Mobile handset sales have reached a half a billion per year, and the industry players are vying for the biggest slice of the pie

As the final figures trickle in, 2003 is turning out to be a better than expected year for wireless telephone handset manufacturers. Consumers worldwide snapped up about half a billion new cell phones.

Those are phenomenal annual sales, according to Ben Wood, principal mobile communications analyst at research firm Gartner. His figures say about 510 million handsets were rung up last year, a 20 percent increase from 2002. By his assessment, the strongest new markets are India, China, Russia, and Brazil. Analyst John Jackson at communications and networking research firm The Yankee Group agrees that handset sales are showing a strong rebound, but his estimates are more conservative. Fueled by high-growth markets in China and India, global handset sales grew by 10 percent last year to $76 billion – or more than 497.7 million units sold, he says. Full final sales figures will not be known until June, when the last of the manufacturers report official results.

Mr. Jackson says the mobile momentum has legs: “Global handset unit and market growth will be favorable for the next three years.” He is projecting 2004 handset sales to pass 513 million with the bulk of sales in two regions: Western Europe, which is seeing growth, primarily from current customers upgrading to handsets with more advanced technology like cameras and larger display screens (see “Smart Phones Briefing: Devices Sector Analysis”) and Asia, which views wireless technology as a cost-effective way to provide telephone and data service.

Gartner points to photo messaging and so-called “disposable” photography as last year’s marketing cornerstones. “The mobile handset industry rode the crest of a wave of robust replacement demand to realize record levels of sales,” says Gartner senior analyst Bryan Prohm.

Nokia was a clear standout among manufacturers last year, says Mr. Jackson. The company continues to profit from a strong foothold in Europe, which makes up more than one-third of the total handset market, and a significant presence in Asia and the Americas. However, Nokia – and other major handset makers like Motorola, Sony/Ericsson, and Samsung – may have trouble ahead.

Consumer appetite for technical advances, service provider demands for lower-priced phones to stem customer churn, and increased competition in general will continue to squeeze already thin profit margins for handset makers, says Mr. Jackson. That pressure may be too much for some companies to stick it out.

“Consolidation may occur, but as established vendors exit the market, emerging Korean, Japanese, or other ODMs [original design manufacturers] will take their place. Nokia’s European stronghold will come under pressure from Asian vendors, and possibly from Motorola, if its execution improves,” he says.

ODM companies profiting from the upturn in handset sales include Solectron, Flextronics, Celestica, and Elecoteq, according to Mr. Jackson. He says cell phone companies will be increasingly reliant on these manufacturers to head off growing overhead expenses as demand pushes up production volume.

Gartner’s Mr. Wood says he will likely raise the worldwide handset sales forecast for 2004 to 560 million, up about 10 percent from the current 511 million, based on the increased demand so far in 2004.

While cell phone makers are enjoying a booming business, not all companies targeting the mobile market are faring as well. Microsoft once again failed in its attempts to dominate or even gain a significant foothold in wireless handset operating systems last year. Mr. Jackson says before Microsoft can win broad entry into the handset market, service providers will have to give up control of the handset distribution system.

Yankee says global service providers like Vodafone, Telefonica, Verizon Wireless, T-Mobile, and NTT DoCoMo controlling the sell-through distribution of handsets to customers – and wield the power to demand customized offerings from handset makers at the lowest possible price. Handset manufacturers are likely to eek out better margins by turning to free or cheaper operating systems like Linux and Symbian rather than pony up the money to license a Microsoft OS (see “Nokia vs. Microsoft in Mobile Phone Face Off”).

Service providers are using their position to fend of a giant while continuing to boost profits. Without distribution, Microsoft will need more than muscle to commandeer this market. However, the lure of annual sales of a half a billion handsets means the competition has just begun – and it will come from all fronts.

For: Red Herring

New, “blue” laser technology is magnifying optical storage, and spurring competition. Possible: The Lord of the Rings trilogy on a single disc.

A refined laser technology is giving optical storage an edge in the data space race, and two products – each with big-brand supporters – are vying to dominate the market.

When 4.7 gigabyte DVD-ROM storage technology was released in 1996, it opened up a new world to the typical computer user, who was then making due with 1.4 megabyte floppy disks and 2 gigabyte hard drives. Even gearheads who were using CD-ROMs were limited to 650 megabytes.

Few milestones have followed DVD storage’s big debut, however – until now.

In late February, Hitachi unveiled its 10K300, the first 300-gigabyte magnetic hard disk drive. Comparatively, the highest-end re-writable magneto optical (MO) storage DVDs are maxed out with less than 9 gigabytes of storage capability. The floppy disk is getting swiftly replaced by CDs and portable flash memory smart cards, and is on its way to join the 8-track tape in history’s tech dustbin.

