had already begun to identify some of the features that would eventually
establish it as the leader in setting industry benchmarks. The Nokia 2110, launched that year,
gained popularity with a large screen, elegant design, and a clean user interface. During the
early 1990s, Frank Nuovo, head of Nokias worldwide design team, led Nokia to design phones
that offered customizable rings, elliptical designs, and custom faceplates 8. Although such
features may appear trivial or obvious in hindsight, Nokia continued to gain market share by
paying attention to the details that worked to enhance ease of use and customizable preferences.
The insight that the handset could be a stylish fashion accessory, rather than merely a
communication tool, allowed Nokia to lead the trends and direction of the entire handset
industry.
In addition to a superior design effort, Nokia assembled a diverse team to research how
consumers can use its phones. The team consisted of engineers, graphic designers, sociologists,
psychologists, and even a theatre director. While theyve designed similar, easily recognized
handsets, Nokia has successfully segmented the market to targe t specific demographic groups.
For example, in the year 2000, different phones were marketed to appeal to the rugged user,
the sophisticated user, and the youth market, among others.
8Cahners Business Information, A Tale of Two Mobile Telephone Makers, May 2000.
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With all these product innovations, designed to satisfy customer preferences, Nokia has
reinforced its brand image of providing cutting-edge communications technology. Analysts have
positively characterized the company by describing it as young, sexy, sophisticated, hip and
generally with it. 8 Alternatively, theyve compared Ericsson as an austere, conservative,
middle-aged Swedish engineer, which supports the widely held belief that Ericssons handsets
are unfashionable. Since Motorola lethargically moved from analog to digital phones, Nokia
was able to overtake them as the leader in the handset market by 1998. Subsequently, Nokia
leveraged its superior marketing strategies and powerful brand to avoid the price wars that have
recently afflicted its key competitors9.
9CNET, Nokia expects to meet estimates, September 12, 2001.
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INDUSTRY TRENDS
The near-term future of the wireless space in which Nokia plays is characterized by several
trends:
Commoditization of the handset
Outsourced manufacturing of handsets
Technology trend towards always-on, always-connected devices
Commoditization of the handset
Increasingly, we are observing that handsets are following the pattern of typical consumer
electronics; the trend is toward phones with improved features at lower prices. Simultaneously,
there are more manufacturers who will deliver cheaper handsets to capture the mass market. In
early September, Ericsson announced plans to license its cellular technology to virtually all
comers. This means that state-of-the-art cellular technology, formerly the domain of a small
club of telecom equipment manufacturers, will now be available to any gadget-maker that wants
to turn a camera, PDA, or music player into a wireless device.10 At the same time, we are finding
that handset differentiation is increasingly based on price as opposed to features. In the past few
years, Nokia was able to succeed in the handset industry by implementing an aggressive
branding campaign to effectively target the end-user market.
10 BusinessWeek Online, Sept 24, 2001, Can Nokia Keep Outrunning the Pack?
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Outsourced manufacturing of handsets
Over the past six months, both Ericsson and Motorola have increased the use of contract
manufacturers to make its phones. In addition, Motorola, Nokia, and Ericsson have announced
layoffs in handset manufacturing plants as they shift production between existing plants to
maximize the use of fixed assets.11 Specifically, we observe the following:
Ericsson announced in January that it would exit its unprofitable handset manufacturing
business and let Flextronics make nearly all its phones. It is also using Arima and GVC in
Taiwan to design and manufacture its low-end product line.
Last year in May, Motorola signed a $30 billion, five-year agreement with Flextronics for
mobile phones and messaging devices. In December, Motorola sold handset and
messaging manufacturing operations in Ireland and Iowa to Celestica, and signed an
agreement to outsource one billion dollars worth of equipment.
In August, Siemens signed an agreement to outsource the production of 33 million
mobile phones to Flextronics for a three-year period. It currently outsources about 30% of
its manufacturing volume.
Trend towards always-on, always-connected devices
The General Packet Radio Service (GPRS) is a non-voice service developed as part of the GSM
path to 3G. The system adds packet data and the ability to use more than one of the GSM time
slots at a time.12 The packet-based network enables devices to always remain connected to the
11 Merrill Lynch Wireless Equipment Report, April 2001, p. 37
12 First Global Research, Sept 21, 2001, Nokia Is this leader lagging?
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network and provides for data speeds between 10Kbps and 100Kbps. The current wireless
Internet scheme requires the user to establish a connection to the wireless network operator,
thereby burning up valuable minutes and raising connection costs for the end user. In addition to
lower cost, a packet-based network enables the end user to receive real-time notifications from
the Web. Imagine an Internet-based auction service that proactively sends real-time notifications
to a potential buyer of the latest bids for a particular item. Or imagine a stock quote service that
alerts the user to market activity.
