The swirl of events last month and their possible implications for the domestic handset industry are several-fold, analyst said last week.
First, despite an outlook tempered by drastic economic headlines, the wireless market in the United States may not be the “meltdown” many are expecting.
Second, heavy marketing and subsidies for high-end, compelling devices are pushing the U.S. market into new territory. Carriers are banking heavily on massive subsidies and marketing to get data-hungry devices into consumers’ hands. And that means traditional categories are shifting. Low-, mid- and high-tier segments are morphing into something else, variously defined by analysts.
Third, portfolio competition and macro-economic trends may claim some victims.
Lastly, the January post-mortem on the fourth quarter will be more avidly sought than usual for indicators of where the market is heading under intense pressures.
Outlook for the quarter
The North American market this quarter is intriguing due to a supply of appealing, well-marketed “large display” phones running into softening demand, according to analyst Tero Kuittinen at Global Crown Capital L.L.C.
“Analysts and vendors may have under-estimated demand in this quarter,” Kuittinen said. “We all knew there’d be a 5% decline in handset volume shipments, year-on-year, but we suspected worse. It may not be a good quarter, but it may not be a complete meltdown.”
“If you’ve got a ‘hero campaign’ going for the newest smartphone at an attractive price, you’re doing okay,” said analyst Matt Thornton at Avian Securities L.L.C. “Those products are moving fine. The pinch is coming for everything between smart and free.”
One driver for carriers, Thornton added: “Data ARPU is driving incremental growth in subscribers. There’s no choice but to market heavily.”
“The clear leaders are the little computers masquerading as phones” – i.e., smartphones such as Research In Motion Ltd.’s BlackBerry Storm, HTC Corp.’s G1, and Apple Inc.’s iPhone – said analyst Avi Greengart at Current Analysis.
Shifting categories
All three analysts agreed that the traditional notion of low-, mid- and high-tier devices has been upended by the massively subsidized and ambitiously marketed top devices this fall.
For Greengart, the new categories are roughly “free,” “not free” and “needs data plan.” According to Kuittinen, “smartphone” masks a larger category that should be captured with the term “large display” phone, which includes top- and mid-tier messaging and multimedia devices. Thornton isn’t naming categories but said that a “pinch” is coming for everything that’s between free and smart. (Perhaps “between free and smart” is the new “between a rock and a hard place.”)
The upshot is that mid-tier phones- variously “not free” and “between free and smart” – will have to re-establish their value proposition. Smartness is pushing downward into mid-tier price points and traditionally mid-tier features are pushing downward into the free category, the analysts said.
The competition, and victims
AT&T Mobility and Verizon Wireless have an “impressive diversity” of portfolio and major marketing muscle that is squeezing T-Mobile USA Inc., according to Kuittinen. Plus, BlackBerrys are ubiquitous at all carriers, the iPhone is still doing well and Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. continue their pursuit of the U.S. market with new product launches at the high-end. T-Mobile USA’s offer of “free” Motorola Inc. Zines (the vendor’s 5 megapixel camera phone offering) on Black Friday is a “desperate move,” the analyst said.
Kuittinen will be watching how consumers react to the campaigns for “large display” handsets that require data plans in the remaining run-up to Christmas.
Thornton speaks to eight retail store managers each month to gauge consumer demand, traffic and behavior.
“November has seen traffic pick up from a lull in October, but it’s still not typical for this time of year,” Thornton said. “It’s tough to get people in the stores right now. That requires offering free phones and ‘hero’ campaigns.”
In the new market environment, casualties are possible. Clearly, the former U.S. market leader, Motorola, has little presence in the smartphone category and Palm Inc. is burning cash as it furiously pursues a next-generation platform that could save it, all the analysts said.
“I’m worried about Motorola because it’s not playing well at the top of the market,” said Greengart. “Is it cutting costs fast enough? That said, Motorola still maintains a stable core of phones that fall into the “free” category. And its Moto Zine, with a 5-megapixel camera, is one of the best in the world.”
Other vendors potentially facing trouble in the U.S., according to Greengart: Kyocera Wireless Corp., Sanyo Corp., Palm and Sony Ericsson. Those well-positioned include: Apple, RIM, HTC, Samsung and Nokia Corp.
Looking ahead
What to look for when the holiday quarter is history?
How did OEMs manage their inventory? said Thornton. The usual metrics of volume, average selling prices and margins will figure into the equation. If volumes are down, there’s more pressure on ASPs and margins, the analyst said.
“We’ll see who is disciplined and who gives up their margins to move volume,” Thornton concluded.
