The late chess grandmaster Edward Schuyler Jackson used to regale anyone who would listen with stories, stories with a point. One featured a Wall Street tycoon berating a young business school graduate trying to make an impression.
Impatient with the neophyte’s earnest display of the latest business savvy, the tycoon thundered:
“‘When’ is what I need to know! Can you tell me when?!'” As in, when to buy and sell-all that really matters.
The global handset market, according to conventional wisdom, is split between the high-margin developed countries and lower-margin emerging economies. Today, the emerging economies continue to fuel strong handset demand, while the mature markets, particularly in Europe and the United States, appear to have cooled.
When will payoff begin?
So, when will the upgrade cycle begin in earnest in emerging markets to pay off current efforts by Nokia Corp. and Motorola Inc. to secure market share there? When will developed countries gather steam toward another upgrade cycle that will return higher margins to fatten the bottom line?
Granted, this is a gross over-generalization about the two types of markets. The U.S., for instance, remains only about 70-percent saturated, while emerging markets such as China include cities like Shanghai that behave like savvy, mature markets. Nonetheless, the general dichotomy seems to explain some of the recent handset vendors’ financial results. Motorola, for one, just posted fourth-quarter jumps in shipment volumes and market share, while earning record low profits.
The question of “when,” however, remains as elusive in the handset business as on an apocryphal Wall Street. (Full disclosure: Edward Schuyler Jackson was this reporter’s grandfather.)
Albert Lin of American Technology Research said his firm has gathered and analyzed data on all major network operators worldwide, concluding that in general they are implementing new technology but not yet deploying it. The advent of broadcast mobile TV (ie., MediaFLO and DVB-H), location-based services and completed network upgrades will produce a new wave of must-have handsets that will ignite higher-margin volumes and lift many boats, he said recently.
When?
Lin said his projections call for late 2007, early 2008, which in his view is supported by the job cuts at Motorola, which may be girding for a long lull.
Others shy from the “when” question, in part because they see drivers of the next wave of upgrades as more diffuse.
What will drive upgrades?
“I think mobile TV will drive some demand, I just don’t think it will move the whole market,” said Bill Morelli, analyst with IMS Research. “Location-based services and network upgrades also will play a role, but most consumers will upgrade for specific applications like consumer e-mail, music and media content, if it can truly be accessed in real-time.”
Music, in particular will continue to drive upgrades, Morelli said-it is one key to Sony Ericsson Mobile Communications L.P.’s success and an area to be exploited by Apple Inc.’s iPhone.
The hand-me-down handset
Further diffusion to predictability, according to analyst Bill Hughes at In-Stat, comes from the data itself.
“I’ve been working on a forecasting model for handsets and have found that survey responses to ‘how often do you upgrade your phone?’ do not correlate well with information on how many subscribers are on a network,” Hughes said.
Most U.S. subscribers, for instance, say they upgrade every two years, Hughes said. Instead, data reflects that a phone stays on a network about four to five years. Used phones find uses after the main user upgrades. (The hand-me-down phone-a new category?)
“I think that the upgrade rate is really a measure of effective merchandising,” said Hughes. “Users may have a perfectly good phone, but will upgrade to get something new and cool.
“This scenario is hard to anticipate without very close understanding of the carrier and the local culture. I hesitate to estimate the worldwide or even regional effectiveness of merchandising as it is very subjective.”
When will a significant wave of handset upgrades take place in developed countries, what will drive it and who will chase it?
Diffusion reigns.
“In most of those countries, upgrade cycles will be many years away,” Morelli said. “Motorola is gunning for Nokia, which is trying to maintain its position. Emerging markets are the best bet for big numbers.”
As for Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd., Hughes said, “my advice is to not get into battle for market share with Nokia and Motorola-it’s bad enough for them. They should focus on their strengths . and let the bigger competitors bleed each other dry. This will prevent the ASP decrease that the rest of the industry is seeing.”
Meanwhile, Sony Ericsson has done just that-in Lin’s terms, “picking its battles.”
Sony Ericsson’s CEO Najmi Jarwala said at the International Consumer Electronics Show that maintaining his company’s momentum-it has vaulted from No. 5 to No. 4 and its Q4 profits were not too distant from Motorola’s, despite less than half the volumes shipped-means garnering market share. How to do that without sacrificing high ASPs and margins and brand equity is the subject of “intense discussion” at Sony Ericsson, Jarwala said.