Key Decisions Facing Nokia
Nokia is confronted with the age-old question of how to maintain growth as the market reaches
maturity. It has the advantages of scale, experience, and name recognition, but will it be nimble
enough to adjust with the changing industry landscape? A number of forces in the mobile phone
industry do not bode well for Nokia. These include commoditization of the handset, impending
saturation of the U.S. market, slow emergence of a single standard for third-generation
technologies, and the possibility of the handset becoming integrated with other devices.
As mobile phones approach the end of their growth phase in the U.S. market, Nokia faces a
number of strategic decisions about where to focus its priorities. Should Nokia continue building
its brand when there may not even be a handset in ten years? Should Nokia try to be the Dell of
the handset market and compete solely on cost? Which customers should it target first-time
buyers or the replacement market? On which technology should it focus its resources?
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RECOMMENDATIONS
Resist Commoditization
Our first recommendation is that Nokia resist commoditization. While the commoditization of
the handset may be an undeniable, inexorable process, we recommend that Nokia make attempts
to slow the process down. Nokias brand equity stands as one if its strongest competitive
advantages. By continuing to build its brand, Nokia will be able to leverage that brand in short-
term handset sales as well as in future long-term dealings with other entities in the value chain
for telecommunications services. Nokia should strengthen its brand through both push and pull
marketing; push marketing is the targeting of the next link in the value chain, while pull
marketing is the targeting of end-users in such a way that they ultimately pull the product
through the value chain13. See Figure 3 of the Appendix.
As described earlier, Nokias current position as a handset maker in the value chain is weak.
With a direct line to customers, it is the service operators (e.g., AT&T, Verizon, Sprint PCS, and
Cingular) who wield the most power in deciding what customers see with respect to the
marketing mix: product, price, place, and promotion. In fact, handset makers in Japan are
relegated to a single-letter designation on the handset. A Fujitsu phone, for example, simply
shows F on the phone accompanied by a model number. Service providers want customers to
see the names of their respective companies, not those of the handset makers.
13Winer, Russell S.Marketing Management. Prentice Hall, New Jersey. 2000.
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Nokia should take steps to ensure that the U.S. market does not follow the same path as the
Japanese market with respect to the name on the handset. One way to do this is to ask the
service providers to sign a long-term contract, such as a ten-year agreement, stipulating that the
brand name Nokia remain on the phone. If Nokia is ever going to siphon power away from the
service providers, now is the time. Service providers are facing intense competition and Nokia
has built such a strong brand that customers are asking for Nokia phones. Service providers are
already leveraging the Nokia brand to attract customers. For example, Sprint PCS currently has
a promotion specifically touting a Nokia phone as a sign-up incentive for its service.
On the pull side, to encourage customers to purchase its phones, Nokia should continue with
direct-to-consumer advertising, including sponsorships and product placements. Nokia has an
advantage over service providers in using product placements because it is able to show a
tangible product that people would want to purchase14
. Nokia is currently sponsoring television
shows such as Alias and has strategically placed its products in movies such as The Matrix.
Nokia may achieve something similar in some ways to what Intel has done with the chip with
branding the ingredient and branding to the end-user, such that the handset brand factors into
the customers decision of service providers. In the short-term, with Nokias handsets
positioned as stylish and cutting edge, customers will continue to pay for the perceived
14If Product's Invisible, Can it be Placed? The Wall Street Journal, Marketplace section, April 9, 2001.
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added value of the brand. In the long-term, as Nokia transitions from handsets into other
markets, such as networking and Internet services, it will be able to leverage its brand; customers
will have positive associations with the name and Nokias designs may provide a sense of not
only being hip but innovative.
Focus on Replacement Market
With mobile handset penetrating through the mass market, it is becoming increasingly difficult
for handset makers to sell additional mobile phones and sustain growth. This is especially true
for a market leader like Nokia. By the end of the year 2000, approximately 58% of Europeans
and nearly 40% of Americans carried cell phones, according to Herschel Shosteck, president and
CEO of the international wireless consulting firm Herschel Shosteck Associates. With the
market approaching saturation, the only viable source of growth for the mobile handset industry
is the replacement market. Figure 4 in the Appendix shows the global trend of the handset
replacement market. Nokia has fully recognized the potential of the replacement market. Our
firm opinion continues to be that the replacement will continue to grow and the share of
replacements in the total market will grow, Matti Alahuhta, president of Nokias mobile phone
division, told Reuters (October, 2000).
