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Technology evolves all the time. Much of it goes on underneath the radar until there comes a point where commercial adoption patterns switch and money flows in a new direction. That flow is irresistible. That’s what happened in the mobile Internet. The market shifted to the iPhone first and the rest of the market is shifting to Android-based systems as an alternative.

Yes, it’s true that Research in Motion and Nokia were leaders in mobile phones before that happened, but it’s simply not true anymore. The market has moved underneath them.

And it’s clear that from the OS standpoint there are going to be two main ones, Apple iOS and Google Android. Android is going to get custom layers added to it by players like Motorola, so in time it will be hard to see the similarity in Android-based phones but for the fact that users will be able to tap the vast world of applications, content and solutions to meet their needs.

Both Research in Motion and Nokia are doing their best to respond but are sticking with what is called a walled garden approach. You can get in to develop applications and content but only on their own terms and for their increasingly-isolated markets. It’s not very attractive for any potential players in the ecosystem, including consumers.

People are voting with their feet. The shift to iPhone and Android is staggering. The idea that RIM or Nokia is going to launch some device that could even make a blip in that data curve is unlikely. So the die has been cast.

I’d say it’s impossible for a company like Nokia to think outside the box, let alone do something there. RIM, however, might be able to. Damning all the technology details and migration issues, if RIM simply issued a statement saying that they were going to migrate their proprietary email and messaging technologies for consumers and companies to run on top of the Android OS, their stock would shoot up dramatically.

All of a sudden RIM would be a very undervalued player in the Android-based smartphone market for investors. And they would have a shot at making the best (or at least one of the best) Android phone families out there.

I’m not sure RIM can do it but they might have a chance. I’ve spent hours talking to Nokia management and can only say: RIP Nokia.

[Disclosure: No positions in any stock mentioned.]

Back in December of 2008 we posted our conclusions on why Nokia would yet again fail to gain any traction in the smartphone market. (See Five Reasons why the new Nokia N97 doesn’t matter.) Since then the mobile Internet has continued to be dominated by Apple, Google Android, and Research in Motion.  Recently we added Motorola to our list of winners in this space because their Android-based strategy appears very solid to us.  Palm continues to be in the group but a high valuation coupled with concerns we have on long-term operating margin push it lower on our priority list.

The meta issue for Nokia seems to be the fact that they see the world through their own lens of “leadership” and believe they are actually ahead of companies like Apple and Research in Motion.  Obviously this isn’t a good place to start if you plan on improving.  Nokia measures things like their total number of different phones and their rank as a global brand.  So they can succeed on their terms and fail on ours at the same time.   Recently it came to light that the Nokia “Comes With Music” promotion has garnered just over 100,000 users after nine months in the market.  Given the vast resources Nokia can wield their abject failures in new markets are simply stunning.

We’ve commented here before that Nokia management has been hostile to us in the past if we simply mentioned products like the iPhone or Blackberry during discussions.  Based on the uselessness of this “exchanges” we haven’t had a briefing from them in the past 12 months or so but we haven’t felt that we were missing anything based on the publicly available information.

This month Nokia is launching their “Booklet 3G” in Best Buy stores in the US.  It’s a good quality small laptop what falls into the “netbook” category but will run Windows 7.  It will compare favorably to similar models offered by Asus, Dell, HP, Samsung, MSI, and others.  Nokia is offering it both with and without a 2-year data contract with AT&T.  At the time of this writing it seems that the price with the data plan will be $299 and the best guess on a price for the system without a data contract is $599.

Nothing about the Booklet or the current plan is going to change anything in the market.  (The same can be said of Dell deciding to enter the smartphone market.)  Nokia will have a product in the category and can add it to their “unrivaled breadth of devices” slide and draw another “so what” from the user and investment community.

The central problem with Nokia is that they have not aligned themselves to any significant segment of the smartphone market.  We hinted at this in our review of the N97 which noted that the devices “was neither sexy nor business like” which means it has modest appeal to many but great appeal to few.  Nokia has been abysmal in the consumer and entertainment space versus a device like the iPhone and similarly unable to come close to matching Research in Motion with business features and enterprise appeal.

