Earnings Place Handset Makers Under Microscope of Investors
By DAVID PRINGLE
Staff Reporter of THE WALL STREET JOURNAL
It is the week of reckoning for the mobile-phone industry. As the three leading handset makers release their fourth-quarter earnings, it should become clear whether the industry is finally pulling out of a year-long downward spiral.
The market is likely to be fixated on the near-term outlooks offered this week by Motorola Inc., Nokia Corp. and Telefon AB L.M. Ericsson, but longer-term investors will pay close attention to any snippets of information about sales of the latest wireless Internet handsets. Valuations across the industry, ranging from chip suppliers to operators, are built on the premise that consumers want to use their mobile phones to view Web pages, zap each other pictures and even buy things electronically.
Up until recently, slow connection speeds, small screens and fiddly controls have combined to ensure that the wireless Internet has been a flop everywhere except Japan. But general packet radio services, or GPRS, phones, capable of accessing a cut-down version of the Internet much faster than earlier models, are now widely available.
Deciding Factor
Analysts say that GPRS is key to the future of the whole wireless food chain and a fast uptake would give stocks in the sector a significant boost. "GPRS will make the difference between this being a growth industry and not being a growth industry," says Victoria Granger, a London-based analyst with Merrill Lynch. The technology is particularly important to handset makers, who are hoping that GPRS will persuade consumers in already saturated markets to upgrade their phones. Without such upgrades, the boom years of the late 1990s won't return.
After long delays, the glitches in GPRS have been ironed out and marketing is beginning in earnest. Vodafone Group PLC, the world's biggest operator, said in early November that it had about 50,000 GPRS subscribers across Europe, but it expected adoption to increase significantly as a greater variety of GPRS phones become available. Most of the major handset makers had GPRS phones available in volumes later that month and this week's results are the first opportunity to gauge how they are selling. Nokia, which will release earnings Thursday, said in October that it expected 10 million GPRS phones to be sold world-wide by the industry as a whole in 2001.
While one quarter's figures won't provide conclusive evidence of whether GPRS will be a hit, they will give some indication of whether consumers still have any appetite for wireless Internet services.
Normally, Nokia, whose share of the handset market is almost 35%, is regarded as the best bellwether for trends in the mobile-phone industry. But Motorola and Ericsson were faster to market with GPRS handsets. Because Nokia only began shipping GPRS handsets at the end of the third quarter, its fourth-quarter sales figures will be an indication of demand from mobile-phone operators, rather than from consumers. Motorola, on the other hand, has been shipping GPRS phones in volume for six months or so. In October, Motorola said it had already shipped 1.5 million GPRS handsets and had an order backlog of 2.4 million handsets. Its fourth-quarter figures and outlook for the first quarter should give analysts a clear idea of how many of those GPRS phones are still sitting in retail stores.
Piece of the Picture
While such figures are important, they don't tell the whole story. GPRS should give handset prices a lift. If average selling prices are on their way down, it might suggest that the phone makers are cutting the price of GPRS handsets to shift them off the shelves. If prices fall sufficiently, some consumers might buy a GPRS handset because it has other features they like. There is already anecdotal evidence that some consumers are buying GPRS handsets, but not subscribing to a GPRS service.
Given its lead, Motorola, which will release earnings Tuesday, should be keen to talk about this new technology. If the U.S. company doesn't say much on GPRS, it will be a sign that the new handsets have had a cool reception.
With Ericsson, the picture may be less clear-cut. It merged its handset operations Oct. 1 into a joint venture with Sony Corp., and that may have created some logistical problems. Sony Ericsson Mobile Communications has already admitted that it has struggled to meet demand for its new color-screen GPRS phone in the fourth quarter, but it isn't clear whether the shortage was caused by modest production runs or extraordinary demand. Moreover, it could be the color-screen, rather than GPRS, which has made this handset popular.
As yet there are few services that really take advantage of GPRS's higher speeds and ability to retain an always-on connection. For that reason, analysts suspect that GPRS has yet to capture consumers' imagination.
Those suspicions will be reinforced if Ericsson offers a disappointing outlook Friday for its Mobile Systems division, the company's core business of building networks for operators. If the operators do see promising demand for GPRS services, which use a much greater chunk of network capacity than voice calls, they are likely to buy more network equipment so they can maintain the same quality of service. If GPRS demand is weak, they are likely to delay spending on their networks. |
