The blazing-hot mobile-phone market is finally due for a cool down, and the only companies able to weather the difficulties will be those that have substantial businesses already.
As the world’s phone makers coast into the first quarter, many will have to take stock of their surroundings. Analysts expect most of the top handset makers to report glowing fourth-quarter results-flush with revenues from the holiday buying rush-but predict phone sales will contract as the market matures.
Indeed, research and consulting firm iSuppli Corp. said slowing growth and falling prices will lead to a revenue decline of 4.7 percent this year compared with last year, from 2005’s historic high of $115.1 billion to $109.7 billion in 2006.
The firm said market saturation-which in part is causing a decline in the average selling price for phones-is to blame for the market slowdown.
“Low-end, ultra-low-cost mobile phones are being pushed into emerging markets in large numbers,” said Scott Smyser, director and principal analyst of communications and consumer electronics for iSuppli. “Meanwhile, at the high-end, wireless communications service providers are continuing to demand lower-cost 3G mobile phones in order to spur greater consumer adoption of 3G services. These two factors are driving down the overall ASP (average selling price) in 2005 and 2006.”
Other firms proffered similar predictions.
“With annual revenue close to $120 billion, the industry is not likely to see sustainable double-digit growth going forward,” UBS Investment Research wrote in a recent report on the global handset industry. The firm does business with a variety of wireless players.
Despite the somewhat downcast predictions, most firms expect the handset industry to post another stellar fourth quarter.
“We are expecting another big quarter, up nearly 27 percent from (fourth-quarter 2004) and getting us to 816 million (phones sold) for the year,” said Chris Ambrosio with research and consulting firm Strategy Analytics. The firm predicts that the handset industry will report a total of 250 million phones sold in the fourth quarter.
Indeed, Samsung Electronics Co. Ltd. kicked off the fourth-quarter reporting season with a 40-percent jump in its profits, gains that were largely driven by the company’s semiconductor and TV businesses. Samsung’s mobile-phone operations saw a slight rise in sales quarter to quarter but a drop in operating profit.
Samsung’s relatively solid results were such that Ittai Kidron with CIBC World Markets predicted that both Motorola Inc. and Nokia Corp. also would enjoy sturdy fourth-quarter results. Motorola specifically has generated a notable amount of interest due to the company’s stellar performance during the past several quarters.
“Thus far, Motorola has executed on its plan to revitalize its core businesses through several years of major restructures, and continues to execute on its longer-term vision and strategy,” wrote Maynard Um with UBS. The firm makes a market in Motorola securities. “Over the near term, we believe Motorola will continue to gain market share driven by its strong product portfolio as well as its focus on emerging markets.”
Analysts polled by Thomson Financial Network predict Motorola will report revenues of $10.5 billion in the fourth quarter, almost double what the company reported in its year-ago quarter. However, analysts generally expect little movement in the company’s stock since investors’ expectations are already high. Motorola is set to report fourth-quarter results this week.
Motorola’s successes are in large part due to the company’s expansion into the low-cost phone market, particularly in India. Interestingly, UBS said Motorola’s move into the low end is actually part of the company’s strategy to sell more high-end phones.
“Why is Motorola moving so aggressively in the emerging markets?” asked UBS’ Um. “We believe it is not to sell the ultra low-end $30 phones, but rather to create presence in order to sell $100 replacement devices in the future.”
While Motorola has captured much of the market’s attention, Nokia won’t be left out of the picture. CIBC World Markets expects Nokia to beat revenue and earnings estimates with sales of more than 80 million phones in the quarter. And though Nokia’s successes are due mainly to its focus on low-end, inexpensive phones, CIBC said the company could boost its earnings with 3G phones.
“We expect W-CDMA demand to help offset some of the low-end mix shift with the new N70 growing in popularity, joining the widely available 6680,” CIBC wrote in a recent report. The firm also does business with a variety of market players.
But beyond the first quarter, analysts generally expect the mobile-phone market to finally slow down after years of stellar growth. Revenues should decelerate as phone makers target emerging markets with inexpensive products, having already tapped out mature markets like Europe and the United States. The situation likely will make the strong even stronger.
“We also believe that the top five vendors probably account for 95 percent of industry profits, with the vast majority of smaller industry players likely to lose money in 2005,” wrote UBS. “We estimate that the top five vendors will account for 85 percent of global handset volumes by 2007, up from 70 percent in 2003.”
However, a slowdown in the handset market doesn’t necessarily mean the market will collapse. As 3G networks come online, most analysts expect users will flock to new, high-powered devices-a move that could spark another wave of replacement sales. Emerging markets that move to 3G could grow into cash cows.
Indeed, iSuppli predicts that by 2009, the worldwide mobile-phone market will return to back to its 2005 levels with $115.1 billion in revenues.
