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Consumers Hold Torch For Better Handsets

Thu, 12/25/2008 - 5:52pm
Brad Smith

 

The mobile phone market can’t escape the recent wave of economic uncertainty,
but consumers still want more from their handsets.

The mobile phone industry is undergoing some fundamental changes, spurred in part by the downturn in the global economy. At the same time, consumers are expecting more from their handsets.

'Better Handsets'The shrinking global economy is expected to see a marked slowdown in handset sales, with both the No. 1 handset manufacturer, Nokia, and the research firm Gartner predicting a single-digit decline in mobile phone sales worldwide in 2009.

Nokia said, at its December Capital Markets Day event, the general slowdown in consumer spending will mean retailers and operators will sell more phones from their stocks, which will result in a 5 % or more decline in mobile device sales in 2009.

STILL GROWING
The decline in new handset sales is due to a slowing of replacement purchases as consumers hang onto their phones longer than in the past. On the positive side, Nokia said it still expects the industry to continue growing, with the first quarter of 2009 bringing 4 billion mobile subscribers worldwide.

Although noting that the U.S. market could be more resilient than some other regions, Gartner has forecast a low single-digit decline in handset sales for 2009. Global handset sales saw a marked slowing in the third quarter of 2009, Gartner said, with sales falling from the 16% growth rate in 2008 to 6% in 2009.

Worldwide Mobile Terminal Sales to End-Users in 3Q08 (Thousands of Units)
Note: This table includes iDEN shipments, but excludes ODM to OEM shipments.
Source: Gartner (November 2008)

“It is too early to say how long the economic climate will impact the devices market, but we expect market conditions to remain challenging through at least the first half of 2009,” according to Gartner analyst Carolina Milanesi. She noted handset sales declined in Western and Eastern Europe, as well as Japan.

Smartphones are the brightest spot for handset sales in North America and globally. Smartphone sales worldwide increased 11.5% in the third quarter, Gartner said, with Nokia, RIM and Apple being the leading smartphone OEMs.

Ross Rubin, an analyst at the NPD Group, said a smartphone now is the top-selling handset in the United States for the first time. That’s the iPhone 3G, which AT&T started selling last June. Motorola’s Razr V3 had been the No. 1 phone in the United States for 12 straight quarters.

The Razr V3 in its various iterations was No. 2 on NPD’s list, followed by another smartphone, the Research In Motion (RIM) BlackBerry Curve. Two messaging devices, the LG Rumor and LG enV2, were fourth and fifth, respectively.

WATERSHED SHIFT
“The displacement of the Razr by the iPhone 3G represents a watershed shift in handset design from fashion to fashionable functionality,” Rubin said. “Four of the five best-selling handsets in the third quarter were optimized for messaging and other advanced Internet features.”

In other words, voice may continue to be the main reason to have a phone, but consumers also are looking at phones as Internet and messaging devices.

Worldwide: Preliminary Smartphone Sales to End Users by Vendor, 3Q08 (Thousands of Units)
Note: Under the name HTC, Gartner counts only the company’s own-branded devices.
The devices that HTC designs for mobile operators are shown separately under the
operators’ names in these statistics. Source: Gartner (December 2008)

Rubin said NPD’s research showed 43% of phone buyers wanted a cameraphone, while 36% wanted the phone for text messaging. The greatest annual increase in sales was for phones with QWERTY keyboards. Rubin said 30% of phones sold in the third quarter had that feature, nearly triple the year before. Bluetooth was found in 83% of the phones sold in the third period, compared to 72% a year earlier, and 68% of phones were music enabled, compared to 49% the year before.

Voice-centric consumers see little reason to upgrade their devices in current economic conditions, Rubin said, so sales are being spurred by consumers who want a phone to do other things.

Although mobile phones are being seen more as a consumer electronics device, Rubin said there is little chance that anyone except an existing handset OEM could capture much market share. He doesn’t think any CE manufacturer not now in the business will be able to enter the mobile phone world.

The Big Five – Nokia, Samsung, Sony Ericsson, Motorola and LG – sold more than 80% of the phones globally in the third quarter. Motorola, which hasn’t had a hit phone since the Razr launched, has seen its market share falling steadily in recent years. The iPhone has sold well in the United States, but Apple doesn’t have the breadth of models nor carriers to compete in the mass market.

Worldwide: Preliminary Smartphone Sales to End Users by Operating System, 3Q08
(Thousands of Units)
Note: The “Others” category includes sales of Sharp Sidekick devices based on the Danger platform. Source: Gartner (December 2008)

CARRIER RELATIONS
One thing that’s not going to change anytime soon, Rubin said, is the best way to get mobile phones into consumer hands is through partnerships with carriers, and especially with carrier subsidies. “As long as the market remains dominated by carrier distribution,” he said, “it will be tough to dislodge [the major manufacturers]. It also will be difficult to compete with carrier subsidies.”

