Fancy mobiles stuck in a rut

CHICAGO: A week of chilling earnings showed mobile phone makers are caught in a squeeze between price competition and a failure to sell fancy models with cameras, games and calendars.

Quarterly earnings from four of the five biggest handset makers paint a gloomy picture of a sector where a trickle of growth goes straight down the drain with increasingly steep price cuts.

Hesitant consumers shaken by a weak economy are not interested in buying the most expensive models, Jorma Ollila, chief executive of Nokia said this week.

If they do, these phones have complex software which is expensive to develop, he added.

With Nokia, Motorola Inc., Samsung Electronics, Sony Ericsson and numerous other companies all vying for market share, the wireless operators are gaining the upper hand in setting phone prices.

In developing countries like China, which are generating the fastest growth, local manufacturers who sell their phones at cutthroat prices are squeezing out foreign makers.

"Nokia is signaling that margins are coming down. That's basically saying handset competition is going to remain fierce, it's going to get fiercer and you can expect to see aggressive pricing from pretty much everyone," said Shawn Campbell, principal with Chicago-based Campbell Asset Management.

After mobile phone sales slowed down in 2001, the industry looked to be recovering.

Gartner Dataquest estimates the $64 billion mobile phone industry sold 423 million units in 2002 vs. 412 million in 2001. The research firm expects the industry to sell more than 440 million phones in 2003.

Yet Nokia said in its second-quarter earnings report earlier this week that revenue rose just 2 percent despite a 14 percent rise in unit sales. It also warned a 10 percent unit growth expected in the third quarter will be wiped out by price pressure and dollar weakness.

The No. 2 mobile phone maker, Motorola, reported 13 percent lower handset sales in the second quarter. Korea's Samsung, the No. 3 mobile phone maker, sold 12 million handsets in the second quarter -- a million fewer than expected. It hopes to catch up in the third.

Japanese-Swedish joint venture Sony Ericsson was the only one sounding an upbeat note, boasting that its new models were at last catching on as it sold 85 percent more GSM phones, based on the globally dominant technology standard, than in the year-ago period.

All of them claim they will do better in coming quarters, an ambition that has raised a few eyebrows among analysts.

"In the third quarter, you've got Nokia, Motorola and Samsung ... all launching new product and all anticipating market share gains. It ain't gonna happen," said Brian Modoff, wireless equipment analyst with Deutsche Bank Securities in San Francisco. "Unit volumes are OK ... but we're giving it up in price pressure," Modoff added.

Analysts say competition has gotten so fierce that mobile phone makers can no longer afford to sell new phones without offering huge discounts almost immediately.

In the United States, for example, Verizon Wireless offered a new $300 Motorola model for as little as $50 during the holiday season last year.

"This is getting to be a pretty mature industry," noted Jane Zweig, chief executive of Washington-based wireless consulting firm the Shosteck Group. "In a mature market, you've got to convince people there's something worth trading in and trading up ... what's happening is a reality check that's much more tough to manage."

If industry leader Nokia is saying its profit margins -- the highest in the industry -- will be under pressure, that bodes ill for the rest of the gang, who get by on far less luxurious margins, analysts said.

© Reuters