As a consensus of forecasts converge on the magical billion mark for handset shipments this year-although with some dissenters-attention has focused on several dynamics at play.
The upshot? Watch the market for replacement handsets in emerging markets, the mobile handset industry’s new driver.
Most forecasters agree that the handset industry’s rate of growth is cooling. Developed markets are projected to chill out the most, while emerging markets remain strong-particularly in handset replacement sales. This affects aspects of the market in China, India, Brazil and parts of Latin America, Russia and parts of Eastern Europe, the Middle East and Africa.
According to a new report by Sandeep Malhotra and a team at Merrill Lynch, this year will mark the peak of growth in handset unit shipments. (Incidentally, the investment bank also upgraded its own 2006 handset shipment volume projection to 970 million from 918 million, and it pegged 2007 as the year the industry hits 1 billion handset shipments.)
The context, in Merrill Lynch’s view: This year, net adds in the developed and emerging markets will be about 440 million and 387 million, respectively. The annual growth rate of handset unit shipments will slow in the 2007-2010 timeframe to 10 percent, from the rampant 20-percent to 30-percent growth of the go-go years, 2003-2006. The investment bank attributes that to a slowdown in emerging markets’ subscriber growth from 28 percent year-on-year this year to 18-percent next year.
The bright spot: replacement handsets in emerging markets will grow a whopping 66 percent next year-the engine of continued growth. That segment will account for 80 percent of all handset shipment growth between this year and next year, according to Merrill Lynch. This fact and the trend-replacement handsets in emerging markets accounted for 28 percent of shipments in 2005, 40 percent this year and 58 percent next year-belies the simplistic notion that emerging markets are populated solely by humble fishermen and farmers.
“The burgeoning middle class in India, for instance, is relatively affluent and keen to demonstrate their status through material possessions,” said Ben Wood, analyst with Collins Consulting Service. “Autos and houses may be beyond their means but the mobile phone is a perfect status symbol.”
Replacement handsets in emerging markets will need to sport certain features to attract this newly ascendant market segment. The desire for more status-worthy and functional devices will focus on color screens, cameras, fashionable styles, Web access, mobile e-mail and mobile music. In contrast, replacements in developed markets are not dissimilar as they are driven by mobile music, fashion and e-mail, as well as advanced imaging, high data speeds and, possibly, mobile TV, in Merrill Lynch’s view.
Who benefits?
According to Informa Telecoms and Media’s Gavin Byrne, the trend is likely to favor the two behemoths-Nokia Corp. and Motorola Inc.-that now dominate the emerging markets with low-cost handsets. Brand, scale, an established presence and balanced portfolio may well carry Nokia forward in the replacement market, Byrne said.
Wood said that Nokia has fielded a well-defined upgrade path in its portfolio and its third-quarter results reflect this strategy’s benefit. In contrast, Wood said, Motorola stumbled at first by focusing solely on the ultra-low cost segment, an approach that has improved.
Now Motorola’s focus on ultra-low cost handsets has broadened, as reflected by the aspirational features and utility of its new Motofone device, giving it traction. Motorola’s W220-a clamshell style, Razr-like device, in Byrne’s view-scores on style, color screen and modest music (FM radio), he said.
However, the aspirations of replacement handset buyers in emerging markets has opened the door to aggressive moves by the remaining top-tier vendors-Samsung Electronics Co. Ltd., Sony Ericsson Mobile Communications L.P. and LG Electronics Co. Ltd. All three, while avoiding a charge into the buzzsaw of Nokia and Motorola’s advantages in entry-level, low-cost offerings, have targeted the affordable tier above the entry-level.
One element of the replacement segment, regardless of whether it’s in developed or emerging markets, is that buyers will seek handsets with more functionality and, possibly, style.
“Emerging markets have a sweet spot above entry-level,” Byrne said. “Samsung, Sony Ericsson and LG will try to maintain their own portfolio structure and plan on a `halo’ effect to attract attention to their lower cost offerings.”
Samsung has announced efforts to address the sub-$100 market segment, Sony Ericsson will market a low-cost Walkman handset and LG is aiming a CDMA offering in India at the sub-$50 tier. Traditionally, sub-$40 handsets have been considered “ultra-low cost.”
Steve Walker, head of Sony Ericsson’s global product marketing efforts, said the trend toward replacement handsets does his firm a favor.
“Buying a replacement handset is when people are trading up to richer features,” he said, “and that’s where Sony Ericsson has a strong portfolio.”
Walker said that Sony Ericsson would market its portfolio at all price tiers above the ultra-low cost segment. The vendor’s focus on profitability will temper how aggressive it is in pursuing volume in the emerging markets, he said. Low-cost versions of its flagship offerings in music and imaging-the Walkman and Cybershot series-will spearhead the effort to use brand and functionality to address the new market growth opportunity among replacement buyers from Africa to Asia.
In every silver lining there’s a cloud, Wood said. The focus on relatively low-cost handsets for the replacement segment of emerging markets will continue to drag average selling prices downward-an inevitable cost of being a behemoth such as Nokia or Motorola, and an aspect of the business Sony Ericsson is stepping nimbly to avoid.
