LONDON Nokia's (NOK1V.HE) bid to challenge the dominance of Apple's iPhone and Google's Android has failed to convince telecom operators in Europe, depriving it of powerful allies in its fight to regain the top spot in the mobile market.
Four major telecom operators in Europe, where the phones have been on sale since before Christmas, told Reuters the new Nokia Lumia smartphones were not good enough to compete with Apple's APPL.O iPhone or Samsung's (005930.KS) Galaxy phones.
Nokia now faces a battle for the key U.S. market, where its former dominance has shrivelled to 1 percent of the smartphone market. AT&T (T.N) has been selling the Lumia 900 for two weeks and it says early demand has been strong.
Sceptics among operators say the sleek, neon-coloured phones are overpriced for what is not an innovative product, cite a lack of marketing dollars put behind the phones, and image problems caused by glitches in the battery and software of the early models.
Nokia's big bet made a year ago to put Microsoft's (MSFT.O) Windows Phone software in its smartphones looks far from certain to pay off, operators said.
"No one comes into the store and asks for a Windows phone," said an executive in charge of mobile devices at a European operator, which has sold the Lumia 800 and 710 since December.
Nokia is trying to catch up after earlier smartphones were unsuccessful and hurt its image at the higher end of the market.
"Nokia have given themselves a double challenge: to restore their credibility in terms of making hardware smartphones and succeed with the Microsoft Windows operating system, which lags in the market," the executive said.
He said Microsoft's software worked nicely with PCs and allowed you "to do tonnes of cool things" but few customers knew this. "If the Lumia with the same hardware came with Android in it and not Windows, it would be much easier to sell," he said.
Moody's cut its credit rating on Nokia to one notch above junk on Monday after the company said it would post losses for the first and second quarters. Standard & Poor's announced a similar downgrade in March.
Nokia's shares fell below 3 euros, a 15-year low.
Telecom operators subsidise the majority of mobiles in the United States and Europe before putting them in the hands of consumers, so they have an outsized influence on the market.
Operators want a viable alternative to Apple and Android, not only to offer customers more choice but to give them a stronger bargaining position with phone manufacturers.
U.S. operators buy about 90 percent of mobiles while their European peers buy 50-70 percent, according to market researcher Gartner and Bernstein Research. Operators then sell them at a discount and recoup the money through 1-2 year contracts.
"It's good for operators if we can reduce the dominance of Apple," said a spokesman for a second telecoms carrier, who asked not to be named because of the sensitivity of relations with mobile phone makers.
Nokia is trying to capitalise on its closer ties with the operators and to exploit their irritation with Apple's dominance and Google's bandwidth-hungry services like YouTube in the hope they will push their phones on the market.
However, at a France Telecom store in Paris, Lumia models were not prominently displayed and a sales clerk was quick to offer one shopper an iPhone first. She then presented a range of Android smartphones made by Samsung and HTC (2498.TW).
Reviews of the Lumia on tech blogs have been mixed with some liking the smart look and Windows-inspired design, and others pointing out the poor quality of the screen and battery life. Few reviewers have suggested users should dump their iPhone or Android to buy a new Nokia.
Getting customers to switch phones is even trickier in the "app economy" as users buy games, publications and videos on their phones and do not want to lose them by switching system.
Issuing a profit warning last week, Nokia fell short of analysts' estimates by saying it had sold over 2 million Lumia smartphones in the quarter ending March, up from 1 million in November to January. Analysts had expected sales of 3 million.
Apple sold 37 million iPhones in the last quarter of 2011 while South Korea's Samsung has sold more than 40 million Galaxy smartphones since the range went on sale in June 2010. It will unveil the third-generation Galaxy S on May 3 in London, banking on grabbing attention before the Olympic games.
Apple uses its dominant position to dictate to operators the minimum number of iPhones they must buy and the size of subsidies they must offer to reduce prices for consumers.
The carriers then have to recover the cost by signing up customers to multi-year contracts.
That has hit the profits of European and U.S. operators just as they struggle with more competition from Web-based free messaging services and face costs for network upgrades to keep up with data traffic generated by smartphones.
AT&T and Sprint (S.N) posted hefty losses last quarter that they blamed at least partly on heavy iPhone subsidies.
Apple iPhones tend to cost operators roughly 600 to 700 euros ($800 to $900), while high-end Samsung smartphones can cost 300-500 euros.
AT&T sells the new Lumia 900, a fourth-generation phone capable of ultra-high connection speeds, for $99.99 with a two-year contract and is marketing it heavily. Rival operator T-Mobile says the Lumia 710 is among its most popular phones.
"We don't put this weight behind every launch," said an AT&T spokesman, adding the Lumia 900 had sold out in many stores.
At a shop in New York, a sales associate pointed out the Lumia to a Reuters reporter, saying it was AT&T's newest phone and many people had been asking for it.
In Europe, although most operators are offering the new Nokia Lumia brand Windows phones, few use the weapons they have to push them: deeper subsidies or bigger marketing budgets.
Some complain they are too expensive, despite Nokia selling the range to operators and distributors for an average 220 euros last quarter, well below what had been expected.
"This implies that sales to the consumer are proving to be more difficult than we would have expected," said Richard Windsor, global technology specialist at investment bank Nomura, who had expected an average selling price of 300 euros.
A spokesman for a third operator who did not want to be named said: "If they could lower the price we think they could sell more. It might be worth making it a bit of a loss leader to get it out of the door. It's not rocket science."
Operators are also frustrated that cash-rich Microsoft is not spending more on marketing Nokia Windows phones.
"The operators say to Nokia: 'We will try to bail you out if you and Microsoft come with the marketing money,'" says telecom consultant John Strand. "But even if the operators start to give away the Nokias for free, it will not make Nokia a success," said Strand, who works with many of the top European carriers.
One device chief at a European operator agreed. "We can open our stores to them and train our staff to sell the phones, but that's it," he said.
"Ultimately, Nokia and Windows are challengers and they either need to come to market with a really disruptive, innovative product or a huge marketing budget to create client demand. So far they have done neither."
($1 = 0.7644 euros)