US Bancorp Piper Jaffray projects further decline in wireless infrastructure demand, growth in new subscriptions - Market Intelligence

Mobile Internet, The, June, 2003

Although he expects low double digit year-over-year growth in both global wireless subscriber (14.3 percent) and handset (11.3 percent) rates in 2003, US Bancorp Piper Jaffray senior wireless communications equipment analyst, Samuel May believes the demand for wireless infrastructure will decline by 14.8 percent for the same period. In a new in-depth research report titled 2003 Global Wireless Projections-The Book, May makes forecasts such as these and outlines his expectations and outlook for the wireless industry for 2003 and 2004. This includes forecasts for wireless subscribers, wireless handsets and wireless infrastructure.

In 2002, wireless subscribers grew by 198 million, down from 224 million net additions in 2001. At the end of 2002, wireless subscribers totaled 1,152 million, up from 954 million in 2001. For year-end 2003, May is forecasting 1,317 million wireless subscribers or net additions of 165 million, which represents growth of 14.3 percent year-over-year. Additionally, in 2004, he anticipates net additions will decrease to 140 million and worldwide subscribers will total 1,457 million (10.6 percent year-over-year growth).

According to May, net subscriber additions in the United States in 2003 are expected to continue to slow, as the market is expected to surpass the 50 percent penetration mark and reach late stage maturation. He is forecasting net additions of 10 million subscribers for the region in 2003. Additionally, China is expected to remain the fastest-growing country with 55 million net additions in 2003, versus 62.0 million in 2002. Code division multiple access (CDMA) is expected to represent 11.0 million of net additions in 2003. India exhibited record growth in 2002 with 5.0 million net additions, up from 2.4 million in 2001. May is forecasting 11.2 million net additions in the region in 2003. Other regions expected to grow nicely in 2003 include Brazil and Russia.

Post first quarter results, May's mobile phone forecast for 2003 remains unchanged at 445 million, which represents 11.3 percent growth from more than 400 million in 2002. In 2004, he expects mobile phone sales to grow by 13.5 percent to 505 million. May believes the rate of handset replacements will make substantial gains in 2003. The replacement rate is expected to improve to 24.3 percent, versus 21.2 percent in 2002 and 21.4 percent in 2001. In absolute terms, this implies the sale of 280 million handsets in 2003. In 2004, he expects the replacement rate will climb to 27.7 percent, with 365 million replacement handsets sold.

Additionally, May expects handset manufacturers such as Nokia, Samsung and LG Electronics to grow over coming years. "While original design manufacturers (ODMs) are expected to represent a disruptive force over the next couple of years, we believe a dichotomy will emerge between strong and weak ODMs with the latter beginning to fade away as insufficient unit volumes for smaller players are unable to support viable business models," said May.

In 2003, May expects the demand for wireless infrastructure to decline by 14.8 percent (compared with industry expectations of 10-15 percent), as first quarter 2003 results for equipment suppliers were worse than expected and declined by 20 percent year-over-year. In May's opinion, service providers will maintain a conservative posture with regard to capital investment in 2003, as many remain focused on improving internal financial health of operations and balance sheet metrics.

"Investment in wideband-CDMA (W-CDMA) equipment will continue to languish into 2004, as carriers seek validation for the demand of data services before moving forward with investments," said May. "That said, we believe infrastructure spending will reverse its four-year decline and return to modest growth in 2005."

To receive a copy of 2003 Global Wireless Projections-The Book, clients and members of the media should contact Dana Wade at: dwade@pjc.com or 415-277-1556.