The trouble with Nokia’s iPhone killer

    No. 1 handset maker unveils (sorta) its iTunes and App Store killer to little fanfare.

    By Anu Partanen

    Finally, it is here! Nokia’s Ovi store, the cellphone giant’s answer to Apple’s iTunes and App Store, and a central piece of the company’s new strategy. Well, actually, it has been here for a couple of months already, but who knew?

    If you have not heard of Ovi, no one will blame you. Nokia (NOK), the Espoo, Finland-based handset manufacturer, has chosen a peculiar strategy for launching its new online storefront. The strategy being – no launch.

    In short Ovi – “door” in company’s native Finnish – is a portal where Nokia phone users can access, store and share pictures, videos, music, maps, games, contacts, calendars, files and more. The online store is only one part of the service, a place where users can download free and paid content onto their devices. The service can be accessed both through a computer and a mobile device.

    The vision of Ovi is ambitious. Nokia is taking on not only other device manufacturers such as Samsung and LG, or smartphone royalty such as Apple (AAPL) and Research in Motion (RIMM), but social networking sites like Facebook and Twitter, too. The website has been running for couple of years already, and the store has been open for business since May.

    All the more surprising, then, that at least in the U.S. nobody seems to know the service exists.

    The launch of Apple’s App Store for iPhone a year ago breathed new life into the mobile application business, and companies such as RIM, maker of the BlackBerry and Palm (PALM), maker of the new Palm Pre, have responded with widely promoted applications stories for their devices.

    Nokia, however, seems to have hardly made a peep for its store. There have been no ad campaigns, no press releases boasting the number of downloads.

    “We’re growing this in an organic way,” says Marco Argenti, vice president of media and games at Nokia.

    The company will direct bookmarks on its devices towards the store, Argenti says, and markets it online, for example through sponsored Google links. Eventually the store will be one of the key selling points in marketing of new devices.

    The European marketing of Nokia’s new Internet flagship device, N97, is already leveraging the store. According to Argenti, there is a new way of thinking behind all this.

    “We’re philosophically more in a software and Internet mentality, where you don’t almost even have the concept of a release. Ovi is a service, not a product. We keep adding content to it and improving it every day.”

    Improving it needs. The Ovi site has been plagued by technical problems, with the servers crashing on the first day of business and users facing frustrating malfunctions ever since. The number of apps on offer is still significantly smaller than the volume available in Apple’s store.

    Nokia says the reason for the troubles is the complexity of its operations. Ovi store has registered users in 180 countries, works in five languages and runs on more than 75 different devices, which use 4 different operating systems. 27 operators in 9 countries offer the possibility of mobile billing.

    At launch Nokia estimated that 50 million devices could access the store, and its hope is that in the end every Nokia device (from low- to high-end) will have a button pointing to Ovi.

    Analysts have sympathy for Nokia.

    ”It is always more challenging for Nokia to launch a service of this size than it is for any of the other handset manufacturers,” notes wireless analyst Julie Ask from Forrester Research. “The number of devices and platforms they are trying to operate the Ovi Store on is broader than it is for Apple, or Blackberry. It is not an apples to apples comparison.”

    Another aspect of Nokia’s vision adds even more complexity to the equation: localization. The Ovi Store recognizes where the user is located, which language they speak, and how they have behaved in the store in the past. It then recommends content and applications accordingly. Users are also invited to review and recommend content, bringing the idea of social networking to the world of apps.

    “I think Nokia has a great concept that is more advanced than Apple’s App Store,” estimates senior analyst Tina Teng from iSuppli. “Nokia has really recognized the possibilities of wireless social networking and the mobile lifestyle.”

    In the U.S., however, solving technical problems is not going to be enough to get Nokia’s vision going. Arguably an even bigger problem arises from the company’s battle with the carriers.

    Nokia has always been reluctant to modify its devices according to carrier wishes, preferring to sell devices separately from the service. The strategy works in Europe, but in the U.S. carriers want to control the devices in order to offer them to their customers subsidized.

    As the result of these conflicting approaches, in the U.S. Nokia’s phones have been expensive and hard to get. If for example, one wants to by the new N97 smartphone in the U.S., just about the only options are to shop online or to go to one of the two Nokia flagship stores. The phone costs currently $599, compared to, say, a carrier subsidized $99 iPhone3G.

    The implications of all this to the Ovi Store are dire: if users don’t have the phones, there’s not much point in marketing content for them.

    So far none of the U.S. carriers support the Ovi Store software on their devices, and the analysts say the operators view parts of Nokia’s vision as direct competition.

    “Nokia is trying to create a portal where all billing and services go through that channel, at the same time when operators are trying to maintain direct billing through themselves,” says senior research analyst Ryan Reith from research outfit IDC.

    Unlike many of the other handset manufacturers, Nokia has invested heavily on its own services, such as maps and navigation, which also puts it in direct competition with the carriers.

    “It’s a difficult approach, but I think if there’s anyone out there that can take that approach, it’s Nokia, because of their global dominance,” notes Reith.

    Some signs of happier times have surfaced lately. Nokia’s second carrier supported smartphone hit the U.S. market in May, when AT&T launched the E71x. July 19 marked the launch of AT&T’s third Nokia smartphone, one called Nokia Surge, designed especially for social networking. AT&T has also said that it plans to offer the Ovi Store on their devices some time in the future, but so far the company has declined to say exactly when this will happen.

    These are however but small steps in an uphill battle. According to Nokia’s second quarter earnings released last week, their sales in North America dropped 6% from the previous quarter and 29% from a year ago. According to IDC, Nokia’s share of the total U.S. handset market has fallen in the past three years from almost 20% to less than 8%.

    Luckily for Nokia, North America is only a small part of their business. The company holds 38% of the total global handset market, and 40% of the smartphone market. With big size come perks: if one market is not working, you can always play on others.