Nokia's software solution

SAN FRANCISCO (Fortune) -- Nokia's $8.1 billion acquisition of digital maps provider Navteq marks a sea change in the mobile industry as software and services become as important as the phones themselves.

The Navteq acquisition was announced just two months after Nokia launched a music download service similar to Apple's iTunes, and less than a month since it snapped up Boston-based mobile marketing company Enpocket.

Nokia plans to introduce more GPS-enabled devices like the N95-3 seen here.

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Why is the world's biggest mobile phone company so concerned with software all of the sudden? Because it knows that to compete in today's increasingly commoditized wireless market, hardware alone won't make the cut.

And with innovative newcomers like Apple (Charts, Fortune 500) - and possibly Google (Charts, Fortune 500) - getting into the phone business, Nokia (Charts) realizes it needs to give consumers music, video, and social networking services as well as the latest must-have handset.

Consider the iPhone. Despite its sleek exterior, it's the software inside that really shines - the über-intuitive user interface and innovative features like visual voicemail.

If the rumored Google phone ever becomes a reality, it is expected to be a showcase for services (think Gmail and search) rather than just a piece of flashy hardware.

"Nokia no longer views Motorola (Charts, Fortune 500) and traditional phone-makers as significant competitors," says Chris Ambrosio, director of the Wireless Device Strategies Service at research firm Strategy Analytics. "They have to compete outside of the cellular world now, and they view Google and Apple as their new competitors in this converging media age."

In fact, early next year Nokia plans to reorganize its device business into three primary groups, one of which will be called services and software. Location based services - applications like downloadable maps, turn-by-turn directions and location-targeted ads - will be one of the pillars of that strategy, says Ambrosio.

Nokia's GPS-enabled phones already use data from Navteq (Charts), which supplies digital maps of more than 100 cities. According to Ambrosio, Nokia plans on upping its portfolio of GPS-enabled devices in 2008. Last year, the company also released a standalone navigation device that competes with GPS gadgets from Garmin and TomTom.

"Location based services are one of the cornerstones of Nokia's Internet services strategy," Nokia CEO Olli-Pekka Kallasvuo, said in a statement.

Of course, turning itself into a one-stop shop for devices and services doesn't come cheap:

"$8.1 billion is a lot of money," says Avi Greengart, a principal analyst at research firm Current Analysis. "Strategically, it's a great move for Nokia, but I'm not sure whether or not they can make the economics of the acquisition work."

Still, the Navtaq deal puts new pressure on Motorola, which has made some recent software acquisitions of its own - including last year's purchase of corporate mobility player Symbol Technologies.

But with this most recent addition to its arsenal, Nokia doesn't look too worried. Says CEO Kallasvuo: "The acquisition of Navteq is another step toward Nokia becoming a leading player in this space."