DVDs have labored under several limitations. They can only hold about 240 minutes of video, so popular movies like the lengthy Lord of the Rings have to be split among multiple discs. Worse, TV programs are migrating to the high-definition format – its demands, including boosted clarity and color, quickly max out conventional storage. “Once you want to write high-definition TV on an optical disk, you need more storage capacity, simply because you have more information available,” says Jean Schleipen, principal scientist at Philips Electronics.

Enter the blue laser. The five-year-old technology has been recently refined, and is helping MO play catch up with magnetic hard disk storage. To compare, the red laser used in CD and DVD technology is like writing in crayon; the blue laser is like a ballpoint pen. The finer tip allows the user to fit more information in the same space. MO blue laser DVDs hold about 27 gigabytes of storage, allowing each disc to record more than 13 hours of standard TV video or two hours of HDTV. Lord of the Rings – the trilogy – could fit on a single disc.

Two rivalsOptical storage hardware manufacturers agree that blue laser technology is the future of their industry – what they can’t agree on, however, is a standard. The discord is prompting a blue laser home video format battle reminiscent of the Beta vs. VHS war of the late 1970s. This time the two competitors are Blu-ray and HD-DVD, each with big-brand supporters.

In one corner: HD-DVD, from NEC and Toshiba. It can hold up to 20 gigabytes (about five movies) for a re-writable disc. Squarely targeting the home video market, HD-DVD is cheap to produce – about 10 percent higher than traditional DVDs – and is backwardly compatible with current red laser DVDs on the market.

Competing is Sony’s Blu-ray, backed by companies like Matsushita, Hewlett-Packard, Dell, and Philips Electronics. One big drawback, Blu-ray is four to five times more expensive to produce than red laser DVDs and it is not backwardly compatible with DVDs currently on the market. However, red laser compatibility is, reportedly, on the way and proponents say the technology is easier to use than HD-DVD. Even better, some versions of Blu-ray have 40 gigabyte rewritable discs – twice the storage of HD-DVD.

Giving Blu-ray an extra edge is the Ultra Density Optical system. Developed by U.K. storage device maker Plasmon, the new blue laser MO system, an extension of Blu-ray, could potentially hold up to 320 gigabytes per DVD disc – or, 150 hours of standard video storage.

Favoring cheaper production costs, movie studios, including Disney and Warner Brothers, are leaning toward HD-DVD (although Sony-owned Columbia Pictures is, of course, backing Blu-ray). The market is huge: In 2003, movie studios sold $22.2 billion in DVD and VHS video in the U.S., according to Sony figures. That’s more than twice last year’s total box office receipts.

Unlike HD-DVD, Blu-ray backers have two business models: high-end corporate storage and home entertainment. Blu-ray’s advanced cataloging efficiency allow for that versatility. Sony started shipping blue laser drives under the “Professional Disc for Data” moniker last November. The drives offer 23 gigabytes of storage per rewritable disc starting at $4,150. The highest-end product sells for about $19,000 for 1.6 terabytes of storage in a multi-drive rack-mountable device. Blu-ray is set to own the corporate storage market: HD-DVD is focusing on Hollywood.

Optical, not optimumWhen it comes to sheer storage muscle and data retrieval speed, optical DVD disk storage may never be able to compete toe-to-toe with hard drives. Advancements in nanotechnology and micro machine-abilities mean that traditional hard disks will soon surpass 400 gigabytes in storage, a milestone optical DVD storage has only accomplished in prototypes.

They also suffer for their youth. DVDs have only been around for about a decade – their plastics, metals, and adhesives are still relatively unproven. Flaws in the kindred, 20-year-old CD technology raise some red flags. “CD bronzing,” describes the degradation of the inner metal membrane; “CD rot,” is when a geotrichum fungus infects CDs in hot and humid climates (Spain’s National Center for Biotechnology is an authority on the condition).

Yet optical storage is far from the also-ran. Comparatively, DVD storage is a more permanent, and rugged, medium. With Sarbanes-Oxley legislation requiring scrupulous, long-term, record keeping in corporations, executives want a platform they can trust. Removable blue laser DVDs, unlike hard drives, have no finicky moving or electronic parts. DVDs can withstand moisture and extreme temperature exposure that would cripple a hard drive and all of its stored data. They can sit on shelves for years without risking rust or dust damage.

Traditional hard drives use iron oxides, which pose the risk of accidentally degaussing, losing, or corrupting stored data by exposure to magnetic or strong electrical fields. University of California research shows the earth’s own magnetic fields can eventually destroy data on most long-term magnetic storage media.

In consumer electronics the two platforms are not competition, but complimentary. Companies like Korea’s LG Electronics are planning to market hard-drive-equipped digital video recorders with built-in Blu-ray DVD burners to HDTV owners.

