As Its Stock Sinks, We Wonder What's Wrong With Nokia

nokia.gifEarlier today Nokia (s NOK), the world’s largest mobile phone maker, said things weren’t going too well. The Finnish company posted a 66 percent plunge in second-quarter earnings and a 25 percent drop in sales, and said it’s no longer expecting its market share this year to increase over 2008. The comments sent shares of Nokia down more than 14 percent, to end at $13.46.

More importantly, look at the longer-term decline in Nokia shares — they’ve lost over half their value in the past 12 months. While a moribund global economy can take much of the blame, Nokia itself can’t be absolved of its sins. The company has failed to respond to threats posed by the likes of Apple (s aapl), RIM (s RIM) and Google’s (s goog) Android.

“Competition is increasing in the smartphone area as many participants rush into one of the few growing markets,” Nokia Chief Executive Officer Olli-Pekka Kallasvuo said in a call with analysts. Is the company just realizing this now?

The way I see it, Nokia is under siege from its own legacy. The company has become so comfortable with its position as the No. 1 handset maker that it’s failed to realize that the ground is shifting under its feet. It reminds me of Dell (s dell), which became the top dog in the computer business by selling a lot of cheap machines even though there’s more money to be made by selling a few higher-end computers than many cheap ones. Dell also failed to realize that people were looking for more than just generic computers — smartphones and music players, for example.

Nokia for the longest time was doing the right thing — selling bazillions of cheap phones and then augmenting them with expensive, high-end superphones. It was a cushy life. But it got too comfortable with its top-dog status.

It’s failed to recognize the threat posed by web-centric platforms developed by U.S. companies. Nokia, despite all its talk about its Ovi service, doesn’t really have web DNA. It’s a handset maker, trying hard to remake itself as a web-centric, software and services-oriented company. Which isn’t quite working. For proof, look no further than the Nokia N97 and the lukewarm response that it received.

As a company, Nokia finds itself in an unfamiliar place — that of reacting, playing defense. It is constantly responding to what others are doing. The irony is that Nokia has always been the one with the grand vision, bold ideas and multibillion-dollar innovation budget. And yet it can’t seem to put all that together to build game-changing products of tomorrow. Instead it keeps making noise about incremental changes to its line-ups. It’s started confusing the trees for the forest.

In my many years of covering Nokia, the company could never satisfactorily tell me why it hadn’t been able to get a strong foothold in the U.S. The typical reply was that carriers were hard to work with. Fair enough — by now we all know that U.S. mobile carriers are the ones that put the MOB in mobile.

I have another explanation: Nokia has never made a handset that U.S. carriers would have no choice but to carry, a handset that was radical enough that a carrier would actually give the company a piece of monthly subscriber revenues. Apple got AT&T (s t) hooked on the iPhone. How? By designing a game-changing product.

While it’s fashionable to focus on Apple’s iPhone, it’s Google’s Android that poses the real threat to Nokia and its long-in-the-tooth Symbian platform. Industry sources tell me that there are many Asian vendors building cheap, Android-based feature phones, and they will become a big threat to Nokia’s low-end phone business in the coming years.

Nokia’s response to the threat posted by the newbies has been reminiscent of Digital Equipment’s when it was faced with a growing tide of competition from PC makers like Compaq — it ignored it. And in the end, Compaq bought Digital. A better model would be Intel’s (s intc) reaction to competition from Japanese memory chip makers: Intel dumped its commodity-DRAM business and put all its chips on microprocessors. The rest, of course, is history. Nokia needs to do something equally drastic and dramatic. Any ideas?