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Cast your mind back for a second to 2005, when the forecast for Nokia was as sunny and clear as an endless Finnish summer day. The world's biggest cell-phone maker had just launched the Nseries, a clever new range which packed a Web browser, video, music and pictures into a single phone. The devices moved Nokia a generation ahead in the race to build the first real smart phone, and were selling out from Dubai to Denmark. Then came a product called the iPhone. With its clever touchscreen and snazzy software and services, Apple's phone — launched in 2007 and dismissed privately by Nokia execs unimpressed with its engineering — won rave reviews, millions of customers and, crucially, a rep for cool. Today, Nokia still sells at least a dozen times more phones than upstarts like Apple or Ontario-based Research In Motion (RIM), which makes the BlackBerry. But the firm remains lengths behind in the image stakes, and has struggled to get its smart phones to stand out. "You know who are the winners when you have huge innovation," says Pierre Ferragu, a London-based analyst at investment research firm Sanford C. Bernstein. "It's anybody but Nokia. [The company] is just unable to do it."

That's a reputation Nokia has battled of late. The company, based in Espoo, Finland's second city, began life 144 years ago making paper and now ships roughly four in every 10 cell phones sold globally. But despite its huge size, and an image that 15 years ago was the epitome of a clever sort of Scando-hip, Nokia products have in the past decade seemed off the pace. The company trailed in the scramble to produce clamshell phones earlier this decade; when the market moved on to razor-thin handsets, it lagged again. With smart phones, Nokia actually offered a touchscreen well ahead of the iPhone, only to watch as Apple enhanced the feature and packaged and marketed it more smartly.

Nokia's momentum has stalled. According to Boston-based tech consultants Strategy Analytics, its share of the global smart-phone segment has dropped from 49% in 2007 to 37% in the first quarter of 2009. RIM, meantime, has boosted its share from 10% to 20% over the same period, while Apple's share has more than tripled to 10%. Throw in the global recession, which has users holding on to their handsets for longer than usual, and it's little wonder that Nokia's second-quarter results, announced last week, showed profits down 66% to $536 million. With investors spooked, and Nokia itself warning that global cell-phone sales will drop by 10% this year, the firm's shares are down by a fifth in 2009.

Nokia's answer to all this bad reception is to concentrate on what it's best at. The company remains confident it can sell high-end smart phones. But competition from the iPhone, BlackBerry and rival handsets from the likes of Taiwan's HTC could limit Nokia's slice of the high-end market to 15%, according to analysts at Sanford C. Bernstein. With 40 million potential users for those devices, that's no small loss.

But even if Nokia does miss out on the high-end market, it has a huge opportunity in taking smart phones to the hundreds of millions of middle-income consumers who want a fancy device but don't want to pay too much. At the moment, smart phones account for just one in every seven mobile devices sold. But the segment has doubled its share of the global cell-phone business over the past three years, and with users craving the added features they offer, smart-phone revenues should roughly double to half the industry total by 2014, according to Kulbinder Garcha, an analyst at Credit Suisse in London.

To grow the number of smart-phone users, manufacturers will have to squeeze the price of each unit they sell. Doing that, especially in key emerging markets such as Asia and Latin America, will require both scale and extensive distribution networks — and on both measures nobody beats the Finns. There's "a major opportunity for Nokia to … deliver mid-range smart phones to the masses," analysts at HSBC wrote in a recent advisory. The middle-income market, they said, was right in Nokia's "sweet spot."

The rewards are likely to be considerable. For devices with many of the features of more expensive products but priced from around $300, the potential market grows to some 400 million users. As many as two-thirds of those consumers are likely to be in emerging markets.

Which is exactly why Nokia is releasing phones like the 5800 XpressMusic and the E63. Designed with both developed and emerging markets in mind, the 5800 looks a bit like an iPhone. It's not as clever as Apple's gadget, but it has a neat touchscreen, plays music and videos, and — at under $400 — retails for roughly 25% less than a 3G Apple. For $280, meanwhile, the sleek E63 messenger phone packs all the basic features of a BlackBerry Bold at just 50% of the price, according to Bernstein's Ferragu. Nokia has shipped almost 7 million of the 5800 devices since they were launched last November. The firm won't reveal figures for the E63 but Shiv Shivakumar, managing director of Nokia in India, says the device "is our way of democratizing the QWERTY keypad and the whole concept of messaging to the Indian market." In the West "people have gone from the PC to the converged device," he says. "In India, people will skip the PC and go straight for the converged device."

