Carriers Inch Ahead as Phone Makers Suffer

Mobile carriers, smartphones and the economy

While the recession is prompting layoffs and salary freezes across the tech landscape, the wireless industry is weathering the storm better than others.

But with dwindling growth rates and weakening margins, it’s clear that wireless players are feeling the chill as well, according to the latest stats from research firm Strategy Analytics.

Mobile carriers, for instance, continued to see subscriber growth throughout 2008, according to a new report from the firm. Yet that growth is increasingly sluggish — dipping from 9 percent in 2007 to 6.5 percent last year, and from an annual increase of 21.5 million subscribers to 17 million. For the coming year, Strategy Analytics projects growth of only 5.7 percent, or 16 million mobile subscribers.

While wireless carriers are moving to cope with slowing growth, many mobile phone manufacturers are seeing sales in outright decline. Strategy Analytics said fourth-quarter handset sales were off 10.5 percent compared to the same period a year ago — dropping from to 329 million to 295 million.

The news signals new levels of weakness in an industry that had shown signs of being better prepared than other when it came to riding out the recession. Mobile users continue gobbling up new phones like the Apple iPhone and the latest BlackBerry models by Research in Motion (RIM).

But it’s easy to forget that Apple (NASDAQ: AAPL) and RIM (NASDAQ: RIMM) fans represent only a sliver of worldwide mobile phone users — and they can’t offset a larger decline.

In particular, analysts placed the blame on businesses and consumers’ efforts to scale back on expenses like multiple devices.

“We have been seeing a consolidation by users down to one device rather than multi-devices for e-mail and voice in the enterprise segment,” Susan Welsh de Grimaldo, a senior analyst at Strategy Analytics, told InternetNews.com. “The largest contributor to the slowing growth in 2008 was a 44 percent drop in multiple subscriptions, as businesses find smart devices with multiple functionality a good solution, rather than using one device for voice and another for e-mail.”

Carriers face the recession

While the research firm doesn’t expect wireless carriers to repeat last year’s costly rate plan war to try to gain new subscribers, it believes they’ll come up with alternative strategies to offset slowing growth: innovating with new technology, plans and pricing.

“Carriers are facing fewer gross adds this year, mainly due to the maturing of the market, but the current economic situation is not fundamentally undermining profitability,” Welsh de Grimaldo said. “We expect to see positioning for value and more flexibility in plans to address both enterprise and consumer belt tightening in the current economic downturn.”

Top carriers Verizon Wireless and AT&T, which last year showed a tremendous resilience to the market downturn, will continue to find themselves locked in battle for dominance — and increasingly, becoming the only two games in town, Welsh de Grimaldo added.

[cob:Pull_Quote]”These two will jockey for technology leadership on advanced network technologies and increasingly represent a larger share of total subscribers and service revenues,” she said.

Cost-savings will remain a top priority as well, despite carriers’ relative health. Several, including AT&T (NYSE: T) as well as No. 3 Sprint (NYSE: S), began cost-cutting programs last year. In mid-2008, AT&T first laid off 5,000 workers and than another 12,000 in December, even after posting strong quarterly revenue growth.

In November, Sprint began offering voluntary severance packages to reduce headcount. The carrier also cut costs by trimming office supplies, encouraging employees to print less and minimizing cafeteria services.

“Cost savings will be a key mandate for 2009 and 2010,” Welsh de Grimaldo said. “Carriers will be pushing for savings in many areas, particularly network-related operating savings and controlling cost of customer acquisitions and service.”

The smartphone impact

But carriers are only one side of the coin. The trend toward consolidated mobile devices means greater competition for phone makers — most of whom are already hurting thanks to a steep decline in overall sales.

Strategy Analytics said in a separate report that global mobile phone shipments dropped a whopping 10 percent in the fourth quarter of 2008, with just 295 million devices sold.

That performance weighed on the industry’s full-year sales, pushing growth rates down to 5 percent — its weakest levels since 2001, according to the report.

