Competition Likely to Intensify Among Mobile Phone Makers

Next year’s mobile phone war will largely mirror this year’s, with most consumers still opting for smarter but cheaper handsets rather than higher-priced models packed with high-speed Internet gadgetry.

This year’s battle, which left Motorola Inc. and Sweden’s Ericsson with badly bloodied noses, will intensify even as second-tier firms from Asia and Europe push for a bigger slice of the pie, analysts say.

They expect Finland’s Nokia, the world’s largest handset maker, to boost its market position while second-ranked Motorola and No. 3 Ericsson see theirs come under pressure.

Fund manager Ed Protheroe of Aberdeen Asset Management, which has in its $2.4-billion portfolio a stake in Nokia, said there also may be consolidation among small players.

Ericsson, under intense pressure to turn around its loss-making handset unit, may be eyeing a linkup with an Asian player such as Japan’s Matsushita Communication, Protheroe said.

Growth in the number of people signing up for new cell-phone subscriptions is expected to slow in 2001, especially in Europe, and this could affect manufacturers.

Fears of an oversupply in the handset market could squeeze prices. To make matters worse, threats of a U.S. recession and European economic slowdown loom.

Although Nokia is expected to weather this storm, Motorola and Ericsson may not, industry experts say.

Motorola has issued warnings on its first-quarter earnings, partly because of its handset segment, and Ericsson has said its handset unit will continue to report losses in the first half of 2001.

Compared with Nokia’s market capitalization of about $220 billion, Motorola has a market capitalization of $42 billion and Ericsson $94 billion.

While Motorola and Ericsson restructure, Nokia and smaller firms such as Germany’s Siemens, France’s Alcatel and South Korea’s Samsung Electronics may gain ground.

Siemens already has said it has overtaken Ericsson as the world’s third-biggest handset maker. The company is jointly developing multimedia phones with Japan’s Toshiba Corp. for release in early 2002.

Analysts and industry sources say that Ericsson--the leading maker of mobile network equipment--also may merge or sell its handset unit to an Asian company such as Matsushita Communication, whose affiliate, consumer electronics giant Matsushita Electric Industrial, makes such market-leading brands as Panasonic and National.

“The market would welcome such a deal, and the sooner the better,” Aberdeen’s Protheroe said, adding that such a deal could be a threat for Nokia. “This would mean the inside of the phone would be Ericsson and the outside Matsushita.”

Other rivals to the big three in Europe and Asia are teaming up too, but the real battle on sophisticated handsets is not expected until late 2001 once General Packet Radio Service, always-on wireless Internet technology, is fully available and service providers begin upgrading their networks to third-generation, or 3G, systems.

U.S. mobile service operators such as AT&T; Wireless and Verizon Wireless say they probably will stock more mobile phones made by Asian makers next year. Their success will depend on their ability to produce the same volume of phones as the big three mobile phone makers, analysts said.

Internet-enabled phones will see a gradual rise in popularity through the availability of sophisticated new models, lower prices and more services.

European telecom operators are busy now upgrading their mobile phone networks with GPRS technology, but the technology is not expected to be widespread until late 2001.

It will be at least six months before Internet-enabled phones take off in the United States, analysts said.

Operators and manufacturers have taken a more cautious approach to promoting GPRS because of the hype created with its predecessor, WAP, which turned out to be less than successful.

Herschel Shosteck Associates, a leading wireless consulting firm, expects 90% of mobile phones sold by 2003 to be Internet-enabled, compared with only 10% this year.

To ensure mass-market consumers will buy their phones next year, especially in the maturing European market, manufacturers must continue to produce trendy and inexpensive phones quickly. Two-thirds of phones sold globally are cheaper models.

“What applied this year will apply next year--a strong brand, a wide product portfolio and fast releases of new phones,” said wireless analyst Mika Paloranta at Finland’s largest brokerage, Aros Maizels.

While there will be a slowdown in mobile phone growth, partly as subscription growth eases, industry experts said expansion will stay healthy, helped by consumers who will buy new phones to replace their old ones.

Handset growth will increasingly be dominated by users upgrading their phones to newer, feature-laden models, and the time gap between such purchases will shorten, analysts said.

Nokia and Motorola agree that replacements will account for about 50% of mobile phone sales this year, and that number is expected to rise.

Nokia estimates that 70% to 80% of phone sales in coming years will be replacement purchases.

However, Pip Coburn, global technology strategist for UBS Warburg, said in November that the changeover to the new generation of Web-enabled handsets may mean a lot of consumers will wait to upgrade their phones.

“We don’t think there will be much of a necessity to upgrade or replace a phone next year when we are in the midst of the largest changeover from voice only to voice and data,” he said in a research note.

Worldwide mobile phone unit sales are expected to reach 550 million units next year, according to leading wireless phone makers, up from 400 million this year.

Analysts expect Nokia to continue to dominate the market as it uses a successful product portfolio to lure customers.

Motorola and Ericsson have not been as successful in gaining from this market in Europe, analysts say.

Nokia, which has a global market share in excess of 30% compared with about 15% for Motorola and about 11% for Ericsson, also will have the advantage of economies of scale.

This will help Nokia if pricing pressure on mobile phones rises as predicted by Ericsson and many U.S. wireless service providers. “Nokia has thus far kept away from pricing pressure on its phones,” said Aberdeen’s Protheroe. “Even when they’ve seen pressure they’ve maintained [high profit] margins because of the volumes.”

U.S. analysts say Nokia may even take advantage of competitors’ current weaknesses by cutting its phone prices and pressuring them even further.