I mean 300 million by the end of 2000, yes. The current number is above 160 million and should easily top 200 million by this year's end. I'd like to point out that GSM subscriber growth outpaced expectations in Europe and China during the 1Q 1999. The replacement sales are higher than expected as well. The key to good sales growth during the next couple of years lies in getting consumers to upgrade their handsets to new models with robust data capabilities or other features that justify an upgrade.
This demands several new models a year from manufacturers who want to lock in the replacement crowd. It demands basically a 12-16 month product-cycle in any given segment, such as entry-level phones targeted at teenagers or urban high-end phones targeted at professional people. I know of one company that is actually executing the shortening of the product cycle successfully. The preparations for this new paradigm had to be made years ago - any company now stuck in the 2-year product cycle can't readjust if they are waking up only now.
And here we get to the dysfunctional heart of the Nokia thread - the Qualcomm dilemma. Which used to be the Motorola dilemma in 1997 and then morphed into the Ericsson dilemma in 1998. The basic question is the same: is there a better mobile manufacturing business model than the one Nokia is pursuing? The Motorola model included making semiconductors, paging gear and all kinds of other stuff in addition to mobile networks and phones. I think it's safe to say that this did not turn out to be the optimal solution. The Ericsson model was built on the assumption that making network equipment would turn out to be safer and more lucrative than making handsets. Wrong again - the lower sales growth and tougher price competition on the network side did not make infrastructure manufacturing a better bet than handsets. Of course, this may change when we move towards higher data transmission speeds in mobile networks and operators are forced to major upgrades.
Yes, Caxton, it would be sweet if Qualcomm could be competitive as a handset manufacturer. It's tempting to think they already are: the company indeed hit a good handset profit margin at the end of 1998. They also have good chipset sales and great licensing income. I believe that Qualcomm gets higher W-CDMA licensing fees than any other company. But that did not get Qualcomm invited to any of the key W-CDMA collaborations among major operators and manufacturers. So they essentially are out of the loop in the third generation manufacturing race.
Could the licensing fee/handset-chipset manufacturing still be the new, better business model? It might - if Qualcomm's handset division wasn't trading market share for those high margins. This is the gimmick Motorola used in mid-Nineties. They gave away market share every quarter to keep the margins high. It worked like a charm - until the market share losses finally caused those margins to collapse. You see, this approach is basically a shell game. You can't grow slower than your market and keep margins healthy in the long run. This "Apple" school of managing profit growth has been discredited.
Let's say CDMA handset sales grew by around 80-100% during the last six months. And Qualcomm's chipset & handset sales grew by around 24% during this period. So the company's sales growth is around four times slower than the growth of their core market. This is how the racket works: Qualcomm can say that they are selling everything they make and the phone margins are 20%. Which is true. It was also true for Motorola's Startac phones in 1996-1997. What this glossy surface conceals is the fact that no company can endure relentless market share losses in their core market without paying for it at some later date. The economies of scale and the importance of strong consumer brand are crucial in maintaining margins. A company can consciously keep the production increases so low that they sell everything they make - and thus for some time both maintain high margins and survive market share losses. But sooner or later the piper has to be paid.
It's that deja-vu moment for Nokia investors - Motorola's vocal supporters pointed to the high profit margins of the company when Motorola kept bleeding share every quarter in 1996. When the inevitable profit crash came, it took Wall Street by surprise. They say that history always repeats itself; first as a tragedy and then as a farce. I'm not sure which stage we're at right now. Time will tell.
China Unicom is spending billions on GSM networks and 800 million on CDMA networks. That should tell something about their priorities. The company's strategic "vision" of building a nationwide GSM network and then complementing it with a CDMA network with inadequate national footprint is a highly unique approach. I'm not sure anyone outside of China understands what exactly is the point aside from being a WTO negotiation gambit. Forecasting consumer preference isn't much of a gamble - the five biggest-spending mobile telecom networks in China at the end of this year will be the Unicom GSM network and the four "Baby Telecom" GSM networks resulting from the China Unicom break-up. Aside from better footprint they also possess comprehensive distribution chains, high consumer-awareness and support from the biggest handset brands.
Not only did Unicom agree to buy infra from Ericsson - they also placed their biggest ever Motorola GSM order and first Nokia GSM order a couple of weeks ago.
Anyway, I'm not bullish on any of the mobile telecom stocks right now. Nokia might dip to high sixties before summer. Aside from a possible overall tech slump it will take some time for investors to gauge the new handset sales situation. The 7110 internet phone and other models won't have a big impact until the third quarter. The new CDMA models are being shipped to places like Radio Shack, but won't be on sale for a week or two. Until 3Q, I expect to see more interest in Motorola's and Ericsson's rebounds. Nokia has been very low-key about expectations and that doesn't wash well with most investors - they want a story.
Tero |
