As the digital revolution begins to move at a substantial pace, mobile phone manufacturers have some tough decisions to make.
The demand for digital handsets is growing, especially in the CDMA arena, where carriers are screaming for more handsets. More cellular carriers aggressively are pushing digital service and personal communications services operators have penetrated the market further than analysts anticipated.
But manufacturers are finding the dynamics in the digital handset arena are much different than in the analog business. No longer can they make one type of phone to meet large quantity demands. Now they have three expensive digital technologies and frequencies to choose from and must work to meet the necessary price points needed to enter the market and make money.
“It’s a whole new ball game,” said Lawrence Swasey, analyst with Allied Business Intelligence in Oyster Bay, N.Y. “Formerly, with an analog phone, manufacturers would make one flavor phone that everyone could use and everyone needed in large quantities. The progress on these phones were usually made through the form factor … With digital, the whole cost structure has changed because of diverse technologies and digital and PCS just taking off. The economies of scale aren’t there.”
The difficulty can be highlighted by Northern Telecom Inc.’s recent exit from the Global System for Mobile communications handset business. Nortel’s Matra Nortel Communications joint venture recently closed its manufacturing plant and sold its research and development unit in Germany to Nokia Corp. because of continuing losses. Nortel said it wants to focus on its core competency in wireless infrastructure.
“There is a cost issue,” said Phil Redman, senior analyst with the Yankee Group in Boston. “There is competition there, and it’s hard to sign contracts before the product and have guaranteed sales.”
Though a number of manufacturers jumped on the digital handset bandwagon, announcing their intentions a couple of years ago to make phones, some have and may never make good on their promises. The profit margins are too small, say analysts. In particular, many companies that planned to enter the Code Division Multiple Access handset market and develop their own chipsets rather than purchase them from Qualcomm Inc. to help manage costs are having problems.
“Those trying to do their own chips are finding it much more difficult than anticipated,” said Jane Zweig, senior vice president with Herschel Shosteck Associated Ltd. in Wheaton, Md. “Motorola’s late entrance into the market suggests a lot of problems. The price of the CDMA handsets are very high and subsidization is very tricky for carriers and manufacturers.”
Richardson, Texas-based Siemens Wireless Terminals is one manufacturer that decided to scale back its efforts in CDMA technology. Last year, it announced plans to introduce a handset during first-quarter 1998, but ended its development project in March and moved R&D back to Munich, Germany.
“We wanted to focus on our core strength, which is GSM,” said Stacey Black, vice president of market and strategic business development. “We didn’t want to deliver something that didn’t meet our customers’ expectations. The first-generation product is difficult for any company … We still intend to pursue other technologies.”
Some CDMA handset vendors say it’s almost becoming too late to enter the CDMA handset arena as price points continue to fall and other vendors like Samsung Telecommunications, Qualcomm and Sony Corp. have several handset models already in the market.
GSM handset prices are falling quickly as well, but analysts believe the market still needs more competitors.
Zweig said that even if manufacturers introduce one new handset, they still need enough cash to continue with their R&D cycles to come out with more models.
“They have to be ready to come out with lots of models and price points. There is limited shelf space with carriers and distributors. Those that have multiple models are guaranteed shelf space,” she said.
“For those that are meeting the challenge, it’s a huge market,” said Redman. “Nokia, Ericsson, Qualcomm, Sony and others are meeting the challenge. We’ll find out about others later this year.”
Redman said many digital handset manufacturers believe they have to make handsets that address at least two air interfaces, and some are spreading themselves thin over technologies, especially if they want to produce GSM and CDMA handsets-two drastically different technologies.
“When you throw CDMA in the mix, it’s pretty difficult, especially if you want to do your own chipsets and RF integration … The impact is who survives later on,” he said.
Mitsubishi Wireless Communications said it is leveraging its expertise as a GSM handset vendor to introduce a TDMA handset in the fourth quarter. Those technologies are similar, but the number of TDMA handsets needed in the industry is far less than those needed for CDMA carriers.
Nokia Corp. and Motorola Inc. are the only two vendors offering handsets using all three technologies. Nokia can barely afford to do so, said Zweig. “I don’t think it’s smart for companies to do so. These technologies are difficult and so are the multiple frequencies,” she said.
According to published reports, Motorola already has had problems with digital handsets operating correctly. David Pinsky, spokesman for Motorola’s handset division, confirmed that Aerial Communications Inc. returned some of its StarTac GSM handsets before they reached customers. The company plans to introduce a whole line of TDMA and CDMA handsets this month.
Problems are not uncommon. Vendors are dealing with technologies that are a thousand times more difficult than analog technology, said Redman.
“You have vocoders, variable rate systems, base station technology, multiple vendors of infrastructure that need to tune systems with other manufacturer’s phones. Roaming is a challenge and quality of roaming,” he said.
But the pressure is on to get the handset out the door, and at the same time be quality conscious.
“Once you design a poor handset, you’re out of luck,” said Swasey. “The word of customer dissatisfaction travels fast.”
Sprint PCS recently returned all of its existing inventory of Qualcomm’s CDMA Q-Phone because of cracks in the plastic casing. Sprint PCS said the move didn’t affect many customers.
The challenge for handset makers only will become more complex as the industry envisions world phones capable of operating at multiple frequencies and bands. Dual-mode handsets are difficult enough to produce, say analysts.
“Tri-mode handsets were promised in the second quarter of 1997, but there aren’t any out there,” said Zweig.
A move toward software-defined handsets capable of operating over any frequency and air interface is creeping along. Rather than sticking pieces of hardware together, manufacturers will be able to build multimode/multifrequency handsets using software chipsets. But the change in manufacturing requires a tremendous amount of money and manufacturing overhaul.
Redman and Swasey indicate some manufacturers may be holding out for third-generation technology, realizing they missed the boat on current technology.
“One of the problems with the wireless industry at this point is that we are already entering a new generation of technology,” said Swasey. “Unfortunately, this isn’t the computer business where you can add to what you have. You have to change your handset. Companies have to redesign for new generation technology … With so many different technologies, so many different ways to please the customer and the prospect that handsets produced today may be out of vogue very quickly and useless in five to six years, a lot of companies may wait to see if 3G is a reality.”
