The market outlook for CDMA handsets may be described as a tale of two contrasting regions. And therein lies a few wireless lessons about the difference in how profits are made in emerging and mature markets.
The emerging market is the Asia-Pacific region, led by surging numbers of new subscribers in India. According to the market intelligence firm iSuppli, Indian wireless carriers added about 4.7 million new subscribers in January. The Indian market is characterized by first-time handset purchasers seeking basic service and a low-cost mobile phone. Profits there may depend on whether vendors can maintain favorable margins on low-cost handsets, a scenario that in turn may depend on whether Qualcomm Inc. succeeds-as expected-in meeting its goal of providing a single-chip product for its customers.
For a more mature market, consider North America. Growth in volume sales indeed continues here, albeit at a slower pace than in the past. North American sales, however, will be outpaced this year by APAC, according to market analysis and projections by Strategy Analytics. In North America, carriers’ migration to third-generation networks and their push to turn mobile phones into rich media devices is driving a replacement market for handsets with advanced media functions, in turn driving profits for CDMA and competing air interfaces.
Beyond the contrasts in these two distinct, regional markets, the number of disparate local markets and the different requirements for handsets among those markets’ network operators spells f-r-a-g-m-e-n-t-a-t-i-o-n. And fragmentation, in Strategy Analystics’ view, precludes domination by any single vendor.
“It’s a fragmented market, so the vendors who can best meet this fragmented demand from their current range of products stand to win,” said Chris Ambrosio, director of Strategy Analytics’ Devices Research Service.
Who among handset vendors is best positioned to deal with the situation?
“LG Electronics [Co. Ltd.] and Samsung [Electronics Co. Ltd.] have the two richest product portfolios of any CDMA manufacturer and they have the top market-share positions. LG, for instance, has done well in India, based on its willingness to go into the market and work closely with local operators and build their distribution channel,” Ambrosio added.
LG, Samsung and the recently formed Nokia Corp./Sanyo Electronics Co. Ltd. venture are locked in battle for supremacy in CDMA global market share and, according to Ambrosio, that supremacy has historically been determined by who best meets the needs of the U.S. market for advanced handsets.
Thus the two representative markets and their circumstances. To place them in context, consider handset sales data for the six regions of the globe defined by Strategy Analytics. If you accept that India and North America represent two distinctly different markets-emerging and mature-and two distinctly different profit strategies, they can be used to organize a view of the global picture.
Strategy Analytics divides the world into six major regions: North America, Western Europe, Asia Pacific, Central and Latin America, Central and Eastern Europe and “Rest of World.” The CDMA action, of course, is found in North America, Asia Pacific and Central and Latin America.
Last year, for which solid data is available (see Figure 1), North America led the globe in volume handset sales with 65.4 million units, APAC followed closely with 57.4 million units and Central and Latin America trailed with 29.2 million units. Projections for this year reflect a shift that portends the future contrast in the North American and APAC markets: Strategy Analytics projects 70.8 million CDMA handsets sold in North America, surpassed slightly by 71.9 million handsets sold in APAC; Central and Latin America remains as the globe’s third-largest CDMA volume sales market with 32.5 million units.
By 2010, APAC volume sales may outpace North American sales by 101 million units to 91 million units. The compound annual growth rate of North American sales is expected to be on par with Central and Latin America at about 7 percent, while APAC will experience nearly 12-percent growth.
Growth in APAC, i.e., India, has been stimulated by rising financial fortunes for a broad swath of the population, according to iSuppli. Jagdish Rebello, principal analyst on India-related research at iSuppli, said, “The drivers of this remarkable growth include India’s favorable regulatory climate, falling tariffs, slow growth in the deployment of wired telecommunications infrastructure and wireless carriers’ aggressive strategies to reach new areas of the country.”
Indeed, the current and projected subscriber numbers in India are staggering: 48 million subscribers at the end of 2004, 75 million subscribers by the end of 2005 and a projected 278 million subscribers by 2010.
In the U.S. market, reaching 70-percent penetration, volume sales are beginning to slow and the market is expected to become based on consumers trading up, replacing their simpler handsets for those providing rich media and multi-functionality. The same goes for the mature markets of Japan and South Korea, to which many industry players and observers look for a glimpse of future trends in 3G services and uptake.
