Mobile-phone penetration rates are surpassing 90 percent in markets around the world, reaching the saturation point in Hong Kong, South Korea and Western Europe.
Meanwhile, handset manufacturers continue to gain ground. Worldwide mobile-phone shipments in the second quarter fell just short of an all-time high, according to figures released last week by IDC, marking a 22-percent increase from the same period a year ago.
In fact, analysts continue to up their expectations for the handset market this year, with some estimates approaching a whopping 1 billion handsets shipped.
Those sales are being fueled in part by emerging markets such as China, India, Africa and South America, where mobile phones are quickly becoming commonplace even in remote, desolate regions. But analysts say replacement phones—handsets bought by users who already have service—are the driving force behind the booming market both globally and in the United States.
“Clearly, the percentage of replacement phones has been going up significantly in the last 10 years,” said Robert Laikin, chief executive officer of wireless distributor Brightpoint Inc. “With the (wireless subscriber) base getting bigger, the normal replacement cycle has been a significant part of sales.”
Indeed, replacement handset sales have exploded in recent years, according to market research firm iSuppli, and the trend is expected to continue. The firm predicts first-time phone sales will plunge from 268 million units this year to 115 million by 2010, while upgrades increase from 664 million units to 900 million units in the next four years. Upgrades, which in 2004 represented about half of all phones sold, will account for 89 percent of the market by 2010, iSuppli forecasts.
And while security firms continue to churn out alarmist announcements about lost phones—one recent survey claimed nearly two-thirds of Americans lost a handset last year—most onlookers agree replacements are being purchased by users who want phones with more bells and whistles to take advantage of new 3G networks.
“I think the reality is that people who buy a brand new device and lose it or break it before the contract is up, that’s not the rule,” Laikin said. “The trend is, if you’re a teen and your friend has a high-megapixel camera phone and you don’t … you’re going to want a high-megapixel camera phone. If your colleague at work has a phone with a built-in MP3 player, you’re going to want a phone with a built-in MP3 player.”
As any consumer who’s ever had to buy a new phone while under contract can attest to, those upgrades can be pricey. So carriers are subsidizing handsets, helping users afford new phones in exchange for locking them in for an additional year or two. The tactic not only extends the operator/subscriber relationship, it allows carriers to push higher-end plans so users can take advantage of new applications such as photo-messaging, mobile gaming and surfing the wireless Web.
Interestingly, while users seem willing to pay for such high-tech hardware, they’re less willing to pay more for 3G services. An In-Stat study released earlier this year found that subscribers would spend an extra $20 for a multimedia phone but believed $15 a month was too much to pay to receive content on their handsets.
That attitude is likely to change as multimedia phones become more commonplace, according to IDC, and more potential users are exposed to next-generation services.
“There has been much talk about 3G being a standard, but that could only become a reality when carriers were able to market services that were appealing to consumers,” said Ryan Reith, an IDC research analyst. “With competitive services in place to drive usage on mobile phones for applications beyond voice, handset vendors are putting an increasing amount of resources into 3G handsets.”
Carriers, of course, look to benefit from that trend by boosting data revenues as margins from voice service continue to dissolve. But it could also help both national retail chains and mom-and-pop outlets that are able to explain next-generation technologies and applications to users looking to upgrade their phones.
Retailers will look to exploit that advantage as they battle Wal-Mart Stores Inc. for mobile customers. Wal-Mart has gained significant traction in wireless, expanding from off-the-shelf prepaid offerings to pushing more postpaid contracts and giving prime in-store placement to eye-catching feature phones. But, given the chain’s targeted demographic, sales at Wal-Mart are more likely to be made by first-time buyers who value the bottom line.
“While it is harder for retailers to battle with Wal-Mart—especially on price, and for some communities, in convenience—it is possible for other wireless retailers to compete,” Charul Vyas of the NPD Group wrote earlier this year. “Buyers who are looking for a more upscale shopping experience are not as likely to shop at Wal-Mart.”
Regardless of where subscribers may purchase replacement handsets, though, their carriers will fight hard to keep them. Reducing churn is critical as the U.S. market reaches the saturation point, and carriers have the advantage of knowing their users’ spending habits and usage history. Most operators are quite happy to subsidize a high-tech handset for a good customer who spends $100 a month or so for service—even if that subscriber may still be under contract. And that means that going directly to the carrier for an upgrade is in the user’s best interest.
“I think most carriers offer very similar retention programs to the indirect channel; I think they certainly offer very similar programs,” said Brightpoint’s Laikin. “But at the end of the day, the carrier will work a lot harder to retain that customer.”
