Wireless handset sales projections don't add up
By Bruce Gain and Darrell Dunn
Electronic Buyers' News
(08/15/00, 03:46:32 PM EDT)
NEW YORK -- Wide-ranging cell-phone forecasts and a mixed supply picture have some industry analysts claiming that expectations in the wireless-handset market are being oversold.
Coming off Motorola Inc.'s recent revelation that it will not reach cell-phone production goals this year -- coupled with earlier warnings from LM Ericsson and Nokia Corp. that they expect to miss analysts' third-quarter earnings targets -- observers are taking a hard look at the estimates being floated by OEMs. Consumers, meanwhile, seem less than enthralled with current wireless application protocol (WAP)-based Internet phones, lowering demand projections for high-end handsets.
Despite the unsettled picture, the market remains robust overall, with many problems attributed to supply and product-mix miscalculations, or unwarranted pessimism aimed at a healthy industry experiencing growing pains. "Not one company has ever said there is a real lessening in demand on the street. What they've said is they've got the wrong product mix, or they've had a shortage in component parts," said Will Strauss, an analyst at Forward Concepts Inc. in Tempe, Ariz.
The possibility that the cell-phone sector will face anything but high double-digit growth for the next three years is unlikely, according to analysts who share the generally upbeat tone of the industry's handset OEMs. But other observers say incongruous unit forecasts run the risk of misleading suppliers trying to make sense of the data to guide production schedules and capacity increases.
"Some sources estimate we will exceed [the 1 billion] number of subscribers as soon as 2002, while other sources suggest that 2005 is more realistic," said Bob Merritt, an analyst at Semico Research Corp., who is based in Redwood City, Calif. "Either date represents significant growth from our current base of 400 million to 450 million subscribers, but the suggestion that we will double the number of subscribers over the next two years is especially daunting," he said.
"Growth of this magnitude obviously includes critical assumptions of how quickly the infrastructure can be installed, and whether the worldwide population of 6 billion people can use or afford that many cellular phones."
At the beginning of the year, expectations for cell-phone shipments ranged from a low of 286 million by Jack Quinn of MicroLogic Research in Phoenix, to 435 million by Texas Instruments Inc. Quinn said he now believes his projection will be low by at least 75 million. TI, the supplier of roughly 60% of all processors used in wireless handsets, contends 435 million units may still be achievable, resulting in a 60% unit increase over 1999.
"We still think [435 million] is in the ballpark. I think some of the financial community may have let expectations creep up toward 500 million," said Ron Slaymaker, vice president of investor relations at TI in Dallas. "Frankly, if you sat and added up all the individual company forecasts, you'd probably have come up with that number. We understand [handset suppliers] take an optimistic view on their gains in market share."
Tim Luke, an analyst at Lehman Brothers in New York, agreed. "The environment is good, but in their worldwide expectations, the OEMs were ahead of themselves, which partially reflects their operating methodologies to ensure supply," he said.
Motorola, for instance, held a recent meeting with its supply partners during which it lowered a 100-million-unit handset "best case scenario" established at the beginning of the year to between 80 million and 85 million. Jim Caile, vice president of personal communications at Motorola, said the company "asked our suppliers to support 100 million handsets so that if we needed that higher number, they could support that."
Motorola claimed its correction did not represent a true change of forecast, but for SRAM, flash-memory, capacitor, and other component suppliers only recently recovered from a three-year capacity glut, even modest revisions tell a cautionary tale, according to analysts.
"Ericsson and Nokia are missing quarters and missing new subscriber targets," Merritt said. "This flags us that our worst-case scenario is not proved but is now a more likely scenario. We're saying to not extrapolate demand without taking into account new caveats before investing in a $1 billion fab."
No. 1 flash supplier Intel Corp. said it is sold out through the end of the year, but looked hard at the horizon before committing to spending $1 billion to quadruple its 2001 flash capacity relative to 1999.
"We're like the Feds before they raise interest rates," said Scott Dunagan, director of product marketing at Intel's flash-products group. "By looking at all of the indicators, we're seeing strong growth, and believe demand will exceed supply through the first half of 2001."
Ironically, the expectation of greater capacity may have led Motorola to temper its handset shipment estimates, now that the company has a greater assurance of available components, according to Lehman Brothers' Luke.
"We believe that the lower guidance to suppliers reflects a much broader availability of components, since broader availability has meant operators and manufacturers are less likely to make aggressive demand projections -- or even to double orders simply to ensure adequate supply," he said.
Caile noted that during the second half of last year, component shortages posed "significant problems" for Motorola, but were of "modest significance" during the first half of 2000, and will be "insignificant" during the second half of 2000 and beyond. "We achieved this by working with suppliers," Caile said.
While the majority of cell phones being shipped are limited in their ability to display sophisticated data, OEMs are banking on a new generation of Internet-ready handsets to drive sales at the high end.
However, sales of these so-called WAP phones have yet to catch on, which some analysts attribute to slow data rates and small displays. Ericsson, Motorola, and Nokia each warned recently that upcoming revenue could be less than expected, in part due to lower-than-anticipated sales of high-end handsets.
"I think a lot of people are waiting," said Allen Nogee, an analyst at In-Stat Group's Wireless Service in Scottsdale, Ariz. "Some consumers have decided they're not going to upgrade again until there's a major change. There is less motivation to get a new phone."
Nevertheless, Caile said the vast majority of wireless handsets will be Internet- ready within 18 to 24 months, while others in the industry believe improvements in services will help boost momentum for higher-end phones next year.
"You have to remember that today's WAP phones are based on low-speed connections to the Internet," TI's Slaymaker said. "If you go back to the early days of the wired Internet, it tended to be more of a frustrating than productive experience because of the speed of the data connection. Just as increases in digital signal processor (DSP) technology and performance have radically increased the connection speed of the wired Internet with DSL and cable modems, we're going to see the same in wireless."
Current second-generation WAP-based Internet cell phones provide a connection speed of 9.6 Kbits/s. Packet-based phones, such as general packet radio system (GPRS) technology, will be incorporated into WAP for 2.5G cellular phones that are beginning to hit the market, providing around 114-Kbit/s performance. The 3G systems emerging over the next few years are expected to provide up to 2 Mbits/s.
Slaymaker said replacement purchases continue to be the major factor driving cell-phone growth, accounting for more than 50% of sales this year. "And once you get GPRS, it will be a significant and compelling reason for people to upgrade even further," he said. "I think replacement rates will continue to climb." |
