YEARAHEAD-2001 - a "gap-year" for mobile phone makers?
By Yukari Iwatani and Paul de Bendern
CHICAGO/HELSINKI, Dec 21 (Reuters) - Next year's mobile phone war will largely mirror this year's, with most consumers still opting for savvy but cheaper handsets rather than higher-priced models packed with high-speed Internet gadgetry.
This year's battle, which left U.S.-based Motorola Inc. <MOT.N> and Sweden's Ericsson <LMEb.ST> 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 <NOK.N>, 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.
He said Ericsson, under intense pressure to turn around its loss-making handset unit, may be eyeing a link-up with an Asian player like Japan's Matsushita Communication <6781.T>.
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 U.S. recession and European economic slowdown loom.
While Nokia is expected to weather this storm, Motorola and Ericsson may not be able to do so, industry experts say.
MOTOROLA, ERICSSON TROUBLES TO HELP NOKIA, RIVALS
Motorola has warned on its first-quarter earnings, partly due to its handset segment, while Ericsson has said its handset unit will continue to report losses in the first half of 2001.
Compared with Nokia's market capitalization of around $220 billion, Motorola has a market capitalization $42 billion and Ericsson $94 billion.
While Motorola and Ericsson restructure, Nokia and smaller firms like Germany's Siemens AG <SIEGn.DE>, France's Alcatel <CGEP.PA> and South Korea's Samsung Electronics <05930.KS> may gain ground.
Siemens has already said that it has overtaken Ericsson as the world's third-biggest handset maker. The company is jointly developing multimedia phones with Japan's Toshiba Corp. <6502.T> for release in early 2002.
Analysts and industry sources say that Ericsson -- the world's No. 1 maker of mobile network equipment -- may also merge or sell its handset unit to an Asian company such as Matsushita Communication, whose affiliate, consumer electronics giant Matsushita Electric Industrial <6752.T>, 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 GPRS, always-on wireless Internet technology, is fully available and service providers begin upgrading their networks to third-generation (3G) systems.
U.S. mobile service operators such as AT&T Wireless <AWE.N> and Verizon Wireless <VE.N> say they will probably stock more mobile phones made by Asian makers next year. Analysts say, however, that their success will depend on their ability to produce the same volume of phones as the Big Three mobile phone makers.
INTERNET-CONNECTED PHONES NO BIG HIT YET
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.
Analysts say it will be a few more quarters before Internet-enabled phones take off in the United States.
Both 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 percent of mobile phones sold by 2003 to be Internet-enabled compared with only 10 percent 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 a fast releases of new phones," said wireless analyst Mika Paloranta at Finland's largest brokerage firm Aros Maizels.
MARKET GROWTH SLOWING
Industry experts said that while there will be a slowdown in mobile phone growth, partly as subscription growth eases, expansion will stay healthy, helped by consumers who will buy new phones to replace their old ones.
Analysts say that handset growth will increasingly be dominated by users upgrading their phones to newer, feature-laden models and the time gap between such purchases will also shorten.
Nokia and Motorola agree that replacements will account for about 50 percent of mobile phone sales this year, and that number is expected to rise.
Nokia estimates that 70 percent to 80 percent of phone sales in coming years will be replacement purchases.
However, Pip Coburn, global technology strategist for UBS Warburg, said in November 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.
NOKIA WILL STILL REIGN
Worldwide mobile phone unit sales are expected to reach around 550 million units next year, according to leading wireless phone makers, up from around 400 million this year.
Analysts expect Nokia to continue to dominate the market as it uses a successful product portfolio to lure customers.
Both 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 percent compared to around 15 percent for Motorola and around 11 percent for Ericsson, will also 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.
18:35 12-21-00
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