Still limited, and a luxuryLike most cutting-edge technology, blue laser DVD player/recorders first appeared in Japan. Last April, blue laser debuted there with a price tag of about $4,000. Japan consumers are less price conscious than Americans, and demand is higher for the larger storage capacity of blue laser DVDs, partly because HDTV has a wider availability there, according to Sony spokesperson Mack Araki. He says the first consumer Blu-ray products won’t hit North America until 2005. Re-writable blue laser DVDs incorporated within set-top digital video recorders (DVRs) will, he adds, eventually replace the VHS tape recorder. He predicts that over the next few years more homes will adopt re-writable blue laser storage to replace their VCRs – discs do not need rewinding, take up less space, and hold much more video than cassette tapes. Like most consumer products, Mr. Araki says, as production increases, Blu-ray DVD player/recorder prices are expected to drop to more appetizing levels.

Even then, blue laser DVD players and recorders may stay luxury items for the next few years, instead of a necessity. Says In-Stat/MDR senior analyst Michelle Abraham, “They will become mainstream products eventually, but not before 2008.”

For: Red Herring

(The following was written on request for the Spring Newsletter for the Billy DeFrank LGBT Center)

By David Speakman

Typical of our Silicon Valley life, my recent marriage can be traded to an email. February 11, a note in my inbox said that San Francisco would grant marriage licenses to same-sex couples.

Three days later on Valentine’s Day, my life partner Rich Bean and I were standing in line outside City Hall in San Francisco along with hundreds of other couples, patiently waiting our turn to say, “I do.”

The line was long – longer than your worst DMV nightmare. Four or five people thick, it stretched for four blocks. By 4:30 p.m. and closing time, Rich and I hadn’t even made it to the Van Ness side of the building where City Hall entrance is. But we were hopeful of getting married and having a Valentine’s Day anniversary. This despite rumors that were passing around that the city had begun turning away people since it was unable to handle the huge crowd.

DeFrank Newsletter - March 2004Moments later, the rumors were confirmed. A city worker apologized and handed us a piece of paper which was to “guarantee” us a spot for the next day. Worse than us, they looked exhausted. These government workers volunteered to give up their three-day weekend, work full shifts all weekend without pay, overtime credit or even breaks for meals.

Still it was heartbreaking. Crestfallen like scores of other couples that day, Rich and I drove back to our home, unmarried. But we were more determined than ever to become husband and husband.

Too excited to sleep much that night, bleary-eyed, we got up early and drove back the next day and showed up four hours before the building opened. But the line at the front of the building had already stretched a full block. Some people had camped out all night to stay in line. Still, we dutifully took our place and settled in for another long wait and hoped for the best, checking (more than once) to make sure we still had our number from the day before – our guarantee.

Luckily we met some of the most amazing people while waiting in line. With 15 and 18 years of respective activism under our belts, Rich and I consider ourselves veterans of LGBT-related gatherings. But this was different; neither pride nor protest. The assembled crowd was not your stereotypical LGBT group, either. Mist of us were in the over-35 age bracket and it was the most orderly, well-behaved crowd of more than 1,000 gay and lesbian people I’ve ever seen.

marriage lineThe mood was that of quiet hopefulness with a light tinge of desperation. We were gathered there that day in fear that we would be sent home once again by overwhelmed city workers who, although marrying one coupe a minute on average, said could only handle 400 marriages that Sunday.

The relative silence of our assembly was only broken by the occasional honking in support or our own cheers as yet one more newlywed couple left the building, The cheers were two-fold, part in congratulations to the newlyweds and part in self-congratulations that the various newlyweds-in-waiting like us were one step closer to our own marriage ceremony.

at 10 a.m. we got the news for the day. The city said ti would process us in two groups of 200. Everyone else had to wait and come back the next day on a first-come first-served basis. We also were told we had to exchange our number from the previous day for fresh numbers which would tell us if we made the cut or not. I started to worry. Like the day before, there already were hundreds of couples in front of us in line.

But as city officials approached us, they were smiling. “You will get married today,” Assessor Mabel Teng reassured us as Rich was handed a numbered piece of paper that looked a little too much like a deli counter number.

He handed it to me and I held on to that little piece of paper like it was the Holy Grail. It said “B201.” Rich and I would be the second couple married out of the second group.

A few hours later, Rich and I were finally ushered into the city hall building to fill out paperwork and be married. Every step of the way, I made sure to thanks every volunteer worker I could. Not really for making history in the gay rights movement, but for working on a Sunday for no pay to allow me to marry the love of my life.

[[–Ed. note: Along with being newlyweds, David Speakman and Rich Bean are members of the DeFrank Center board of directors.]]