If, at first blush, associating the Sony Ericsson brand with prepaid handset offerings at Cingular Wireless L.L.C. seems like a mismatch, look at it this way: the link simply illustrates a number of ways in which carriers and handset vendors do business, though-shocking!-explanations from carriers, vendors and analysts may vary.
According to Sony Ericsson Communications L.P., having an entry-tier handset such as its recent Z300a model at Cingular shows the handset vendor’s need to address all price tiers in the market. According to Cingular, it reflects the carrier’s desire for a strong variety of brands across price tiers, particularly in prepaid, one of the carriers’ new growth areas. And, if you can believe those pesky analysts, it may represent a quid pro quo for doing business at any price tier.
“For the past two or three years, we’ve had a continuous presence in the U.S. entry-level market,” said Paul Hamnett, vice president of sales for Sony Ericsson in North America. “Going forward, it will be Sony Ericsson’s intention in the U.S. to provide a full portfolio of handsets to bring what most people see as an aspirational brand into most price segments.”
“We often have exclusive GoPhone offerings and this is one of them,” said Judy Cavalieri, vice president for alternate payment products at Cingular, referring to the carrier’s prepaid program. “It works for us to offer our GoPhone customers a special set of products.”
“You don’t get shelf space at the higher end if you don’t provide the carrier with the bread-and-butter volume products that they need,” said Avi Greengart, analyst with Current Analysis. “This is a global trend.”
Traditionally, prepaid customers have been viewed as not lucrative and as drivers of churn, according to Chris Ambrosio, director of wireless device research at Strategy Analytics. But in the past year or so, carriers have seen higher profit profiles in certain segments such as prepaid users. Prepaid customers, for instance, are bigger messaging users than some family-plan users. A lot of extra lines are sitting around unused, according to Ambrosio, whereas prepaid users are spending $30 to $40 per month. And, the analyst said, messaging is “a hugely profitable business.”
Shelf life
“So the spend and profit profiles for prepaid users are starting to change and operators are getting into that segment more,” said Ambrosio. “And they need more reliable brand support from [original equipment manufacturers] brands users want. Nokia [Corp.] really owns that tier in the U.S., especially at Cingular. So Cingular needs some other brands and Sony Ericsson is responding.”
Is it important to Cingular to have all brands well-represented at all price points?
“It’s absolutely important for Sony Ericsson,” Cavalieri said. “They’ve been working on how they could fit into our portfolio.”
Who goes to whom to get a new handset in the Cingular portfolio?
“Cingular has a stringent [request for proposal] process in which we’ll define our requirements for devices we’re looking for,” Cavalieri said. “Then the vendors will offer what they think is their best play in each of the spaces. The entry-tier Sony Ericsson products have done well for us. So we’ve expanded that lineup to include the Z300a, which is a small clamshell model with color casing and internal antenna. It’s selling very well.”
In fact, according to Ambrosio, the Sony Ericsson Z300a comes from an existing Sony Ericsson design. The phone fits into Sony Ericsson’s efforts to focus on media features at the high-end and entry-tier offerings on the lower end, as with their J220 model and, before that, the T290a. “They’ve worked the kinks out of that now,” Ambrosio said. “They’ve got the product designs and they’re executing on getting products to market.”
“We realize that we play in a global, billion-piece-per-year marketplace,” said Hamnett. “And while we’re a growing, profitable company that plays traditionally in the mid- to high-end price segment, we also understand that there’s a volume requirement to remaining relevant in this global market. While our global share is, what, 7 percent, you don’t double that market share by staying exclusively in the mid- and high-end.
“So our strategy is one of balancing the brand we’ve built up with the need to be a serious player on a volume scale, globally and in the U.S. That’s why we have products across all the price points except the very low-end.”
The handset
So much for the strategy. What about the Z300a device?
On the Z300a in particular, Greengart has a positive assessment.
“The handset has a beautiful design, excellent usability and a reasonably low price for prepaid users,” Greengart wrote in a recent research note. “Like all Sony Ericsson phones, the menu structure is clear and easy to navigate.”
“Cingular has an exclusive on the Z300a, but the fact that it is only offered as a prepaid device does Sony Ericsson no favors,” Greengart added. “Most consumers in the U.S. sign up for postpaid plans.”
In the context of Cingular’s other prepaid GoPhones-which include the tiny Pantech C300 clamshell camera phone at $120 and the Motorola Inc.’s Razr v3 in various colors at $200-Sony Ericsson’s Z300a offers “the best bang for the buck,” Greengart said. The Z300a, he added, is the least-expensive clamshell among Cingular’s prepaid offerings.
One way Sony Ericsson appears to have saved money on the Z300a is that it didn’t include a camera. For a mainstream phone, the camera is a “checklist feature,” Greengart said. For prepaid, it’s merely “nice to have.”
“The Z300a is not a bare bones phone,” Greengart said. “Sony Ericsson has lower end phones in its lineup now and, if you go back a few years, they never would have considered that. They’re doing it now because the carriers are asking for it.”
Hamnett shed a little light on the vendor-carrier relationship.
“A major carrier in the U.S. will come to a handset vendor with specific requirements for `customer segments,’ which often are associated with price points, but not always,” Hamnett said. “A customer segment could also mean a music-based phone, a browsing-based phone, a business-based phone. On prepaid, for example, it often is around price points, around $39.99, $59.99, $79.99 and $99.99, primarily. But generally they will come with a feature-set expectation. They’ll do it twice a year. We then show them what we have to offer in those price- or feature-driven segments.”
Sony Ericsson’s apparent success in broadening its portfolio while retaining the sheen of its Sony consumer electronics heritage has won it increasing profits, market share and analysts’ praise.
“Sony Ericsson is hitting on all cylinders,” said Ambrosio. “When they announce a product, it’s getting to market when they say it will.”
With headquarters in both Sweden and Japan, integration issues remain in the five-year old joint venture, Ambrosio said. “But they’re finally executing on their vision and that’s good for operating margins and volume.”
Strategy Analytics recently said in a report that Sony Ericsson is exceeding 9-percent operating margins, the best in a decade. At the high end, where margins are wider, Sony Ericsson is justly getting attention with its Walkman line of music phones and its Cybershot camera phones are in the pipeline for the U.S. Thus, Strategy Analytics is bullish on the handset vendor’s future.