The replacement market customers will be pickier about their next handset and will demand data
services (MP3 player, GPS, Mobile Vending Machine, just to name a few) in addition to voice
communications from their mobile handset. Therefore, Nokia must concentrate its efforts on
convincing existing users of the need to purchase the next generation of handsets. One way to
effectively achieve this goal is to segment the existing customers into different groups based on
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their collective characteristics and employ different marketing strategies to the different target
groups. Two groups of customers naturally come to mind for the replacement market, youth and
professional users. For the youth market, the handset should add services with an emphasis on
entertainment. For instance, MP3 players, short message services, chatting, and mobile gaming
are some promising examples. Also for the youth market, careful attention should be paid to the
design of the handset. Teenagers and young adults simply wont buy if the new handset does not
look cool or hip. For professional users, Nokia should provide the ability to remotely access
their data and files through the handset. Calendars, conference schedules, e-mails, PowerPoint
presentations, spreadsheet, and word processing documents should be obtained with the touch of
a button, at least in the corporate site, if not nationally. Due to the limited memory capacity
available to handsets, Nokia should also provide the means to transfer information from the
handset to a computer or PDA. Professional users are known to pay premium prices for
convenience; Nokia will see huge margins for its new handsets if they can provide seamless data
access services.
Enable Data-Driven Services
One way Nokia may capture the replacement market is by working with content providers and
enabling the delivery of compelling data content. With the emergence of 3G, data
communications are finally ready to be deployed for the mobile handset. As a handset
manufacturer, Nokia does not have core competence in the data content area, so key alliances
with data content providers will be beneficial in terms of delivering innovative services to
customers through Nokias handset. Nokia also needs to establish strategic partnerships with
mobile software developers so that new data services can be launched without glitches.
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To avoid repeating the dot-com experience, Nokia needs to carefully consider the kind of data
services it will offer to customers. For example, motorists will certainly value GPS and E-911
services more than, say, mobile purchasing capabilities. Nokia needs to obtain the first-mover
advantage by successfully launching at least one type of data service before its competitors. If
Nokia succeeds in this attempt, it would further establish the Nokia brand by associating
innovative data services with its line of handsets; this would likely encourage consumers to
consider Nokia when the time comes to replace their mobile phones.
Focus on the CDMA market
Over the last twelve years, Nokia has done many things right to establish market leadership. It
was one of the first companies to develop a GSM phone in 1992, and since then it has been
leading the market in TDMA technology, of which GSM is a specific standard. Its U.S. market
share for TDMA/ GSM phones is around 64.4%. However, one of the challenges Nokia faces is
to maintain its dominance as the technology evolves to 2.5G and onward to 3G. Although the
standards evolution process is not totally clear, it seems like CDMA will be the technology of
choice in the U.S. in the future. And Nokia has a big problem in that its market share for CDMA
is a paltry 2.9%.
Currently, CDMA and TDMA have roughly equal presence within the U.S., with CDMA gaining
a slight edge in 200115 (Fig. 5). Verizon and Sprint PCS are the two major carriers who have all-
digital CDMA networks. On the other hand, AT&T and Cingular use TDMA/GSM technology
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in their networks. Carriers are now starting to deploy 2.5G networks, which would continue with
current standards but offer a higher data rate; however, in the long run, 3G would probably be
deployed which is primarily based on CDMA technology (Fig. 6).
Traditionally, Nokia has been extremely good at capturing market share when the technology
changes. During the transition from analog to digital networks, Nokia managed to displace then
market leader Motorola, which was slow to catch on. Until the year 2000, it looked like the
current CDMA standard, IS-95, would migrate to cdma2000 and become the dominant standard
for 3G systems in the U.S. In late 2000, ho wever, AT&T completed a deal with NTT DoCoMo
of Japan to migrate to GSM networks and provide new services in the United States16. This
implies that W-CDMA (which is the 3G evolution of GSM) might be the preferred evolutionary
path for 3G rather than cdma200017.
This uncertainty in future standards is a hurdle as Nokia will be hard-pressed to achieve
dominance in both markets. But in any case, we feel that Nokia has to develop more handsets
that are based on CDMA so that it does not lag behind in the technology. Since its strength is in
GSM, it should develop phones for the W-CDMA standard and then move on to cdma2000.
Nokia should not allow itself to stumble on technology in the future. In contrast to our previous
recommendations, this is a longer-term issue Nokia must address.
