NEW YORK-More than any other part of telecommunications, the handset business “will go through the most severe changes in the next several years,” said Jeffrey Schlesinger, wireless technology analyst for UBS Warburg, New York.
Slowing rates of growth in voice communications, coupled with the lag in data uptake, mean a changing competitive landscape that cannot support the expansion of every handset vendor, he said last week at the investment bank’s “Global 2001” conference.
“In its euphoria, the sell side (analyst community) has been overly aggressive in terms of (predicting) number of handsets sold,” Schlesinger said.
“There has been slower-than-expected growth during the first half of 2000 due to few new products … from major vendors that have salient features with more utility. … Smaller, lighter, faster won’t do it anymore.”
As the pace of new customer additions slows, replacement handsets will become an increasingly important part of the sales mix. By year-end, UBS Warburg expects the number of mobile subscribers to reach 700 million, a 44-percent increase from last year. New customers will have purchased 58 percent of the 415 million to 420 million phones it projects will be sold this year, excluding integrated Digital Enhanced Network and Personal Digital Cellular units.
“The United States is a nice market, but it is growing about 20 percent (a year), while Asia and Europe are growing 60 percent,” Schlesinger said.
Next year, UBS Warburg anticipates that half the projected 565 million to 575 million phones sold will be replacements, of which 90 percent will be voice communicators. GSM phones, primarily sold in Europe, will comprise 55 percent of all replacements in 2001. North American subscribers converting to digital from analog will buy 18 million units, accounting for 30 percent of all replacement sales in this region.
By the end of 2002, the bank estimates that 60 percent of the 700 million units sold worldwide will be replacements.
In this environment, Schlesinger said he expects that Asian handset makers, particularly those based in Japan, “could improve their market position.” He cited the distribution relationship that Matsushita Electrical Industrial Co. signed with Ericsson Inc. as one tactic to achieve this goal.
“I am more excited about the Japanese than the Koreans because Korea wants to go its own way,” Schlesinger said.
Enhanced data in the form of General Packet Radio Service and 1XRTT will begin ramping up by the middle of next year, he said. Sales of phones enabled with Wireless Application Protocol technology have floundered this year because the networks are too slow to make WAP phones appealing to users, he said.
Devices enabled to use these 2.5-generation wireless services likely will comprise a niche market of 25 million to 30 million units sold in 2001.
New purchases of handheld and palm-size personal computers also will rise, to about 10 million in 2001 from 7.5 million this year. Palm-size PCs will grab a growing share of this segment.
“There is a lot of hype out there about mobile data and the Internet. … Mobile data is an evolution that starts with SMS (short message service), sending text messages from one wireless phone to another. … SMS is the most successful mobile data technology in the world today,” Schlesinger said.
“We don’t have it in the U.S. because the networks don’t talk to each other. … The U.S. is still trying to take the fixed line Internet and make it mobile, and I don’t think that’s going to fly.”
Corporate e-mail and other applications for business enterprises likely will take off first. For consumer adoption of electronic commerce and other advanced data services, one of the big unresolved issues is provision of “end-to-end security, which doesn’t exist today,” Schlesinger said.
Third-generation wireless is not likely to become a factor in the mobile telecommunications landscape until 2002. Enabling 3G will require a substantial capital investment, one that network equipment “vendors will pay in terms of profitability and revenues being back-ended,” Schlesinger said.
Most of the European carriers with third-generation licenses are established companies that pose less of a credit risk to lenders. In the near term, however, the problem is they have focused on customer growth through aggressive marketing of prepaid services. Postpaid subscribers provide better cash flow to carriers, and this is a more important criterion than customer additions when operators want to borrow money, Schlesinger said.
“The market is concerned over capital spending plans in 2001 because carrier stock prices are depressed and capital expenditures are growing faster than carrier revenues,” said Nikos Theodosopoulos, fixed line telecommunications equipment analyst for UBS Warburg.
The leadership position Nortel Networks has taken in optical networking equipment will provide it with deep pockets to make an aggressive foray into third generation wireless equipment, he added.
“In the 3G mobile infrastructure market, Lucent will have a hard time in Europe. Nortel and Ericsson will be successful,” Schlesinger said.
