Last week, Nokia issued a press release stating that it remains on track to roll out Ovi, its highly anticipated mobile app store. This despite rumors indicating that the company was falling behind and that carrier billing would not be allowed for Ovi in the U.S.  Nokia denied those rumors, revealing its plan to offer various payment options (carrier billing & credit card), which may roll out in different phases. While we see this as a positive event for Nokia’s strategic move into the mobile app/services space, several challenges remain for the Finish company before its mobile app/services strategy reaches its full potential. Here are my thoughts:

1. Nokia’s mobile app/services strategy taking shape. In the past few years, Nokia has made significant investments in the mobile app/services space in order to expand its product portfolio. Today, Nokia offers a fairly wide variety of mobile app/services. In fact, the company has involved in many areas such as mobile advertising (through the Enpocket acquisition), mobile app store (Ovi), mobile widgets, mobile IM (through the Oz acquisition), mobile banking (through the $70 million investment in Obopay), and mobile music. Nokia also recently opened a Nokia Research Center in Hollywood, to work closely with Hollywood studios and develop innovative mobile content/services. It is worth noting that Nokia is not the only handset vendor migrating towards a mobile apps/services strategy today. In fact, other handset vendors (BlackBerry, Samsung, LG, Palm, Sony Ericsson, etc.) have already started to adopt a similar strategy.

2. Nokia set to face several issues in the mobile app store space from increasing competition, fragmentation, interoperability issues between the various mobile app stores, to mobile content discovery issues. Nokia is set to face increasing competition in the mobile app store space as more than 10 mobile app stores are scheduled to go live in the coming quarters. In fact, many players, from mobile OS vendors (e.g. Android), handset vendors (Nokia, LG, Samsung, Sony Ericsson, RIM, Palm), telecom software companies (Amdocs), to IT software companies (e.g. Microsoft) have already jumped into the bandwagon. Enabling interoperability between those mobile stores will also need to be addressed so that mobile app store users can share and recommend applications to other users regardless of the mobile app store being used (e.g. iPhone, BlackBerry, Nokia, etc). Lastly, searching and discovering content will become increasingly difficult as more mobile applications become available through those stores. Adding enhanced content discovery tools (e.g. peer-to-peer recommendations, enhanced mobile search engines, etc.) to existing mobile app stores will be critical.

3. Nokia’s lack of exposure in the U.S. market likely to be a key restraining factor in the short-term. While Nokia is likely to leverage its dominance in the handset market (~34% of market share globally), Nokia’s lack of exposure in the U.S. (only captures ~8%) could be a drag for the Finish company on its quest to become a prominent player in the mobile applications and services space. That said, we expect Nokia to gain market share in the U.S. in the coming years as it introduces new advanced devices (e.g. E71x) with enhanced services. In fact, the company is rumored to soon be introducing a new device featuring  a slim touchscreen and  QWERTY keyboard that slides out when triggered by a sensor (similar to the BlackBerry Storm). This should become a key driver.

4. Nokia’s mobile advertising, mobile Internet services, and mobile music strategy losing momentum. When Nokia acquired the leading mobile advertising company Enpocket in September 2007, Nokia was promised a bright future in the mobile advertising space. Since then, following the departure of Enpocket CEO in July 2008, the Finish company appears to have lost its momentum and seems to be unable to successfully compete against leading companies like AdMob, JumTap, or Quattro. Additionally, the company’s mobile Internet strategy recently took a major setback as Nokia announced its plan to cut as many as 450 jobs worldwide in an attempt to reorganize its mobile Internet services (for map and game applications especially) unit and make significant savings. Lastly, while the Nokia 5800 – Nokia’s flagship music phone appears to gain descent traction with 3 million units sold since its release in January, Nokia’s mobile music strategy seems to take some time to hold, especially in Europe, as sales of Nokia’s Comes with Music service bundle are estimated to only total around 23,000 in the UK, where it launched five months ago, according to MusicAlly. That being said, we expect Nokia’s mobile music strategy to benefit from the robust growth in emerging markets like South America as the company recently launched the Nokia 5800 in Brazil.

Bottom line: Wireless data services have become a key revenue generator for many carriers today as voice ARPU continue to decline. Nokia wants to capture a larger revenue share of this growing and lucrative business. Nokia’s plan to become a key player in the mobile services/app makes sense as it can leverage its dominance in the handset market. That said, 2009 is set to be a transitional year for the company as several reports indicate that handsets sales could be down 10% YoY in 2009. However, as the market returns in 2010, as Nokia introduces more capable devices with enhanced services, and Nokia’s mobile services/applications (e.g. mobile app store, mobile payment, and mobile music) start to gain traction in the coming years, Nokia is well positioned to become a key player in the mobile applications/services space.