15 Industry Standard, Jan 15, 2001, The Wide World of Wireless.
16 Wireless Developer Network, Dec 4, 2000, Tom Taulli and Dave Mock, CDMA/GSM battle moves to US soil.
17 IEEE Spectrum, Oct. 2000, Malcolm W. Oliphant, Radio Interfaces make the difference in 3G cellular systems.
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CONCLUSIONS
As we have shown, Nokia must rethink its strategies if it is to remain successful. The recent
economic slowdown coupled with impending market saturation and the demand for increased
functionality, is beginning to dramatically change the handset market.
Nokia should take aggressive measures to resist commoditization if it is to grow and continue
being profitable. We have outlined some ways that it can accomplish this. Its brand has proven
to be one of its most valuable assets, and Nokia should continue building it. Nokia must also
thoroughly research evolving customer needs and provide a positive impetus for branddifferentiation. Finally, by forming strategic alliances with industry and service providers, Nokia
can ensure and maximize its visibility to the end-user.
Nokia also needs to bring new products to market, and, as the market is showing signs of
saturation, shift its focus onto the replacement market. This means developing data-driven
services and appropriate partnerships with content providers. There simply needs to be an
incentive for existing handset owners to purchase a new Nokia handset.
Finally, Nokia should secure its long-term position by placing more R&D and marketing
emphasis on CDMA, as opposed to its current core market of TDMA. CDMA will form the
basis of third-generation mobile technology, and it would be an advantage to be seen as an a
priori leader in this domain.
While Nokias future and indeed that of the entire mobile communications industry is
growing more uncertain, Nokia is not doomed yet. As long as Nokia is open to reworking its
marketing strategies, it stands a good chance of remaining the dominant player in the handset
market and perhaps even generating larger revenues.
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APPENDIX
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34
52
72
87
0
10
2030
40
50
60
70
80
90
US
Figure 1 - US Handset Sales Volume (in mil)
Figure 2: Value Chain
Service
ProvidersConsumers
Component
Vendors
Handset
Makers
Nokia
Motorola
Ericsson
Siemens
Samsung
Others
Motorola
Phillips
Texas Instr.
Qualcomm
Cypress
RF Microdevices
Others
AT&T Wireless
Sprint PCS
Cingular
Verizon
WirelessVoicestream
Others
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Figure 3: Resist commoditization through push and pull marketing
Figure 4: Replacement market for cellular handsets
(Source: Merrill Lynch, April 2001)
CustomerNokia
Retailer
Service
Provider
Employer
PUSH
PULL
68% 61%
61%59% 48%
32%
39%
39%
41%52%
0
50
100
150
200
250
300
350
400
450
500
1997 1998 1999 2000 2001E
PhonesinMillions
Replacement
New
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Figure 5: TDMA, CDMA and analog market share in the U.S. (2001)
(Source: InfoTech Trends, 2001)
CDMA
AnalogTDMA
Figure 6: TDMA, CDMA and analog market share in the U.S. (expected, 2004)
(Source: InfoTech Trends, 2001)
CDMA
TDMA
Analog
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Additional References:
1. Letting Your Future Go (Ziff Davis Smart Business PCCG) Ziff-Davis Wire -September 12, 2001.
2. Nokia expects to meet estimates CNET Tech Sites: By Reuters, September 12, 2001.3. Nokia in the hot seat, by Rex Crum, Hoovers Online, August 22, 2001.
4. Nokia Targets Handset Replacement Market With New Product Features, Carolyn
Koo, Staff Reporter, TheStreet.com, Nov. 26, 2000.
5. Telecoms Industries Around the World Face Unfamiliar Challenges From U.S.
Downturn, Bhawani Shankar, Gartner, April 3, 2001.
6. What Will The Telecommunications Marketplace of Tomorrow Look Like?, TelcordiaTechnologies, www.ITPapers.com
7. IDC Spots Wireless Handset Sales Slump, Brian McDonough,
wireless.newsfactor.com, Aug. 28, 2001.8. Nokia says 40%-plus handset market share possible, Paul de Bendern, infoworld.com,
May 4, 2001.
9. Wireless Subscriber And Handset UpdateEquity Research Notes, US Bancorp Piper
Jaffray, Sep. 24, 2001.
10. Smart Phones From Luxury Item to Lifestyle Necessity, Karen Parnell, Perspective
Wireless Communications.
11. Data Access Fosters Growth in Cellular Handset Market, Kristen Skedd, instat.com,July 25, 2000.
12. New WAP-enabled handset is aimed at young, trendy professionals, Justin Pearse,zdnet.co.uk, Feb. 25, 2000.