Analysts seek vendor commentary to clarify handset picture: 2009 could be ‘year of decision’ for mobile devices

In about two weeks, when the world’s leading handset vendors deliver their earnings statements for fourth-quarter 2008, analysts will be expecting not just numbers but some critical commentary to understand how the world may have changed.
With mobile phones and service increasingly becoming a must-have element of everyday life for billions of people, the twin pillars of the wireless industry offer a glimpse at the foundation of global consumer spending.
And there may be horse-race interest in the numbers, as well, as Samsung Electronics Co. Ltd. seeks to maintain its position as the No. 1 handset vendor in North America, formerly dominated by now-troubled Motorola Inc.
“Samsung stands to gain substantial market share in the United States, which would add to its global market share,” said analyst Tero Kuittinen at Global Crown Capital L.L.C. “In the fourth quarter, Samsung picked up steam with well-received handset models at both AT&T Mobility and Verizon Wireless.”
The numbers and commentary, meanwhile, may also offer a glimpse of how various companies are behaving in a downturn and whether that behavior signals their view of the downturn’s seriousness.
According to Kuittinen, if a company believes that the downturn will end soon, cutting handset prices may help them compete. Conversely, if a vendor’s outlook is for a prolonged downturn, even a depression, survival may require holding steady on prices to maintain profitability, even if that means a contraction in market share.
That dynamic should reveal itself in a company’s handset average selling price, or ASP, said analyst Matt Thornton at Avian Securities L.L.C.
“One big fear in every industry is that some parties can engage in destructive price cuts,” Thornton said. “Competitors have cited Samsung as being particularly aggressive with pricing in emerging markets.”
India has been cited as such an emerging market where Samsung may be cutting prices aggressively – and Nokia may well use tactical, regional pricing to ensure that Samsung’s earnings suffer from such a move.
Another possible dynamic arises if China’s second-tier handset vendors, which don’t have scale or discipline, according to Thornton, begin slashing prices to clear inventory channels. That can be destructive to the ASPs and profits of more disciplined, multi-national vendors.
If ASPs decline more rapidly than historical trends would suggest, two other dynamics could be at work, Thornton said. One is that consumers across the globe may be trading down instead of upgrading to new handsets. Or it may reflect that emerging market sales in lower-cost handsets are stronger than high-tier sales in developed countries. Again, that is where management commentary from vendors should give a clearer picture of global market dynamics.
Inventory burn
Analysts appear to agree that excess inventory in the channel, left over from the fourth quarter, will have to clear in order to get a better view of actual consumer demand. That excess inventory may take two quarters to clear, analysts said. And insight into that topic will require commentary by management, because it is not clearly reflected by mere numbers.
“Inventory burn is key here,” said Kuittinen. “Companies typically will deliver some commentary on this. And ASPs, not a recent concern, will now reveal who is cutting prices and going for volume and market share.”
Among the suspects: Samsung, LG Electronics Co., Motorola and Sony Ericsson Mobile Communications. Nokia Corp., with nearly 40% global market share and the best distribution of any vendor, may have the luxury of making tactical price cuts to squeeze its hard-pressed rivals.
“If we don’t have an outright depression, it might make sense to cut prices,” Kuittinen said. “But if we’re looking at, say, a three-year depression, then Motorola and Sony Ericsson, for instance, should cap their prices to survive.”
“This could be a ‘year of decision,’ ” Kuittinen added. “How do these two vendors act? It’ll probably be summer before the verdict is in.”
One critical element in assessing global demand is the Chinese market, which showed signs of rapidly softening demand in November and December, the analyst said. Thus Nokia’s regional breakdown of its unit shipments in various global regions will be an important metric to come when the Finnish vendor reports earnings on Jan. 22. Of vendors who’ve confirmed their fourth-quarter reporting schedule, Sony Ericsson will report on Jan. 16 and HTC Corp. is due to report Feb. 6.