Cell phone sales hit a record high in 2003, surpassing even the most optimistic projections from just a few months ago.
So why isn't the industry celebrating a profit bonanza?
Despite new features like color screens, Web browsers and built-in cameras, the continuing entry of new players means tougher price competition.
Meanwhile, in the United States, new rules that allow consumers to switch carriers but keep their cell phone numbers have prompted network operators to try harder to attract or retain subscribers. Carriers are giving away more higher-quality phones as incentives, which is driving unit volumes up but average prices down.
Sprint PCS, for instance, is giving away up to five color-screen handsets to subscribers who sign up for its "family" plans -- a marked change from the past.
"Last year, you could get a free phone, but it looked like it was issued by the U.S. government," said John Garcia, senior vice president of sales and distribution for Sprint PCS.
In the personal computer industry, PC makers have managed to alleviate some pressure on prices by adding more horsepower and new features, such as DVD players. Cell phone manufacturers also are adding plenty of extras, partly to take advantage of new higher-speed networks.
As a result, more customers are upgrading their phones. An estimated 54 percent of U.S. cell phone users replaced their phones in 2003, up from 47 percent two years ago, according to Strategy Analytics.
Even so, prices are under pressure at both the wholesale and retail levels. Kevin Lombardo, a sales and marketing manager in Atlantic City, N.J., recently signed up for service with T-Mobile USA Inc. and got one of Nokia's newest handsets, complete with color screen, built-in video camera and Web browser -- free.
"You can't beat it," he said.
Handset vendors double
Prices at the wholesale level are falling in part because cell phone operators, which are the ones actually buying the handsets from makers, are flexing their muscles, playing a growing pool of suppliers off one another. The number of handset vendors in the United States, for example, has doubled from three years ago, according to Deutsche Banc Securities Inc.
"Operators now have more vendors from which to choose; they are no longer as reliant as they perhaps were on a Nokia or Motorola, so they can put some pressure on these guys," said John Jackson, an analyst for the Yankee Group, a Boston-based technology consulting and research firm.
AT&T Wireless Services Inc., the third-biggest U.S. cell phone operator, said two of the eight most-popular phones it offers are manufactured by Japan-based NEC Corp., which didn't even sell cell phones in the United States six months ago.
Nokia Corp., the world's largest cell phone maker by far, has launched dozens of new models in the past year, many with built-in cameras, but the average wholesale price of its phones still fell 14 percent, to $162, in the fourth quarter compared with a year earlier, according to the company's preliminary figures.
These statistics indicate that Nokia's handset revenue in 2003 was up just 1.7 percent from 2002 despite an 18 percent increase in unit shipments. Operating profit in the handset division rose by a modest 6 percent from 2002. (Nokia said that currency movements partly were responsible for these lackluster growth rates.)
Profits get slimmer
At Motorola Inc., average selling prices in the third quarter were down 10 percent from a year ago. Motorola's profit margin in its cell phone business continues to drop as well, down to about 6 percent in the third quarter from about 8 percent a year ago.
For the fourth quarter, Motorola, based in Schaumburg, Ill., has said that it expects margins in its cell phone business to be flat or possibly down compared with a year ago.
Price pressures squeeze cell phone makers
Despite fancy new features, generous incentive deals and lots of vendors are draining profit margins
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