WSJ -- Pricing Pressure Puts Squeeze On World's Cellphone Makers.
January 15, 2004
Pricing Pressure Puts Squeeze On World's Cellphone Makers
By Jesse Drucker in New York, David Pringle in London and Evan Ramstad in Hong Kong.
Cellphone sales hit a record high in 2003, surpassing even the most optimistic projections from just a few months ago.
So why isn't the industry celebrating a profit bonanza?
Despite new features like color screens, Web browsers and built-in cameras, the continuing entry of new players means tougher price competition. Meanwhile, in the U.S., new rules that allow consumers to switch carriers but keep their cellphone numbers have prompted network operators to try harder to attract or retain subscribers. Carriers are giving away more higher-quality phones as incentives, which is driving unit volumes up but average prices down.
Sprint PCS, for instance, is giving away up to five color-screen handsets to subscribers who sign up for its "family" plans -- a marked change from the past. "Last year, you could get a free phone, but it looked like it was issued by the U.S. government," says John Garcia, senior vice president of sales and distribution for Sprint PCS.
In the personal computer industry, PC makers have managed to alleviate some pressure on prices by adding more horsepower and new features, such as DVD players. Cellphone manufacturers also are adding plenty of extras, partly to take advantage of new higher-speed networks. As a result, more customers are upgrading their phones. An estimated 54% of U.S. cellphone users replaced their phones in 2003, up from 47% two years ago, according to Strategy Analytics.
Even so, prices are under pressure at both the wholesale and retail levels. Kevin Lombardo, a sales and marketing manager in Atlantic City, N.J., recently signed up for service with T-Mobile USA Inc. and got one of Nokia's newest handsets, complete with color screen, built-in video camera and Web browser -- free. "You can't beat it," he says.
Prices at the wholesale level are falling in part because cellphone operators, which are the ones actually buying the handsets from makers, are flexing their muscles, playing a growing pool of suppliers off against each other. The number of handset vendors in the U.S., for example, has doubled from three years ago, according to Deutsche Banc Securities Inc. "Operators now have more vendors from which to choose; they are no longer as reliant as they perhaps were on a Nokia or Motorola, so they can put some pressure on these guys," says John Jackson, an analyst for the Yankee Group, a technology consulting and research firm in Boston.
AT&T Wireless Services Inc., the third-biggest U.S. cellphone operator, says two of the eight most-popular phones it offers are manufactured by NEC Corp., which didn't even sell cellphones in the U.S. six months ago.
Nokia Corp., the world's largest cellphone maker by a long way, has launched dozens of new models in the past year, many with built-in cameras, but the average wholesale price of its phones still fell 14% to €127 ($162) in the fourth quarter compared with a year earlier, according to preliminary figures from the company. These figures indicate that Nokia's handset revenue in 2003 was up just 1.7% from 2002 despite an 18% increase in unit shipments. Operating profit in the handset division rose by a modest 6% from 2002. (Nokia says that currency movements are partly responsible for these lackluster growth rates.)
At Motorola Inc., average selling prices in the third quarter were down 10% from a year ago. Motorola's profit margin in its cellphone business continues to drop as well, down to about 6% in the third quarter from roughly 8% a year ago. For the fourth quarter, Motorola has said it expects margins in its cellphone business to be flat or possibly down compared with a year ago.
Perhaps nowhere is the dilemma facing cellphone makers more apparent than in China and India, where fewer than 20% of people have cellphones, meaning more than one billion potential new customers. But consumers in those markets have less money to spend, driving down prices.
To make matters more difficult, the number of locally based competitors is increasing, putting further downward pressure on prices. Eighteen months ago, Chinese vendors controlled 20% of the Chinese market, according to Deutsche Banc Securities analyst Brian Modoff. That has now nearly doubled to roughly 40%.
In China, unit sales were up 16% in October, the latest month for which figures are available, according to GfK Asia, a Singapore-based firm that surveys retailers in more than 120 Chinese cities. October tends to be the second-busiest sales period for cellphones in China, due to a weeklong national holiday at the start of the month. But average selling prices fell due to discounting over the summer to bring down excess inventory that accumulated during the severe acute respiratory syndrome outbreak in the spring. "Lots of vendors still have inventory pressure," says Zhang Dongming, analyst at BDA China, a Beijing consulting firm.
GfK says unit sales were up more than 20% in Hong Kong, Indonesia, Vietnam and Thailand in October. But sales in Malaysia, Singapore, South Korea and Taiwan were flat in the month.
Meanwhile, in Europe, operators aren't shy about flexing their newfound muscle. Vodafone Group PLC last year asked cellphone makers to bid for a contract to supply a low-cost color-screen phone to its U.K. unit. Hugh Brogan, chief executive officer of Sendo Holdings PLC, a small U.K.-based handset maker, says his company won the contract with Europe's largest cellphone carrier by being "aggressive with a fairly sharp price." The phone, which is exclusive to Vodafone in the U.K., is selling at retail for £40 ($73) without a service contract. One year ago, the cheapest color-screen phones on the U.K. market cost well over £100 without a service contract.
Carphone Warehouse Group PLC, Europe's largest cellphone retailer, says service providers are also becoming increasingly aggressive with the subsidies they apply to handset retail prices. European consumers prepared to take out a service contract can get even the latest high-end handsets, such as Nokia's N-Gage games console, free of charge from some service providers. In December, Vodafone's U.K. arm was giving three DVDs, and in some cases a DVD player, to customers who buy a new handset, reflecting the intense competition between service providers to win new customers.
Write to Jesse Drucker at jesse.drucker@wsj.com, David Pringle at david.pringle@wsj.com and Evan Ramstad at evan.ramstad@wsj.com
Updated January 15, 2004
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