The speculation started in late June. Analysts began questioning whether the mobile-handset market was going soft.
Their suspicions appeared justified when the world’s largest handset vendor, Nokia Corp., said third-quarter results would be lower because of the Finnish company’s timing of new product introductions. Investors punished the manufacturer.
L.M. Ericsson also warned of lower profits in the handset division, and just last week the No. 2 handset maker, Motorola Inc., was hit on Wall Street because of a rumor that indicated the vendor was scaling back handset sales. Motorola indicated the rumor was false.
Still, wireless handset stocks are in a tizzy as investors react to what they believe is a slowdown in the mobile-phone market. The big three-Nokia, Motorola and Ericsson-account for more than 50 percent of annual handset sales to subscribers during the last several years.
Handset makers have enjoyed more than a year of extremely prosperous times. Analysts were consistently finding they had to upgrade their projections for worldwide mobile-phone growth. Handset suppliers couldn’t get phones out the door fast enough, running their production facilities at full speed and hitting component shortages.
Today, many analysts believe they are through raising their global handset sales predictions for the year, and vendors appear to have adjusted to component shortages. Does this mean a slowdown in demand for wireless service?
Most analysts and vendors say no. They still project healthy sales volumes of more than 400 million globally.
“End-user demand doesn’t seem to be affected at all,” said Bryan Prohm, senior analyst with Dataquest. “It’s much more of a supply-side phenomenon, which is something we haven’t seen in a while.
Dataquest plans to release a market research note this week detailing new trends it’s seeing in the global handset market. A shift to lower-end phones has made the handset market more competitive. As a result, supply has caught up with demand, affecting the big three vendors, said Dataquest.
Another major trend is a change to WAP and other data-enabled handsets.
Major operators, primarily in Europe, appear to be shifting their focus from voice-centric handsets to WAP phones, and vendors like Nokia are caught.
“Carriers are definitely demanding phones with Internet browsers,” said Wit SoundView analyst Matt Hoffman, who in June predicted a shake-up among leading handset vendors in Europe as carriers demand more WAP handsets. “Nokia decided not to put WAP across the entire product platform as Motorola and others like Siemens, Alcatel and Mitsubishi chose to put it in mid-tier and lower-end products … Nokia is now late coming to market with that low- to mid-tier product. They’ll have to fight entrenched competition.”
WAP technology’s dismal uptake in Europe is well-documented, due to vendors’ slow transition to that market and lack of compelling applications. Yet, carriers want to reduce their inventory exposure of voice-centric handsets and place more performance pressure on manufacturers to deliver on the data-centric phones they have promised, said Prohm. Vendors in turn have to reallocate resources to meet the demand.
“A lot of what’s happening is because of WAP,” said Prohm. “It’s leading to a slowdown and more prudent buying behavior patterns of carriers. When WAP does come, they don’t want to get caught with excess inventory.”
Hoffman cited one major U.K. operator that has at least 1 million voice-centric and higher-tier WAP phones in inventory. That operator wants to scale down its inventory to make room for the WAP phones it thinks will be dominant in the second half of the year.
Still, analysts wonder what kind of incremental growth WAP handsets will bring in light of the poor uptake of the service. They say WAP services need a broader user base, more compelling applications and packet-switched networks. With no incremental catalyst to accelerate the handset replacement cycle, UBS Warburg L.L.C. technology analyst Jeffrey Schlesinger sees only moderate handset sales growth from vendors for the rest of the year.
“WAP is a toy,” said Schlesinger. “No one is going out of their way to get a new phone for data because of the utility of the service … Incremental growth won’t come this year because data isn’t there.”
U.K.’s BT CellNet reported in June that it sold 175,000 WAP handsets, and has given away another 330,000 in connection with promotional agreements with online banks. Germany’s T-Mobil announced sales of 250,000 WAP handsets in June since launching the service in November. The average WAP customer, it said, used the service less than once a week.
“Users are frustrated with the service,” said Phil Kendall, Strategy Analytics’ director of mobile communications services in Europe. “People are switching off because they are fed up with the headlines on the handset. It’s up to someone to create more compelling reasons to pick up a WAP handset.”
Many carriers are hoping the adoption of WAP services will increase as they sell more WAP handsets and application providers, seeing a larger variety of handsets, work to create more compelling offerings.
However, GPRS handsets, which will allow carriers to offer packet-data service in an always-on mode, are late, too. Nokia has indicated volumes of GPRS phones won’t be ready until the middle of next year. And other major vendors have continually delayed rollout dates of GPRS handsets as well.
“There could be more bumps as GPRS comes out,” said Prohm. “It’s a change of buy-side dynamics to the extent where operators are hesitant to stuff channels with 2G phones.”
