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Battle for handset volume heads to hinterlands: Easy pickings are gone or are already in play

The search for hotties never ends.
Hot wireless markets, that is, with potential growth in first-time subscribers and prospects for high volumes of relatively low-cost handset sales, market share and, possibly, profits.
A couple of currently hot markets will remain in contention-think China and, particularly, India-and a number of ardently pursued markets-think Russia and Brazil-are cooling.
Where are the world’s top handset vendors looking today for tomorrow’s pot of gold? And what factors create candidates for investment?
The answers, according to several analysts, reflect myriad drivers and competitive issues that loom large over the handset business.

Working harder for profit
“The ‘low-hanging fruit’ is gone,” said Chris Ambrosio, analyst at Strategy Analytics. “The players will have to work harder to find these new opportunities. This plays to the strengths of the multinationals.”
Growth and volume are two different things, Ambrosio said. The largest volumes per se are found in the replacement markets, which accounted for two-thirds of last year’s billion units shipped, according to the analyst. But growth in volume is found in emerging markets, where the quickest gains are made, particularly as players jockey for market share.
Those emerging markets are a siren call that few can resist heeding, though the track record on solid profits is mixed. See the disparity between Nokia Corp.’s fourth-quarter results and those at Motorola Inc.; the former profited on enormous volumes last year, while the latter floundered. Small wonder Sony Ericsson Mobile Communications L.P. is slicing and dicing its opportunities with care in that sector; its enviable track record-perhaps even its future-hangs in the balance.
According to Strategy Analytics, Bangladesh, Pakistan and Thailand will be “distribution-building battlegrounds” in 2007, as the players sort out whether these markets can support the investment necessary to justify their pursuit. Channel expansion in India and China remains high on the priority list.
“Nokia is very proactive in identifying those markets and conditions beneficial to growth,” Ambrosio said. “Motorola has flagged this as an area in which to improve its competitiveness.”
The factors that make China and India attractive also apply to these other emerging markets: high population, low cellular penetration, strong economies, political stability and favorable regulatory environments. According to the CIA World Factbook, Bangladesh has a population of 147 million, of which 9 million were cellular subscribers in 2005. Pakistan, with 166 million people, had 13 million cellular subscribers in 2005. Thailand’s 65 million people had 27 million cellular subscribers in 2005.
These gross metrics, however, only produce candidates for investment, Ambrosio said. Vendors must look closely at the prospects and evaluate local political and regulatory environments, economic stability, operators’ spectrum position and existing or potential distribution channels. Vendors can then work with operator partners to develop market share-grabbing strategies. Those multinationals with end-to-end solutions, network-to-handset, are best positioned.

The end-to-end factor
The end-to-end factor tends to favor Nokia, Motorola and the tag-team of L.M. Ericsson and Sony Ericsson, Ambrosio said, while putting Samsung Electronics Co. Ltd. and LG Electronics Co. at a disadvantage. Chinese firms such as Huawei and ZTE also wield end-to-end capabilities, according to the analyst.
Bill Hughes, analyst at In-Stat, emphasized the perils of market models and the critical nature of that second look.
The mantra of high population, low cellular penetration is “a rule of thumb with many exceptions,” Hughes said. Consumer sentiment, to name one factor, can outweigh the hard numbers. (Thus the intense interest generated in the United States by the Conference Board’s Consumer Confidence Index, which can bedevil politicians boasting of a solid economy. It ain’t solid unless the consumer feels confident that his or her income not only justifies a purchase but is likely to remain dependable for the foreseeable future.)
“The data may appear robust, but consumer confidence can be difficult to factor in,” Hughes said.
According to Albert Lin, financial analyst at American Technology Research, the most attractive global hot spots may be wherever handset vendors can sell their wares directly to consumers. That would presumably provide improved average selling prices and margins with fewer operator hoops to jump through. And such a lure may tilt the global balance toward the direct-to-consumer model. Currently, Lin said, the global balance is about 50-50 between an operator-dominated retail model and direct-to-consumer markets.
The search for new, profitable markets will be influenced by handset vendors’ need to keep ASPs and margins as high as possible, but open markets may also bring a dizzying breadth of competition, a possible downside. Whether a focus on these open markets ultimately is good for the handset business, Lin has yet to determine.
Meanwhile, Lin said, many emerging markets contain segments that behave more like mature replacement markets, offering specific opportunities for certain players. Russia, for example, has been through one growth spurt of new subscribers in 2004-2005 and, with oil exports fueling the upper classes, a significant slice of subscribers is entering an upgrade cycle with an emphasis on high-tier phones. In Russia’s case, that may favor the higher end of portfolios offered by Samsung and LG.

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