Low-cost handsets present potential, risk

Big opportunities come with big risks, particularly in chasing the future of the mobile handset business.
One opportunity, pursued by the market’s two giants and their challengers, is to deliver ultra low-cost handsets into the hands of low-income subscribers in developing markets. The upside to this strategy is based on establishing one’s brand and, presumably, harvesting profits when entry-level subscribers upgrade their handsets. The risk is that selling low-cost handsets drags down average selling prices and profits, particularly if mature markets don’t deliver strong sales and relatively higher margins. But the flip side is that, if one doesn’t get a foothold in the emerging markets, there’s no future.
Nokia Corp. and Motorola Inc. base their global grip on a product mix that includes devotion to the low-cost handset markets. Handset makers below the top two must decide whether to pursue that segment and thus imperil profitability.
An ABI Research report brings the issue into stark contrast. Within five years, according to ABI, one in four handsets shipped will sell at retail for under $20. By 2011, that unit volume may reach 330 million-one-quarter of the 1.3 billion units projected to sell that year. According to ABI, half of those ultra low-cost handsets will ship to emerging markets in the Asia-Pacific region, and the balance in emerging markets in Eastern Europe, the Middle East, Africa and Latin America.
Nokia’s profits suffered in third-quarter 2006 due to the low-profit nature of strong growth in emerging markets, and Motorola’s fourth quarter reflected a similar pattern. The risks of working the emerging markets also affect network operator profits. Users of ultra low-cost handsets not surprisingly do not generate significant average revenue per user-about $2 to $5 per month, according to ABI.
ABI finds that Samsung Electronics Co. Ltd., LG Electronics Co. Ltd., BenQ-Siemens, Ningbo Bird and Kyocera Wireless Corp.-the No. 3, No. 5, No. 6, No. 10 and No. 12 global handset vendors-are all pursuing the ultra low-cost segment, not to mention other contenders such as Philips and Haier. Sony Ericsson Mobile Communications L.P., which has worked its way to profitability and No. 4 in global rankings, is wrestling with the question of how to address emerging markets without sacrificing profit or brand value. North American CEO Najmi Jarwala said earlier this month that SEMC would likely pursue the mid-tier segment of the emerging markets in a tightrope walk between volume and profit.