The brawl over 500 million phones

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