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Replacement sales overtake first-time device purchases: ‘Upgrade’ means more features at yesterday’s price

This year, worldwide replacement handset sales will rise to more than double the number of first-time purchases, according to a forecast by market research firm iSuppli Corp. And that has implications for the higher-end of the handset market and vendors with a market-segmentation strategy.
Initially, Nokia Corp., with its lead in 3G devices, broad portfolio and brand recognition in many developing markets, may be best positioned to benefit. Meanwhile, slower growth in handset sales in general may lead to further consolidation, analysts said.
Overall, due to vendors’ cost efficiencies, consumers stand to benefit by getting more features at prices similar to those paid for the last phone they purchased. Thus, “replacement” equates to “upgrade” in the sense that the same dollars will buy more features. That does not necessarily equate, however, to more handset dollars spent.
The trick is to get ARPU-growing features into the hands of consumers, who have a mixed record of adopting new services, according to analysts. While many seem to ignore advanced features that might generate data revenue, there’s some indication that greater capabilities eventually lead to adoption of advanced, revenue-building features.

Higher ARPU ahead?
“This growth in replacement handset sales has been the case for some time in mature markets such as Western Europe, North America and parts of Asia-for example, Hong Kong and Taiwan,” said Ben Wood, analyst with Collins Consulting Services. “The most interesting development is the growing proportion of replacement sales in markets such as China and India. Nokia has been particularly effective in embracing this opportunity through careful market segmentation. In mature markets, Sony Ericsson and Samsung seem to be the leading contenders, given their focus on mid- and high-tier devices.”
Western Europe has enjoyed a strong wave of replacement sales in the past two years, according to Wood. In the United Kingdom, however, a trend toward longer service contracts appears to have stunted the growth of the replacement market. In emerging markets, the replacement cycle is driven more by general economic prosperity and, encouragingly, added features on handsets, the analyst said.
One key to the impact of replacement sales is whether, in fact, more capable devices will translate to greater ARPU, Wood said. That is particularly challenging in growth markets such as India and China, he said. It’s unclear whether replacement sales of higher-end devices actually slow the erosion of average selling prices (ASPs), Wood said.
In a recent report, iSuppli called the predominance of replacement handset sales over first-time handset purchases “a major milestone of market maturity.” This year’s projected 68-percent market share captured by replacement handsets will rise to 84 percent within three years, according to iSuppli’s forecast.
The handset market’s maturity also means that overall subscriber growth, which has averaged 25 percent in the past three years, will slow to less than 13 percent this year and drop below 6 percent by 2010, iSuppli’s research found. That is the inexorable force likely to drive consolidation among vendors outside the top-tier.
These trends are leading wireless carriers to offer their existing subscribers incentives to exchange old handsets for new ones, particularly those that support services promising greater ARPU, said Tina Teng, iSuppli analyst.

Where and when
remain mystery
Figuring out where and when the replacement cycle will hit is difficult to glean from mere data, said Bill Hughes, analyst at In-Stat. Cultural factors, local economies and market offerings across the globe’s patchwork of markets all figure into the conundrum.
“In general, people tend to stick with their phones until there’s a compelling offer to make them upgrade,” Hughes said.
In-Stat found in a recent study on the motivations driving replacement sales that four main factors are at work. Fifty-three percent said they would figure out what they want on a visit to a retail store. Twenty-one percent just wanted a basic phone. Eighteen percent “know what they want”-i.e., they have their eye on more advanced features. Six percent said that someone else would advise them (perhaps a corporate purchaser or a family member).
In-Stat also found that replacement handset buyers tend to be loyal to their carrier first, their existing operating system second and their device vendor third.
Hughes said there appeared to be a correlation, if not cause-and-effect, between the growth in replacement sales and data use.
“There will be a cross-over point in the future when data revenue exceeds voice revenue,” he said. “It won’t be this year, but it will happen before 2012.”
Subscribers who profess interest in voice-only services may pose a problem for the industry in achieving this cross-over, he said. But, he added, In-Stat research showed that more richly featured phones tend to win over those who claim interest in voice-only.
Clear as mud?
“It’s a multi-dimensional issue,” Hughes concluded.

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