Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.

It was a year most of us would like to forget, but one we’re certain to remember. Much changed in the past year, with the world’s financial system crumbling and markets worldwide slumping by half. Everyone from CEOs to armchair analysts will have something to say about what happened in 2008, its causes and consequences, and how they were right or wrong. Books will be written, surveys published, and forecasts revised (or even worse, forgotten). One thing is for sure, everyone reading this Analyst Angle will concur that 2008 was certainly not a dull year.

So, what better way to welcome 2009 than to look forward to the five important strategic trends that will play out for wireless vendors, operators, application developers and consumers of all things wireless in the next year (or two). Of course, these are not the only important strategic trends in the industry and I have certainly put aside trends in areas such as mobile broadband, platforms and applications. Readers of this column are invited to add their own comments and thoughts on these and other trends (scroll down to the bottom of this column to add your thoughts).

Strategic trend No. 1: Wireless devices and services are consumer discretionary items and will be impacted by the global economic slowdown

The last 20 years of tremendous growth in the wireless industry have caused many industry insiders to think that wireless devices and services can somehow defy economic gravity. Indeed, when we think back to past economic crises wireless handset sales continued their upward momentum.

The global financial crisis of 2008/09 will show that wireless devices and services are in fact consumer discretionary items. IE Market Research Corp.’s (IEMR) data on third quarter 2008 handset sales show a slump in overall handset sales across various geographies with unit sales in Western Europe declining by -9% year-over-year (YoY), Japan seeing a -28% YoY decline, and even sequential drops in handset sales in emerging markets (-14% quarter-over-quarter decline in Latin America and -7% decline in APAC excluding China). With two-thirds of handsets shipped globally being replacement handsets, we think that wireless devices are just as susceptible to economic downturns as any other consumer discretionary spending item. Consumers worldwide will be cutting back their budgets and will be delaying the purchase of new handsets and plans by at least a few months. This will affect everything: volumes, average selling prices (ASPs), the mix of offerings of device vendors and average revenues per user (ARPUs) and price plans of operators worldwide.

As of December 31, 2008, IEMR is forecasting a -5% decline in device sales for 2009 and only a 5% growth globally of service revenue at the 200-plus wireless operators we cover.

Strategic trend No. 2: The smartphone war has begun!

The one bright spot in the global handset sales picture was actually, you guessed it, North America! Units shipped to North America increased by 12% quarter-over-quarter (QoQ) and 5% YoY in the third quarter of 2008. The reason is the tremendous success of both Apple and RIM in shipping their smartphone devices into the United States. Apple shipped 6.897 million iPhones in the third quarter of 2008, up 516% from the same quarter a year ago while RIM reported some pretty awesome numbers as well.

What I find interesting about the smartphone wars is that North America will actually be the testing ground for 3G-driven data applications, rather than being perennially relegated to wireless purgatory. Given that both Apple and RIM have stronger distribution and supplier channels in North America, look for neat applications emanating from North America-based developers who have stronger relationships with both Apple and RIM.

I also happen to think that marginal growth in profitability at the big-five vendors will be driven by their smartphone sales. Here, the smartphone war of 2009 will determine the future of Motorola’s handset business, given its current lack of a portfolio of 3G smartphone devices. Motorola reported 25.4 million handsets shipped in the third quarter of 2008, which represented a -32% YoY decline in units shipped. How Motorola engages in the smartphone wars in 2009 will, in my view, alter the competitive landscape of the vendor space globally.

Strategic trend No. 3: The wireless infrastructure war has all but ended for Nortel and Motorola

If you thought that competition among handset manufacturers was intense, check out what the infrastructure vendors are going through. IEMR’s data on contracts and revenues at infrastructure vendors shows that third quarter of 2008 results saw a slowdown in revenues among the leading infrastructure vendors, lead by a 15% YoY decline in GSM infrastructure revenues. This shift in spending is exemplified by W-CDMA maintaining its stellar revenue growth with a 67% YoY rate. The shift in spending has also seen CDMA continue its fall with -31% YoY revenue decline in the third quarter of this year. The slowdown in revenues was broad based as EMEA saw its revenues fall -18% YoY while North America fell -22% YoY. Even Asia-Pacific fell to -6% YoY in the third quarter of 2008.

What is interesting about this shift from CDMA and GSM to W-CDMA is that it is happening at the same time as a shift in market share among infrastructure vendors. In terms of market share, the main gainer is Huawei, reaching 11% in the third quarter of 2008. This increase came at the expense of Nokia Siemens Network, Al¬catel-Lucent, Nortel and Samsung. Huawei’s dominance of the W-CDMA segment with 45% of new UMTS/HSPA contracts in 2007 is helping the company increase its market share. In my view, it will be another year or two before smaller players such as Nortel, Motorola and Samsung will decide that margins in this market are not worth the effort and will chose to throw in the towel by selling their wireless infrastructure business and move on to other segments of the telecom infrastructure market.

Strategic trend No. 4: Operators will be conserving cash and market share while mergers and acquisitions will subside

2009 will be marked by operators cutting back both capital expenditures (capex) and operating expenditures (opex) to preserve free cash flow. In its earnings call, Vodafone articulated this idea when management stated that 35% of its opex and capex are variable with demand. In terms of marketing, I think that operators in North America and Europe will begin to adopt business models that have worked well in emerging markets — actually charging customers for handsets and reducing their emphasis on stand alone retail stores with high distribution costs. The Leap/MetroPCS model in the United States is a useful example of this change in distribution structure among operators in developed markets.

I also think that operators with high market share, free cash flow, and high margins will come out of the slowdown in a stronger position to expand their subscriber base while operators saddled with debt and/or lower market share will look to maintain their current market positions. Merger-and-acquisition activity in telecoms will take a breather in 2009 and, more importantly, most M&A activity is likely to emanate from within the operator community rather than leverage buy-outs or investment-bank led deals that have been prominent in the past.

Strategic trend No. 5: Time for handset design and engineering rules to be shaken up

Readers will agree that, for the longest time, form factor and processor speeds in handsets was pretty standard. Consumers had their choice of a candy bar, clamshell, or PDA-variant form factor in handset devices. That is soooo 2008! My view is that innovations are coming fast and furious. A new cellphone prototype developed by Samsung, for example, opens like a book to reveal a five inch OLED screen. The material’s flexibility allows the screen to open and fold seamlessly. The large display is convenient for surfing the Internet, and is even large enough for watching movies or playing games. Other vendors are working on “lego” hardware and software interfaces that allow consumers to customize how they use their handsets. Such technological advancements combined with developments in the area of nanomaterial mass production will lead to handset form factors of the future being very different from what you and I carry on our hips or in our pockets today.

OK! OK! this is certainly not going to happen in 2009 but developments in materials technology and nanotechnology are, in my view, going to drive the strategic winners among handset OEMs in the next five years.

Questions or comments about this column? Contact Nizar Assanie at nizar.assanie@iemarketresearch.com. Contact RCR Wireless at rcrwebhelp@crain.com. The opinions expressed in this article are the true opinions of the analyst(s) and IE Market Research Corp. (IEMR) about the firm(s) and/or industry appearing in this article. Any “forward looking statements” are the best estimates and opinions of the analyst(s) and IEMR based upon information that is publicly available and that the analyst(s) and IEMR believe to be correct. There is no guarantee that forecasts appearing in this article will materialize.

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