Much of Nokia's emerging market dominance boils down to cost management — a crucial advantage when it comes to selling smart phones to price-sensitive consumers in India and elsewhere. Nokia will likely ship more devices worldwide this year than the next three biggest cell-phone makers — Korean rivals Samsung and LG, and London-based Sony Ericsson — combined. Manufacturing on that scale brings enormous purchasing power, making it possible to squeeze the cost of everything from memory chips to plastic casings.

Nokia is also typically more efficient when it comes to how it builds a phone. While an iPhone requires around 1,000 components, Garcha says Nokia's 5800 needs only half that number. "Having an extra 10 or 20 dollars on your bill of materials doesn't matter when you're selling your phone at $600," he says. "Think about making it a smart phone at $100 a few years from now: $20 of cost is 20 percentage points of margin. It actually becomes very important."

But Nokia's real genius is simply in selling phones in more places than any of its competitors. From Indian mountain villages to towns on the dry plains of northern Nigeria, Nokia is everywhere. Supplying the end user with a smart phone in Western Europe and America is typically the job of cell-phone operators who will even subsidize the cost of a device in return for tying a buyer to a monthly plan. Not so in emerging markets, where users typically buy their phone independently. That means manufacturers need their own "very efficient distribution," says Sanford C. Bernstein's Ferragu. "And on distribution, nobody comes close to the strength of Nokia."

Consider India. Years of building its business in the country — the first ever cell-phone call in India in 1995 was carried over a Nokia phone and Nokia-deployed network — has established the company as India's biggest supplier by a huge margin. Nokia devices are sold in 162,000 retailers in India, more than three times the number for rivals Samsung or LG. Although Samsung is investing heavily to catch up, Nokia claims roughly 60% of the Indian market. So ubiquitous are the firm's products that many locals refer to their mobile phone as a "Nokia" even when it isn't. In China, Nokia supplies around 30,000 retailers, far more than its rivals. Across the Middle East and Africa, it has another 120,000 outlets and enjoys a 52% share. (Nokia's slice of the North American market is approximately 10%; in Europe it's more than 40%.)

That kind of presence in emerging markets helps explain why Nokia is blurring the boundary between smart phones and cheaper handsets, and trying to entice customers to trade up. In recent months, the firm has unveiled a slew of devices aimed at developing markets, some costing as little as $60. That might seem a lot to pay for someone earning a few hundred dollars a month, but for many people in places where access to electricity is hit-and-miss at best, a good phone can double as a computer, an MP3 device or even a video player.

Take, for example, Nokia's new 2730 model, which will be available later this year for just over $110. The 3G device might not have a touchscreen or a swish keyboard, but with access to Ovi Mail, Nokia's free e-mail service, it's designed to give thousands of consumers in emerging markets their "first Internet experience," says Credit Suisse's Garcha. Ovi Mail was conceived specifically for consumers with limited PC access, and almost all the 350,000 accounts registered since the service's launch last December have been created on Nokia phones, not on computers. To the company, that bodes well for the future. "We believe giving [consumers] this first digital identity will be a way of getting [them] later on into all sorts of other Internet services," says Alex Lambeek, Nokia's vice president for entry devices. "There's a longer-term thinking behind this."

That outlook no doubt includes extending smart-phone services beyond major urban areas. In rural India, where Nokia controls around four-fifths of the mobile-phone market, according to Bernstein research, locals may not be quite ready for smart phones yet — but they will be. At the Mobile and More outlet in the city of Gwalior in central India, co-owner Gaurav Kukreja's best seller is a no-frills 2G Nokia. But, Kukreja says, "younger people from villages often go to cities to study. They come back well-versed with new technology, and with aspirations. They want the latest ... Its time will come." Nokia execs must hope the same applies to them.

With reporting by Madhur Singh / Gwalior

• ADAM SMITH
• The Finnish firm had lost its touch. But it can still rule by selling smart phones in fast-growing markets