Editor’s Note: This is one of a series of stories examining the current economic downturn and how it affects the wireless industry. For more on this topic, visit RCRWireless.com/EconomicDownturn.
WE’VE ALL READ THE SURVEYS: don’t leave home without it.
As the handset has become a ubiquitous and critical component of everyday life, it has fueled a remarkable run of annual growth for years. On its own, that growth has begun to slow as penetration rates reach for 100%.
But what about the financial sector meltdown and proposed bailout for Wall Street that threatens to enrage taxpayers and upend the presidential election? Will that impact consumers’ views of their need or desire for new wireless handsets?
Analysts said last week that the handset’s new role in our lives may well spare the wireless industry from taking a major hit in coming months as tight credit and frightening headlines buffet consumers, if not suppliers, vendors and carriers. But macroeconomic factors at play before the latest headlines had brought the handset industry about 16% growth in the first half of the year and a slowdown had been forecast for the back half of the year even before the craziest headlines hit the street in the past few weeks.
These analysts also said that numerous companies – Nokia Corp., as the behemoth with 40% market share, is typically
cited – have warned about the current quarter. It is expected to be unseasonably slow and, in general, macroeconomic issues, consumer confidence and, lastly, competition, are cited as factors.
Vendors have cash on hand
How slow the third quarter has been and how that may impact the critical fourth quarter has focused observers on the third-quarter metrics to be reported by vendors and carriers in October.
But the issue du jour for the wireless industry appeared to be consumer confidence, rather than tight credit caused by the meltdown on Wall Street, particularly since carriers and vendors today tend to have comfortable cash on hand, as well as positive cash flow. Even Motorola Inc. is positioned to weather the storm, though a macroeconomic impact on sales could delay its recovery and its planned spinoff, several analysts said.
“I don’t believe anything is isolated,” said Matt Thornton, analyst at Avian Securities, L.L.C. “The most direct correlation between the financial disasters we’re reading about and the wireless industry is that the financial sector is the largest single sector in our economy. So there may be implications for vendors such as RIM that sell into that space. RIM could be impacted at the margins of its business, weighing on growth.”
That said, Thornton added: “I don’t think anyone who has owned a cellphone is going to go without one. Someone laid off on Wall Street who turns in their BlackBerry is going to replace it.” He also pointed out that as much as 60% of RIM’s sales now are into the consumer space, providing further insulation from major impacts of a recession or erosion in consumer confidence.
Should macroeconomic impacts really weigh on the consumer, Thornton said, he expected consumers to shut off wireline service first and, perhaps second, delay that handset upgrade.
“The only group more immune than others are the HTCs, RIMs and Apples,” Thornton said, “because that sector’s growth rate is higher than the low- and mid-tier.”
(Indeed, data from distributor Brightstar Corp. reflects that between the second quarter of 2007 and the second quarter of 2008, high-tier devices grew to 16% of handset volumes from 6%, while mid-tier dropped to 16% from 29%. Low-tier devices crept up to 68% of sales, from 64%.)
But, Thornton added, low-tier devices sell in a fiercely competitive market and “everyone will feel it.”
According to analyst Tero Kuittinen at Global Crown Capital, L.L.C., the past weeks’ headlines convey that Americans’ penchant for racking up debt to continue consuming goods and services must end. Americans have been far less willing to slow or stop spending than their European counterparts in the face of difficult economic times. Europeans’ tighter spending appeared to be a factor in Nokia Corp.’s early September warning on consumer confidence, for instance.
“The really shocking headlines, though, are only one week old,” Kuittinen said. “That makes it tough to read their effect on consumer confidence in the U.S.”
Declining handset subsidies?
Although wireless players in general have healthy amounts of cash on hand and good cash flow, if they see a recession coming and conserve that cash to prepare for it, that could lead to declining handset subsidies which, in turn, could choke off the volume of handsets purchased by consumers, the analyst said – especially as high-margin smartphones are poised to have their best run ever.
“That can feed on itself,” Kuittinen said. “A delay in spending can snowball. There was some sign of a carrier pullback on spending even before the latest headlines hit. Individually, that behavior makes sense. But if everyone cuts back at the same time, the industry could be in recession.”
In the U.S. market, Motorola’s future is exposed, as its handset division needs to break even or become profitable in order to pursue a spinoff, according to Kuittinen. Samsung Electronics Co. Ltd. and LG Electronics Co., the next largest vendors in the U.S., are only divisions within huge, diversified industrial conglomerates that are better equipped to weather a storm. Smaller vendors may feel the squeeze the most, he said.
“We’ve seen this act before,” said analyst Mark McKechnie at American Technology Research. “And we’re in a much better position today, as an industry, than in past eras. The last time we saw a bubble burst, in 2001, the carriers’ balance sheets were highly leveraged as they took on debt to pay for spectrum. We’re not at the center of the bubble that’s bursting now.”
McKechnie said that, in fact, he viewed handset sales as a leading indicator of economic health for the world’s various national and regional economies. His view, which solidified with Nokia’s conservative guidance earlier this month, is that the fourth quarter will reflect seasonality, but the typical growth of fourth quarter over third will be lesser in magnitude.
“Are handsets the canary in the coal mine?” McKechnie asked. “I’d say ‘yes.’ ”
“I’ll be trying to figure out whether Santa Claus is coming this Christmas,” he added. “But that’s always the question.”
