Are great expectations enough for the mobile? - Brief Article

Electronics Times, Jan 22, 2001

Mobile handset sales are taking a downturn but upgrades may offer a way forward By Anthony Clark

Sales of mobile handsets, much like those of personal computers, are slowing, although phone manufacturers remain confident that demand will return as next-generation 3G services are launched that require new kit. And, on the face of it, there's every reason to be optimistic.

The cellphone market remains one of the healthiest technology sectors. With more than 400 million mobile phones sold worldwide, an increase of nearly 50% on 1999, 2000 was hardly a flop.

But there is a problem. The mobile comms market has been good at building demand by creating expectations around services. Unfortunately, the divide between wireless promise and the reality has often been wider than a marketing manager's patter. WAP anyone?

WAP over-sell

But the over-selling of WAP pales into insignificance when viewed beside the hype surrounding 3G. Speedy Internet access, streaming video, downloadable music; who could refuse such a choice offering? Not your average consumer, or so we are told. But as these services will not all be rolled out with the initial 3G packages, our thirst for wireless multimedia will have to go unslaked yet awhile.

And even if you leave to one side the thorny questions surrounding handset design and building infrastructure for a moment, there is also the problem of how to make all these wonderful 3G services pay. After all, that's what it's all about.

In case you missed the news, last year's short-lived e-commerce boom saw the return of the patent medicine salesman, once again peddling the promise of infinitely renewable vim and vigour in the form of a universal panacea. Bottles of e-jollop, as it turned out, proved to be as efficacious as the traditional variety. So where does this dampened enthusiasm for all things `e' leave the handset manufacturers?

According to Motorola, the first of the big three mobile phone makers to report its quarterly earnings, the first half of 2001 will fail to meet previous expectations due to weakening economic conditions. Nokia and Ericsson were also singing from the same hymn sheet; 2001 will not be a repeat of 2000 for handset sales.

But all three companies will take heart from analysts' predictions that consumers will continue to upgrade handsets as new, lightweight models with extra functionality come on the market. Jorma Ollila, Nokia's CEO, estimates that the proportion of global buyers upgrading older models will leap from 40 or 50% in 2000, to 70 or 80% this year. Whether we use the added functions is a moot point.

This is good news for handset manufacturers (if it is true) but it is new subscribers that the telcos need. Unfortunately, they are currently faced with a slowing market just as they've shelled out billions on 3G licences.

This could throw a question mark over the future level of handset subsidies - an obvious short-term fix to offset debt burden; not everyone has a huge property portfolio, like BT, to sell off to reduce the overdraft.

Bryan Prohm, an analyst at Gartner Dataquest, highlights another problem, hype: "A lot of forecasts among the analyst community were predicated upon the belief that next-generation networks would come to fruition much faster than they seem to be now."

It's official - 3G was over-sold.

Of course, the mobile comms market should not be measured solely in terms of handset sales; for it to be a long-term success, these need to be supported by a range of quality services. But as consumer confidence starts to sag in the US and abroad, people will put off phone purchases, whether they are first-time buyers or replacing their handsets with newer models.

It is a classic chicken/egg scenario: to attract more subscribers and sell more handset upgrades you need improved services. But to support these services you need to have more subscribers if the cost to the user is not to increase as rising costs raise the point of entry, limiting subscriber numbers.

Subscriber drive

For most of the mobile comms industry, the central issue for 2001 will still be the number of new subscribers, but a question mark has already been cast over how this will be achieved in a slowing economy.

But Harris Jones, MD of one2one, does not see growing customer numbers as a key industry goal. He believes that, with 70% of the UK population now owning a mobile phone, operators should be looking to provide better services to existing customers.

"It is clear that the successful network operators of the future will be those with the foresight to look beyond customer number growth at any cost," he said.

There is, of course, a more mundane view of the mobile phone as a fashion accessory. Away from the telco hype and techno-babble, there is a user base that appears to be far more interested in buying replacement covers for their handsets sporting football team colours or the Union Jack than in WAPping up a list of local Indian restaurants.

Perhaps investors would be wiser to put their money into companies making Manchester United handset covers than into the handset manufacturers themselves