Summary
The projections and analysis from the iSuppli Corp. for replacement handsets compared to new subscribers imply the possibility of a price war and reduced margins.
Analysis
The iSuppli Corp. shows from its channel checks how handset growth is dependent on replacements, and not just new subscribers. As iSuppli points out, because upgrades are over 50% of shipments, mobile device results depend on the replacement cycle and will face contraction if the replacement period increases by 4.7 months. Even if emerging rural markets help to add 500 million new subscribers in 2009, the challenge will still be for replacements to make up the difference for the projected 1.3 billion units for 2008. Samsung, LG and Nokia have all revised their forecasts. Samsung altered its original 9% growth for 2009 to single digit or possibly negative. LG claimed to still be striving for 10% marketshare ahead of Motorola and Sony Ericsson, but also acknowledged only slight growth. Nokia might be the realization for what iSuppli refers to as “lean and efficient operations” in response to lower inventories with distributors and retailers. Nokia lowered its fourth quarter projections, claiming that the global handset market could drop by 5% and would be the first industry contraction since 2001. Nokia commented about reduced operating and capital spending and that margin would drop to the mid-teens from the previously targeted 20%. More importantly, during its third quarter results presentation, Nokia stressed its decision not to drop the average-selling-price (ASP). And Nokia is not relying on services as shown by lowering its $128 billion forecast by 2010 for mobile Internet services to $51 billion a year later in 2011.
Nokia could become the business model of promoting a flagship model such as the N97 that is fully featured and high-end priced, but still working with carriers for price-competitive handsets of specific functions. An example is Nokia’s 6650 model to AT&T that is priced at $70 and has dedicated functions for AT&T Navigator, Video Share and Mobile Music. Like the lower handset growth, carriers will have to adjust expectations by reducing subsidies and selling targeted features. The trend is seen with Verizon introducing the $50 Blitz model from UTStarcom for “texters”, and AT&T following with the $50-$80 Pantech units for messaging. The outcome could be a handset price war among the OEMs with reduced margins as carriers try to upgrade for data usage while consumers delay purchases with a longer handset “replacement cycle”.