AT&T’s subsidy of the iPhone 3G, which brought the price down to $199, is one of the reasons that phone has sold so well, Rubin said. And that price – $199 – has become the new standard for smartphones. Apple’s decision to open up the iPhone operating system for approved third-party applications also was a wise move, he said.

The Sprint-Clearwire WiMAX network may have some impact on device pricing, Rubin said, because the network plans to sell all its devices without subsidy and with flexible service terms that don’t require a 2-year contract. That will encourage new entrants into the device market, at least for WiMAX, but it remains to be seen how it will impact the traditional cellular marketplace, he said.

The analyst also said consumers likely will use their handsets more and more for Internet access, especially as 3G and coming 4G networks proliferate. Data plan pricing will be the key to how wireless data grows. “But there’s still a huge segment of consumers who want a thin, voice-centric clamshell phone,” Rubin said.

Gartner analyst Ken Dulaney says mobile phones have become so important to most consumers that the phone market is affecting other CE devices, such as digital cameras and music players. If the choice is between buying a phone that also can be used for photographs, or a basic phone plus a separate basic camera, the consumer likely would choose one device.

Dulaney said as attractive as the handset market might be for CE manufacturers, he doesn’t believe there will be any new phone entrants. There also won’t be any consolidation, he said.

“Motorola has been on the block and no one wants them,” he said. “What [OEMs] will do here is that if someone is sick, they’ll just let them fade away. It’s not worth buying them.”

The future of smartphone manufacturer Palm is somewhat cloudy, Dulaney said. Palm has seen slow sales of its Centro smartphones and has no carrier yet offering its new Windows Mobile Treo Pro, which is being sold unlocked at $499. He said he thinks Palm will have at least one more phone model in the coming year. But Palm faces the challenge of getting that handset to market while simultaneously cutting $20 million in quarterly expenses. Still, Dulaney said, Palm has the backing of the private equity firm Elevation Partners and doesn’t have to go to capital markets for additional funding.

The State of Mobile Phone Retailing

Mobile phone retailing seems to be doing better in this down economy than other areas.

A recessionary economy puts a lot of pressure on retailers, including mobile phone retailers, but it also is an opportunity for some.

The big box retailer Best Buy completed the conversion of all of its 965 U.S. stores to Best Buy Mobile stores in 2008. Scott Moore, marketing vice president, said Best Buy Mobile now figures it is in a position to sell more phones than ever because it offers the most phone models and has a qualified retail staff.

“WALK OUT WORKING”
Best Buy spent some $10 million on the conversion, which included a quarter-million hours of training for its staff, Moore said. Employees get at least 80 hours training and continue to learn about mobile phone technology and trends. The retailer also has a “Walk Out Working” promise that consumers will know how to use their phones when they walk out the store, he said.

Best Buy Mobile is a joint venture with Britain’s CarPhone Warehouse (CPW), created in May 2008. Best Buy also acquired a 50% stake in CPW’s European operations.

Moore said Best Buy Mobile now offers nearly 100 different phone models on nine carrier networks. Since the conversion, the company’s stores have seen sales of its multimedia and other high-end phones increase 10 times what they were a year earlier, Moore said. He declined to give specific numbers.

As phones become more sophisticated and consumer expectations increase, Moore said it is becoming more important that retailers provide the help consumers need. “One of the things that has anchored our thinking … is that most consumers think [buying a phone] is a nightmare,” he said. “They’d rather go to the dentist.”

After the sales staff helps a buyer choose a phone, the staff also activates the phone and shows the consumer how to use it.

Despite the economic downturn, Moore said, Best Buy Mobile has seen pent-up demand during the holiday sales period for handsets. He said people who lined up outside stores on Black Friday were asking for phones, not for computers or home theater devices. “That says a lot about this industry,” he said.

Best Buy Mobile also did some research prior to the holidays that showed the Millennial Generation, which spans pre-teens to those in their mid-20s, were particularly fond of their phones. Millennials are twice as likely to choose a phone over a TV, while Baby Boomers preferred their TV, the survey showed.

Mike Cost
    Cost: It looks like mobile phones sales are weathering the recession better than other consumer electronics devices.

Millennials also make more mobile phone calls and send more text messages than any other group.

Moore said the survey results indicated a bright future for the mobile phone industry, including the trend that younger people want their phones to do more than make calls.

SUPPLY CHAIN
The state of the economy also helps the business model of one of the world’s largest mobile phone distributors, Brightstar. The company can help retailers by improving supply chain efficiencies, according to Mike Cost, U.S. president and COO.

From a distributor’s point of view, Cost said, it appears mobile phone sales are weathering the recession better than other consumer electronics devices. That’s because consumers see phones as a must-have and are demanding phones that do more than simple voice, he said.

Smartphone sales have been increasing worldwide, Cost said, and he expects they will account for about one-third of all phones sold in 2009.

Brightstar, headquartered in Miami, recently was named the 108th largest private company in the United States by Forbes Magazine. The company has sales, distribution and manufacturing facilities in 50 countries and works with more than 60 manufacturers.

 

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