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Sizing up the ’07 handset space: Analysts watching volume vs. niche sales, data opportunities

In the hard light of early January, the shape of the year unfolding ahead remains somewhat amorphous.
What to watch for in the handset space, the wireless industry’s most tangible interface with consumers?
An informal survey of leading analysts, not surprisingly, takes a multifaceted approach to prodding and poking the wild, unpredictable beast that is the handset market.
Analysts suggest that a number of broad, market factors-3G handset offerings, the drive for iconic designs, mobile TV-will affect all handset vendors.
And then there are vendor-specific challenges: Will Nokia Corp. and Qualcomm Inc. resolve their differences at the 11th hour? Can Motorola Inc.’s Krzr succeed the Razr? Are Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. “stuck in the middle,” and trying to figure which way is up? Can Sony Ericsson Mobile Communications L.P. maintain its recent momentum, and how will it balance profitability and market share? Will a number of smaller vendors succumb under pressure?

Cracks in the armor?
For Chris Ambrosio at Strategy Analytics, the 3G situation merits attention. Last year, 90 million W-CDMA units shipped, roughly 10 percent of the year’s total. According to Ambrosio, vendors at the front end of this nascent curve-such as Nokia and Sony Ericsson-benefit from higher average selling prices. “Fast followers” that hang back, looking for their opening, derive some advantages as well. Motorola, however, has yet to “get on the 3G escalator,” Ambrosio said.
Nokia, however, must defend its market share and brand position, particularly in emerging markets, by offering a mid-tier offering that helps it transition users from entry-level devices to the more lucrative high-end phones, Ambrosio said.
In North America, expect “more of the same,” Ambrosio said. Nokia’s efforts “remain a mystery.” Carrier control of the market will tighten through continued use of subsidies, though Cingular Wireless L.L.C.’s more open support of off-portal offerings-particularly for music-is “a breath of fresh air” and may benefit Sony Ericsson.

Stuck in the middle
Bill Hughes, analyst at In-Stat, suggested that one big story is how Samsung and LG will fare in the shadow of the behemoths. He referred to the concept of “stuck in the middle” articulated by Harvard University business professor Michael Porter in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors.” A vendor can be a low-cost, volume producer, saturate a market segment or serve only niche markets, Hughes said. Samsung and LG could decide to more effectively pursue one of these three options, or shoot for the moon.
“If they think they can displace one of the leaders, I’d say, ‘go for it,’ ” Hughes said. “Sony Ericsson, on the other hand, has served the consumer electronics-oriented niche well and I congratulate them.”
Hughes, however, sees cracks in the bastions at the top. Nokia’s strength in volume in emerging markets seems a contradiction from its stated intention of pursuing “multimedia computing devices.” That will require addressing the U.S. market eventually, as data use will rise most quickly in mature markets. The analyst also questions the wisdom of Motorola’s apparently intense focus on the Linux operating system.
Neil Strother, analyst at NPD Group, agreed that Samsung and LG fall into a similar category.
“With ASPs and margins falling, Samsung has to ask itself how it will stay in a volume-based game,” Strother said. “Samsung can probably scale up fairly quickly, but they’ll take a hit on margins. They still need to work harder on brand building, as does LG.”
John Jackson, analyst at M:Metrics, said that “scale is an insurmountable barrier” that may overwhelm a number of small vendors; for example, Motorola’s “retrenchment” with Sprint Nextel Corp. will put pressure on Sanyo Corp. On the other hand, Jackson said, Motorola’s new line of Razr successors has hit a market transformed by competition.
“The fast followers have diluted the market with thin phones,” Jackson said.
The Cingular opportunity
Nokia will do well to pursue an opportunity at Cingular for HSDPA handsets, an opening that might offer salvation to whomever can meet it.
“There’s a flagship opportunity at Cingular in HSDPA,” Jackson said. “And I expect Samsung will be aggressive there too.”
The U.S. market in general is fragmented, due to the split between GSM and CDMA carriers as well as each operator’s customization requirements, leading to relatively small market share for each vendor, Jackson said. This may lead to competition via cost cutting or heavy spending on marketing and branding-both of which may favor the larger players.
The U.S. offers a conundrum, said the analyst: with the handset industry “hemorrhaging profitability,” vendors need to position their handsets in a way to get consumers to pay more, but subsidies in the U.S. are an entrenched aspect of the business here. That may lead to further experimentation with alternative distribution channels akin to Nokia’s flagship stores.
Bill Morelli, analyst at IMS Research, said that Nokia needs an iconic handset to sharpen its brand perception in the U.S. and, indeed, in mature markets where vendors need to offer operators a handset that leads consumers to upgrade their devices.
Though Morelli’s firm does not do consumer research, he plans to closely watch for data on whether carrier’s bundling offers will keep subscribers from churning, or whether hunger for a specific handset will lead them to another carrier. (Who holds the power in the tug-of-war between carriers and vendors?)
The challenge for handset vendors is to deliver a device that taps into bundles that offer, say, satellite TV, cellular and wireline or cable-based services, Morelli said.
Down the road? Morelli said that two schools of thought reign over the handset business, one suggesting that converged devices packing every available feature will rule, while another points toward “diverged” devices, which might only couple one major feature along with voice. He sees continued consumer interest in e-mail capabilities and, thus, growth in the category containing Motorola’s Q, Nokia’s E62, Research In Motion Ltd.’s Pearl and Samsung’s BlackJack.
Morelli said he expects Nokia and Qualcomm to resolve their cross-licensing arrangements, while RIM’s suit alleging trademark infringement by Samsung’s BlackJack is a toss-up that could hurt Samsung if RIM prevails, even temporarily.

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