Big just got bigger. The strategic trade-off between profits and market share stood out in stark relief. And the global market for mobile handsets remains insatiable, creating market opportunities for the nimble and those with heft. Yes, all in the first quarter.
Arch rivals Nokia Corp. and Motorola Inc., by far the two largest handset vendors in the world, each found success in some aspect of their market strategy as reflected in first-quarter results reported last week. Both posted gains in market share-Motorola won nearly 5 percent, largely in emerging markets, while Nokia garnered an additional 3 percent, partly in the hotly contested U.S. market-and the result has clear implications.
With Nokia at 35-percent global market share and Motorola at 21 percent, the top two vendors have gone from owning 48 percent of the market a year ago to 56 percent today. (That howling sound you hear is the sound of dozens of handset vendors giving up a chunk of flesh.)
“First-quarter results reflected overall strength in the market,” said Phil Cusick, research analyst with Bear Stearns, which provides non-investment banking services to Motorola. “We’re looking for around 220 million units to ship in first quarter.” (Two hundred twenty million handsets would be just under one-quarter of various projections for a record year of more than 900 million handset shipments, essentially erasing much of the traditional first-quarter seasonal drop in shipments.)
Competitively, the two players both made gains in achieving their stated ambitions, each at the other’s expense. Motorola, which has made a public goal of increasing its global market share, lived with lower gross margins as it ramped up shipments of low-margin, entry-level phones to emerging markets in India and China. And it reinvested a portion of its operating margins to bolster distribution channels in those countries that feed its quest for greater market share.
(Gross margins represent the sales price of a phone, less the cost of manufacturing. Operating margins refer to the same equation, but with the additional subtraction of research and development, marketing and administrative costs.)
Nokia, with a global leadership position, has not fared as well in North America, trailing well behind Motorola. But the Finnish handset giant made market-share gains here by selling entry-level phones through carriers Cingular Wireless L.L.C. and T-Mobile USA Inc. and building market share to 20 percent or better, a strategy that perhaps sets the stage for pursuit of improved margins in the United States.
“Motorola reported great unit volumes, but weak average selling prices (ASPs), weaker than we expected,” said Cusick. “Nokia then reported great shipment volumes and higher ASPs. What’s happening in the low end of the market is that Nokia gave up some share to Motorola, which drove sales at the low-end level, globally. Nokia ceded share to Motorola, based on price.”
Motorola has said it wants to drive up overall operating margins during the next couple of years and analysts will be watching future quarterly results to see if the vendor’s investment in distribution pays off. “Hopefully, they see a return on that investment later this year, perhaps in six months, with more market share and improved operating margins,” Cusick said. “But where [Motorola’s chief executive] Ed Zander said that Motorola would seek market share, they definitely came through.”
In the North American market, Nokia reported that it is the top GSM handset provider in first quarter based on shipment volumes, which is “a win for them” in achieving a stated ambition, Cusick said. Nokia had seen its market share in North America fall as low as 14 percent in the past and now it’s up to 20 percent or more. “In terms of volume shipped, they’re back,” the analyst said.
As for both players’ lackluster results in network infrastructure, the picture is a bit dimmer for Motorola, whose earnings dipped despite a brisk business in handsets. “The operating margin in the networks business at Motorola in particular was down to 10.7 percent this quarter, down from 15 percent last quarter; that is a very big drag,” the analyst said. Nonetheless, Cusick doesn’t look for either to divest their network divisions, nor make substantial acquisitions that might distract them from pursuing their focus on handsets.
