Cell Phones Caught In A Squeeze
By Lisa DiCarlo
Friday February 22, 8:00 am Eastern Time
Forbes.com
Does the entry of Microsoft and Intel into the cell phone business spell the death of innovation and profits?
To some degree, there are parallels between what Microsoft and Intel hope to accomplish in cell phones and what long ago happened to the PC business. Most PC companies that existed 10 years ago are not around anymore because PCs became commodities. They all ran the same software, chips, hard drives, graphics, etc. Companies that tried to differentiate their products with unique features ended up adding to their cost, and their prices eventually become uncompetitive.
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The dynamic duo dubbed Wintel is trying to further grow the market for cell phones-- which should approach a staggering 1 billion subscribers this year--by lowering barriers to entry for manufacturers. They will sell a "reference design" that includes everything a company needs to build a phone. A Microsoft executive told Reuters earlier this week that "with these reference designs, the entire product is a ready-made solution for manufacturers."
There's no doubt this means that profit margins on cell phones will erode, since standardized and prepackaged technologies will likely create more players and more price competition. Market leader Nokia is also working on hardware and software reference designs that it will license later this year, around the same time Microsoft and Intel license their design.
Nokia, which has the fattest cell-phone profit margins in the industry, at 22%, claims that the industry's business model won't change. "Pricing is as tough as it can be today," says spokesman Pekka Isosommpi.
But with these mammoth players pushing designs that make it easier for companies to inexpensively build cell phones, there's virtually no way that prices and profit margins won't start to fall next year. Still, Nokia says that building a cell phone is not as easy as it might seem. Isosommpi says that integrating memory, communications chips and software into a small, elegant design is extremely tough.
Indeed, elegant design is one of the primary ways companies will try to differentiate their products. An eye-catching design will give them leverage to charge high premiums, especially from well-heeled executives and the otherwise status-symbol conscious. It may be that the cell phone business ends up somewhat like the airline industry, where a relatively small percentage of top-paying business travelers generate most of the profits.
Cell phones are unlike PCs in that design matters--a lot. People have to be able to fit their phones in a shirt pocket, pants pocket, in a purse or on their hip. The buttons must be small but not so small that one's fingers overlap the keys while dialing. Width and color matter, as do features. For example, built-in phone books are becoming standard. There will be room for companies, especially those with established brand names, to set themselves apart with design. Imagine if Apple Computer designed a cell phone!
The industry certainly hopes that premium services will make a difference too, but it's questionable whether subscribers will pay to read their e-mail on a 2-inch screen, or play multimedia games or watch streaming video. It's just not practical and will probably be relegated to a niche set of cell phone users.
Rather than building in kitchen-sink features, companies should concentrate on building phones and networks that simply work every time you make a call, for the duration of your call.
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