The trends don’t bode well for beleaguered Motorola, which slipped from third place in the industry to No. 5 due to a lackluster performance in 2008. Despite debuting a slew of new handsets during the year, the company shipped just 19 million handsets in fourth quarter — a big drop from the 41 million units it moved during the fourth quarter of 2007.

To help it weather the downturn, the company delayed its long-discussed plans to spin off its mobile device unit — a move that had initially been designed to help the division refocus and recover its lost market share. Motorola also ended 2008 with layoffs, salary cuts for executives and pay freezes for staff.

Page 2: Nokia, Palm and Apple

Mobile carriers, smartphones and the economy

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Motorola’s not alone in getting stung by the economic climate. Even mighty Nokia, the No. 1 mobile phone manufacturer, saw a staggering drop in quarterly sales — shipping 113 million handsets worldwide during fourth quarter, down 15 percent from same period a year earlier.



Weakness in many global markets — especially China — led Nokia’s global smartphone market share also to decline, from an estimated 47 percent in the fourth quarter of 2007 to 31 percent in the fourth quarter of 2008, according to the report.

Strategy Analytics also said Nokia’s operating margins hit their lowest levels in the past decade — a fact that the research firm suggested may prompt the handset maker to undertake cost-cutting efforts like eliminating 1,000 jobs during the next few months.

Other phone manufacturers will likely follow suit, Strategy Analytics added.

“If global industry revenues are falling by 10 percent or more this year, then the industry’s cost base will have to diminish by a similar amount just to maintain current levels of profitability,” Neil Mawston, director of Strategy Analytics’ global wireless practice, told InternetNews.com.

“The downturn in global handset shipments means most vendors, such as Nokia and Motorola, will have to slash costs to remain competitive in 2009,” he said.

The trends may also be bad news for Palm, which is banking a turnaround on its Pre smartphone and its advanced WebOS software — both of which are already receiving early praise from observers. The phone is expects hit stores in the first half of the year.

“Palm will certainly have to work hard to grow revenues this year,” Mawston said, adding that both consumers and businesses will be buying fewer handsets in 2009.

“The opportunity for Palm lies in its ability to gain share in the smartphone market, which is still growing at an above-average rate,” he said.

The winners: Samsung, LG and Apple

Yet the industry does have its success stories. Samsung, which is No. 2 in global sales, claimed 18 percent of the phone market during the quarter on sales of 53 million handsets. In the same quarter a year earlier, the company shipped 46 million units and accounted for only 14.1 of the market.

The report cited Samsung’s broad handset portfolio and distribution channels as key reasons for its growth.

[cob:Special_Report]LG Electronics, in third place, shipped 26 million handsets for the quarter, ending December with 9 percent of the market, thanks to robust sales in Europe. For the first time in its history, LG also sold more than 100 million units during the course of the year.

However, Strategy Analytics said that LG’s operating margins were at their lowest levels since mid-2006.

Still, the strong quarter pushed LG ahead of Sony Ericsson, which fell to fourth place in the rankings. Sony Ericsson sold 24.2 million handsets for the fourth quarter of 2008, a year-to-year drop of 21 percent. During the quarter, the company also recorded its lowest profits since 2003, according to Strategy Analytics.

Handset makers are also still coping with the runaway success of Apple’s iPhone, which continues selling briskly despite the economic downturn.

Yet even Apple’s smartphone will be facing some challenges as well, according to Strategy Analytics.

During fourth quarter, Apple saw robust sales growth of 88 percent compared to the same period a year ago. But it shipped a lower-than-expected 4.4 million handsets during the quarter, compared to the 2.3 million units it sold during the fourth quarter of 2007.

“Apple continues to grow at an above-average pace, but the U.S. firm is not immune to the wider recession affecting the global economy and mobile device industry,” Strategy Analytics said in a statement, adding that Apple would eventually need to broaden its lineup of iPhones to maintain its surging growth.

“The U.S. and global smartphone markets are slowing down,” Welsh de Grimaldo said. “No segment will come out of this recession untouched, but smartphones are continuing to grow at an above-average pace and that represents an opportunity for vendors like Apple and Palm to gain share in the downturn.”

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