Sony Ericsson Mobile Communications L.P. announced first-quarter results that were down significantly from the previous quarter, but more than triple its earnings from the same quarter last year. Sony Ericsson earned about $132 million in the first quarter, down from $174 million in the fourth quarter of 2005, but far beyond the $39 million it earned in first quarter last year.
Najmi Jarwala, Sony Ericsson’s president for the United States and Canada, attributed the sequential drop in earnings from fourth-quarter 2005 to first-quarter 2006 to the handset business’ traditional seasonality-that is, strong fourth-quarter, holiday-related sales with a precipitous drop expected in first-quarter numbers.
“We’ve done extremely well on all of our key financial and operational measures,” Jarwala said.
Jarwala said the impressive quarter-on-quarter growth from last year to this year was due to its expanded portfolio of handsets at all price points. The company is best known for its Walkman-branded music phones and its Cyber-shot camera phones, both based on Sony Corp.’s heritage in consumer electronics. However, the vendor manufactures mobile phones based solely on the GSM air interface, which serves the vast majority of European operators, but only 40 percent of the U.S. mobile-phone market. Sony Ericsson decided in 2003 to drop CDMA and pursue only GSM markets.
Asked to discuss the specific financial picture for the North American market, where its sales are limited to Cingular Wireless L.L.C.’s retail operations, that carrier’s deals with big-box retailers and Sony Ericsson’s own branded retail outlets, Jarwala said “We don’t slice these numbers by region.”
“But, more broadly,” Jarwala said, “in North America I think we did extremely well. This is a journey we’ve been on since I’d say the second half of last year. This is the fifth year of our joint venture. In the first few years we had to focus on achieving financial stability and success. Now we have both the financial ability and, strategically, we have taken a decision that we absolutely are going to be successful in North America. To that end, we have made a commitment to bring to North America a complete portfolio, from entry-level to our iconic products. We sold about 3 million of our Walkman phones last year. In the first quarter of this year, we released the Cyber-shot. What we did last year with the Walkman brand, we expect to do this year with the Cyber-shot; we are going to define what imaging means in a mobile phone.”
Sony Ericsson is a London-based, 5-year-old joint venture between Japan-based Sony Corp. and Swedish infrastructure vendor L.M. Ericsson.
Sony Ericsson shipped 13.3 million handsets in the first quarter, down from the 16.1 million shipped in fourth quarter, but up significantly from the 9.4 million handsets it shipped in first-quarter 2005. The company’s average selling price rose 4 percent to $180.
According to Avi Greengart, analyst with Current Analysis, Sony Ericsson has its work cut out for it in the U.S. market, though certain aspects of the market may favor the vendor’s portfolio. The company’s new smart phones, music phones and camera phones introduced in the first quarter are stunning, Greengart said. If the company continues to selectively introduce models into the U.S. market, banking on Sony’s brand strength and technology, Americans may be willing to pay more for the handset vendor’s high-tier offerings. The downside currently is the company’s limited distribution.
“Potentially, the U.S. is important in terms of margins,” Greengart said. “We have a higher level of disposable income and, in theory, there’s the potential for the U.S. to absorb much higher handset prices. In Sony Ericsson’s case, they’ve seen some success in that arena. The problem has been distribution.
“Sony Ericsson is one of the more aggressive innovators in going around the carrier to sell directly to the public, but the carriers have clamped down further by demanding specific feature sets on phones they carry. For instance, Cingular has the Kodiak push-to-talk client on it. So if you want to play there, you have to modify your handset further. Between that and the number of carrier retail outlets, the carriers aren’t making it any easier for the handset vendors to go direct to the consumer. Where there’s been some change-maybe the receptiveness of the big-box retailers to carry unique products such as Sony Ericsson’s products that focus on camera and music functionality. But most American consumers buy postpaid at carrier stores. So, you can’t buy Sony Ericsson products at Verizon, T-Mobile or Sprint. That’s the basic point.”
Sony Ericsson, however, is unfazed by market-share arguments. “At Sony Ericsson, we have never focused on market share at all costs,” Jarwala said, when asked about his company’s stance on margins vs. market share. “The key thing that drives Sony Ericsson is innovation. Given our parentage, we deliver a value proposition that no one else can.”
