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The Changing U.S. Handset Market

Sun, 03/02/2008 - 11:54am
Brad Smith

New and established handset manufacturers seek to gain while Motorola loses.

Your company is fast-becoming a major wireless telecommunications company, making both infrastructure and handsets for GSM and CDMA networks. You’ve had a U.S. office for six years, but you’ve never sold a handset in the market and have no brand recognition among consumers.

The question is, how do you start selling handsets for the first time in a market dominated by the Big 5: Motorola, Samsung, LG, Nokia and Sony Ericsson? That’s the issue facing China’s ZTE, which recently launched its first handset with the CDMA prepaid carrier MetroPCS. It also applies to any handset manufacturer without brand recognition, and in some ways to major OEMs that do have a brand but are seeking bigger market share.

Xperia X1
The Xperia X1 is Sony Ericsson’s
first Microsoft Windows mobile phone.

ZTE saw its net income increase by more than 50% last year, with international sales more than doubling, although it has had minimal success so far in the United States. Most of its non-China sales growth has come from Africa, India and Southeast Asia. But it has started selling handsets to major carriers, including Vodafone, which is putting its own brand on the phones, as well as a mobile TV handset to British Telecom.

MADE IN CHINA
Chinese handset manufacturers like ZTE and Huawei have started seeking foreign markets because mobile handset sales growth in China has slowed. The research firm iSuppli says 229 million handsets were sold by Chinese OEMs, an increase of 76.2%, but predicts only 19.7% growth in 2008.

ZTE’s first U.S. phone, the C88, is being sold as a midrange handset by MetroPCS, at $139. It has a 2-inch screen, WAP browser, Bluetooth headset support, camera, 60 MB of internal memory and several embedded MetroPCS applications and games. It’s the second Chinese phone the carrier has, after the Huawei M318 ($99).

Drew Wilken, director of Handset Solutions for ZTE USA, says the C88 was designed specifically for the U.S. market and with the input of MetroPCS to satisfy the carrier’s needs. ZTE didn’t want to have its first U.S. phone be a low-tier phone because of the consumer perception that Chinese goods are inexpensive and possibly low quality.

“We didn’t want to enter the market with a cheap handset,” he says. “This is a full-featured mainstream product.” Wilken believes the C88 also is the most affordable phone in MetroPCS’s lineup with the features it has.

Smaller carriers often are more willing to work with a new player in the market than the Tier 1 operators. The smaller operators usually get handset models from the major OEMs only after they have launched with the Tier 1 carriers.

ZTE expects to offer more handsets through MetroPCS and wants to expand its distribution to other carriers, including the major operators, Wilken says. The company also is not opposed to making lower-priced phones for the United States but is sticking with CDMA handsets for the time being. CDMA has about 60% of the U.S. market.

“We’re not opposed to the low end,” he says. “We do a lot of that elsewhere. We can compete on price. But in the U.S., we want to be recognized as not being a cheap Chinese alternative.

BRAND LOYALTY
ZTE’s Wilken admits that branding will be a challenge. He says ZTE hopes to build its brand in the United States as consumers see the handsets’ quality and innovation.

ZTE C88Tuong Nguyen, a handset analyst for Gartner, says brand is very important to U.S. consumers. The analyst also thinks there may be some opportunity for handset vendors with little brand to gain some traction in 2008 because of the problems Motorola has had.
Motorola is the No. 1 handset vendor in the United States, with nearly one-third market share, followed by Samsung and LG. But Motorola has not had an attention-getting phone since its RAZR models.

“I think the coming year there will be potential for movement (in market share),” Nguyen says. “First, Motorola is not doing well now. And Nokia hasn’t done well in the United States for years. I think other players, whether ZTE or others, could make moves this year. I see Nokia coming up a little as well.”

Nguyen thinks ZTE was correct in initially launching a midrange feature phone because it will help it become known for quality first. The handset maker can move down-market later. Besides, he says, U.S. consumers are demanding more features in their phones.

ZTE likely will remain a niche handset manufacturer for the U.S. market for some years, Nguyen thinks, although the company has done quite well in other regions, such as Latin America.

ZTE isn’t the only newcomer trying to find a place in the United States. An American company named zzzPhone has started selling a GSM/W-CDMA phone with a factory-direct strategy. The company, which makes the phones in China, says the handset is similar in features to Nokia’s top-of-the-line N95 but costs just $149, about $600 less than Nokia’s model.

Another newcomer is Neonode USA with its Neonode N2, which it showed off at Mobile World Congress in Barcelona, Spain. The phone has an optical touchscreen and 2-megapixel camera. It’s only GSM/GPRS, however, so it has limited data capabilities. The company says it expects to sell the handset in the United States through an unnamed carrier in the second quarter.

North America: Mobile Terminal Market Share, 3Q07

Sales to End Users (Thousands of Units)  Market Share
Motorola 14,082.2 31.3%
Samsung 9,003.7 20.0%
LG 7,032.4 15.6%
Others 14,870.4 33.1%
Total 44,988.7 100.0%
Source: Gartner (November 2007)

GRABBING MARKET SHARE
While these upstarts are trying to get noticed, so are the big guys. With Motorola faltering, Nokia, Sony Ericsson, Samsung and LG are all trying to grab market share.

Sony Ericsson has a recognizable brand in the United States, especially through its Sony parent. And it is eyeing to improve its U.S., and global, share by launching its first Microsoft Windows Mobile phone in the second half of 2008. The phone is called the Xperia X1, the first in a line of handsets under the Xperia brand. Sony Ericsson has been using Symbian for its smartphones, and is an investor in Symbian.

Jon Mulder, product marketing manager for Sony Ericsson, says the company recognized that “to be a player in North America you have to have Windows Mobile.” The OS has a 25% market share for North American smartphones, according to Strategy Analytics. Mulder says Sony Ericsson still strongly supports Symbian.

The X1 is a slider phone with a large screen, full QWERTY keyboard, supports GSM/W-CDMA/HSPA, and has all of the radio frequencies used by both AT&T and T-Mobile USA. No carrier partners have been announced yet, however, and Mulder didn’t rule out the possibility that the phone could be sold unlocked. Mulder says the phone is aimed at the sophisticated consumer and not just the enterprise.

Sony Ericsson, which doesn’t make CDMA phones, will never be one of the largest handset OEMs in the United States, Mulder admits. But it still wants a larger share of the GSM carrier market and aims to be the No. 3 handset manufacturer globally by 2010.

Mulder also says Sony Ericsson really isn’t after any of Motorola’s handset business, preferring instead to use its brand recognition and multimedia capabilities to attract buyers.

Still, says analyst Nguyen, all of the handset manufacturers do see an opportunity with Motorola’s problems. “Motorola’s share is up for grabs,” he says. “LG and Samsung could take it. Motorola needs a solid refresh; they rode the RAZR wave too long. Everyone has an opportunity to take a little share now.”

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