We haven’t seen any evidence that this identity crisis is going to resolve itself soon.  At the same time Android promises to fill another gap for consumers and carriers looking for a robust but more open and customizable device.  Motorola, HTC and many application developers are focused on Android as a platform alternative to the proprietary iPhone.  This is yet another segment of the smartphone market that Nokia has not seized.

We have no axe to grind on Nokia and although we haven’t performed a full Intrinsic Value analysis on the company their valuation probably already reflects a good measure of despair for them.  At the same time we wonder if and when this giant might wake up and be felt in the mobile Internet / smart phone segment.  Is Nokia really going to leave it all for Apple, Research in Motion, Google and a host of Android suppliers?

[Disclosure: Neither the author nor Research 2.0 has any investment position in Nokia at the time of this writing.]

We got excited for a moment about the prospect of Nokia waking up and coming to grips with the fact that the Apple and Research in Motion phones were eating their lunch.  This week they have number of announcements coming and the first one we looked at was the new N97 phone.  The engadget post is a good place to see it.

To be sure it’s a very nice smart phone and since it’s the newest it probably has the best collection of high end features for now.  It also a fairly big, expensive, slide-with-a-full-keyboard, kind of thing.  We’ll let the gadget and phone industry and street analysts have their day of doing a full analysis but this model isn’t enough to stop the secular slide for Nokia in the mobile Internet space (at least in the US.)

Here are our five reasons why:

1. It’s not a high unit phone: Of course the pricing will get much lower than the $600 or so list price with carrier plans.  But even if it is offered at $149 it’s just too much phone for many users.  Nokia has other models of course but these haven’t been helping the company versus the other players either.

2. It’s not sexy or business.  The iPhone wins in sexy category.  The N97 looks like a brick next to an iPhone.  It’s not something a business person is going to be fiddling with either.  They will stick to the blackberry.

3. The "mobile computer" positioning is confusing.  The two things that have momentum right now are netbooks (eePC, mini9, Samsung, etc.) and smart phones.  Nokia may want this to be a mainstream category, but it’s not.

4. Services are lame and suffer from a lack of integration and elegance.  Nokia has a number of refreshed and new services as part of the announcement as well.  They include Ovi, Games, Music, Navigation and also a set of development services to build on.  But they are nothing like what Apple is offering now.  Possibly closer to what the blackberry offers but again, business users who are into games and music are more likely to push for an iPhone.

5. Beyond the "big three" there are strong new offerings out there from a variety of players.  The new Samsung phones are actually pretty impressive.  Phones based on Google are getting into the marketplace to reasonably good reviews and it’s just the beginning.  The Google phone will undoubtedly improve rapidly.  Even the lowly Palm is surviving for now and planning something big in 2009 (hope it doesn’t look like an N97!

In conclusion we thought this might be a week where Nokia really "woke up" to the reality in the mobile Internet space.  So far the evidence suggests that is not the case.  We are still rooting for them but only they can help themselves out of this.

The deal that Universal has struck for consumers to get music on their Nokia cellphones for 12 months is a winner.  Felix Salmon over at Portfolio.com published some commentary on the deal a few days ago. 

Focusing on "free" misses the point.  Consumers are going to be paying a low subscription fee to access the music on their cell phones.  They won’t be able to move into iTunes or burn a CD but then the point is to provide them with the content on the phone itself.  (These other options will be available if the customer decides to actually purchase the music.)

The iPod and iTunes are great but they are also limiting in that one needs to carry the device and agree to the iTunes way of doing things.  It’s a worthwhile trade-off for many.  However there is another huge (probably far larger) segment of the market that this Universal/NOK deal can begin to tap into. 

Entertainment is a personal matter but for many it involves more listening than buying, arranging, and playing.  This is where services like XM Radio have found success.  XM Radio on a cell phone is probably another great idea.  But by paying a small fee to have a music library on the mobile phone is something that can probably net tens of millions of customers quickly *if* it is well-designed and implemented. 

In Europe the phone is the key personal device.  More than 1/2 of the folks one sees on the train are playing games, doing SMS and listening to music on their mobile phone.  (Not nearly as much email as in the States.. in Europe train time for most  is personal time.)

The Universal/NOK deal may or may not be a game-changer depending on how well they execute but the structure of the value proposition for a big swath of the potential user base looks to be on target.

– Kris Tuttle

Tags: NOK, AAPL, Music, Mobile Phones