“Especially in the CDMA market, profitability hasn’t necessarily been tied to volume,” Ambrosio said, about this dichotomy in profit strategies. “It’s more about the migration to higher data speeds and adding richer functionality to support advanced applications. When you talk advanced services such as video streaming and mobile TV, operators are going to subsidize handsets and realize higher revenues per user as a result. So the willingness will be there, in our view, for consumers to buy more expensive handsets to enable that rich media. Profit rests in that migration to 3G and the continuous upgrade to richer media functionality. Adding features allows (original equipment manufacturers) to maintain their margin spread. So, subscriber growth slows, but if we can maintain some (average selling price) strength in the 3G migration, it’ll still be a profitable market going forward.”
For a snapshot on this trade-up-to-3G shift, Ambrosio points to Sprint Nextel Corp.’s reports on the handset replacement trend. “Sprint, for example, reported throughout 2005 that pretty consistently every quarter about 6 percent of their subscribers have been upgrading their handsets,” he said. “That’s a huge number. That statistic illustrates that yes, upgrade sales are rich. Obviously, trading up is not a CDMA-specific issue. That’s true for the total market.”
One vendor that will need to evolve and invest to succeed in the U.S., in Ambrosio’s view, is the Nokia/Sanyo joint venture. “Primarily they’ve [Nokia] got to continue to invest in product development in the high-tier area; Sanyo can’t carry the weight of that on their own.”
The U.S. market for CDMA poses challenges for Nokia that the Finnish global market-share leader in handsets may rectify through its joint venture with Sanyo, Ambrosio said.
“Nokia, with its basic, entry-tier line of products, had been cut out of big markets like the U.S., Korea and Japan because it didn’t offer richer, 3G handsets. The joint venture with Sanyo gives them a nice product mix across both entry- and high-tier handsets so they can compete in these markets,” Ambrosio said.
Strategy Analytics’ outlook for the joint venture is that “the success of this venture depends on both parties’ willingness to continue to devote resources for broad product development in higher tiers.” Should Nokia/Sanyo invest in this manner, the move would also boost Qualcomm Inc.’s already booming chip business for higher-tier handsets.
Emerging strategies
The contrast with profitable CDMA strategies in APAC, specifically India, is stark.
“The U.S. market is a rich device, 3G upgrade market with big subsidies,” Ambrosio pointed out. “The Indian market is characterized by low subsidies, low prices and basic feature handsets. In India, Nokia is probably going to do well in CDMA along with other vendors who are willing to compete on price in order to establish market share.”
So what’s the big picture of CDMA’s overall prospects, when you look at 80/20 mix of GSM/CDMA products in use worldwide and a slowdown in global growth of overall handsets sales in both air interfaces? Does this shift in CDMA markets imply a need for players in the CDMA value chain to diversify into other technologies for long-term strategy?
“They’re all pretty much there,” Ambrosio said. “If you go down the list of the top 10 CDMA manufacturers, they’re all involved to some degree in GSM as well. Diversification has already happened. If diversification is important to CDMA vendors, then it’s the need to diversify CDMA-related product portfolios, as you see happening with the Nokia/Sanyo joint venture.”
The continued ability of CDMA-based vendors to deliver the goods to emerging markets where volume sales are still growing at eye-opening rates may depend on the delivery of a soon-to-be-released, single-chip solution from Qualcomm. CDMA handsets run at a 10- to 12-percent average premium over GSM handsets, in part due to the cost of the CDMA chipset, according to Ambrosio. “So it’s very difficult to get CDMA handsets down to a very low price point for markets such as India, and for manufacturers to maintain a healthy margin on low-priced devices while still being able to move volumes.”
Will Strauss, principal analyst at Forward Concepts, said that the industry is awaiting an announcement from Reliance, the largest CDMA operator in India, on the release of a below-$40 priced mobile phone, which is expected to add to the subscriber frenzy. The phone, in turn, relies on Qualcomm’s expected delivery of its single-chip solution.
“The single-chip solution will simply make for a much cheaper cell phone,” Strauss said. “We know that the vast majority of growth in the cell-phone business is in markets like India where the populace can’t afford better than a $60 phone. In contrast, if you look at the U.S. CDMA market, it’s more than half upgrades and replacements; less than half are for new subscribers.”
Qualcomm’s success in delivering its single-chip solution will go far in sustaining the growth in new subscribers in all emerging CDMA markets, Strauss said.
The market appears to believe that the chip maker will succeed, as the firm contends. Qualcomm recently raised its second-quarter forecast in part due to improved estimates of chip shipments in the quarter, including greater-than-expected demand for entry-level chipsets (read: India) and robust replacement demand in North America (read: United States).
