Sure it's a legitimate concern. Problem is, it has been a legitimate concern since 1991 now, and this "margin-crash" problem has never materialized. Making handsets can actually be regarded as a software business, the software has such a crucial role in whether a phone succeeds or not. In this regard, cellular phones are very different from PC's, which are all alike, with more or less the same software and major parts. So projecting the past PC profit margin crunch on cellular industry sounds plausible and pundits from Forbes and Fortune do it all the time... but it is not very smart and the past 10 years in the cellular business do not support this contention.
Moreover, handsets (well, at least GSM handsets) are developing
at a breakneck speed very much unlike the stolid PC market. Both the size and the prize of an average digital phone has crashed in the last five years... yet truly novel technical features have been added annually. I seriously doubt that laggards like Motorola and the Japanese can climb abroad the digital train at this stage... it's moving 80 mph. You know, Nokia initiated the Nokia 9000 project in 1993. How many people then foresaw the market for internet-compatible phones? At this time Microsoft still thought internet was completely irrelevant for their business. How will the competing companies overcome a four-year lead Nokia has in this nascent market?
It's going to be very tough for the late-comers to catch up when they have to integrate all the different facets of phone-making into novel products almost overnight. A good example is Phillips with the introductions of Fizz and Spark, resounding flops. The company will profit from great name recognition, but the word-of-mouth on the phones is lethal.
Impossible to predict when some Nokia's competitor will come up with a true break-through product, but so far I'm not worried. Nokia's latest phones have the best talk time/weight ratios in the business, the company's lead in the display technology is still around two years, Nokia got the first infrared-compatible phone on market well before Ericsson, the incoming call priority grouping is a useful software innovation, etc. I will start to worry when a company emerges that can compete with Nokia in at least three different fronts simultaneously. As long as the competition cannot integrate a good talk time/sophisticated display/advanced software/novel technology like infrared link into one package, Nokia should come out ahead.
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