Sell-Through Statistics

TWICE: How was U.S. handset sell-through in 2005? What are the growth projections for 2006?

Bob Laikin, Brightpoint CEO: In terms of the unit sell-in figure, the estimated year-over-year growth is in the 20 percent range. I believe 2006 is poised for another strong growth year for the U.S. wireless handset industry.

The growth has been driven to date by a strong replacement cycle, which I believe will continue in 2006. Churn, in my opinion, remained relatively flat between 2 percent and 2.5 percent per month. New and improved feature/functionality devices with compelling data-application capability and form factor are fueling the replacement cycle. Attractive rate plans by the carriers and promotional campaigns further added to the replacement sales.

Peter Skarzynski, Samsung Telecom sales and marketing senior VP: Absolute unit growth was running in the 5 percent to 10 percent range in 2005. In dollar terms, ASPs are off 5 percent to 10 percent, which means overall marker size in dollars is roughly flat. ASPs on the CDMA side are being stabilized by the introduction of EV-DO handsets. 3G GSM handsets won't hit the market until the first half of 2006, and we likely won't see volume sales until at least the second half.

Barring no new paradigm shifts in the market, we expect 0 percent to 5 percent handset-sales growth in dollars in 2006. We have already seen a slowdown in net adds. Carrier churn rates are falling as the impact of the switch to two-year contracts is being fully felt. We have seen replacement rates fall as carriers have mostly completed upgrading long-time subscribers to newer, more efficient networks. Growth is coming from “normal” churn/replacement against a higher installed base and a growing population.

Samsung is well-positioned to take advantage of the shift of handset sales to upgrades/replacements for several reasons. We have traditionally targeted the mid and high tiers of the market. When subscribers purchase new handsets, they tend to go for higher featured handsets. Competitors that have been more focused on the lower end of the market will be facing challenges when their customers change handsets.

Bill Stone, Verizon Wireless marketing VP: We have seen higher sell-through in 2005, compared with 2004. We've also seen a higher cost of goods and higher retail price paid by customers as replacement volumes continue to grow, driven by richer features, functionality and design.

TWICE: Which types of phones have proven most popular in unit sales in 2005?

Laikin: Camera phones and MP3-enabled phones continue to drive wireless penetration on a global basis. Communication (voice and data) combined with entertainment on the same device has expanded the target demographic for carriers and MVNOs. Converged smart mobile devices continue to gain traction and grew 100 percent year-over-year in 2005. We believe this trend will continue in 2006. Bluetooth is another highly compelling feature that has added to the sales of both handsets and accessories.

Michael Misuraca, American Wireless president: Camera phones have proven most popular in unit sales in 2005, mostly since the price is coming down a bit. MP3 phones haven't. PDA phones and smartphones have been somewhat popular, but they're still up there in price and aren't for the average user. Phones that accept downloadable applications have also been popular, as are phones equipped with built-in Bluetooth or sold with Bluetooth add-on modules. That's particularly true for power users who appreciate the benefit of not being “tethered.” Bluetooth offers a great and safe way to multitask. Bluetooth accessories have also become more plentiful, which is driving sales.

James Burke, Motorola GSM product operations senior director: While the design-focused Motorola RAZR has impressed both the techno-savvy and techno-novice — becoming the best selling flip phone in the world — we've also seen strong consumer interest in phones that offer imaging capability, Bluetooth connectivity and music capability. Because today's mobile demographic is composed of so many consumer types — stay-at-home moms, global traveling business executives, college kids, 20-something trendsetters and the like — we believe in offering a portfolio that offers a product to suit the needs of each consumer, from fashionistas to gadget geeks.

Skarzynski: At major carriers, we are seeing camera sales in general ranging from 40 percent to more than 60 percent of total handset sales. PDA/smartphones account for less than 5 percent of the overall market, including RIM. Bluetooth is becoming more of a standard feature. Beginning in Q2/Q3 2006, Bluetooth will be a common feature in volume camera handsets. Bluetooth should therefore experience similar growth as camera phones. MP3 handsets comprise a small segment of the market. Most handsets sold, at least at major carriers, accept downloadable applications. Fashion-oriented phones are an extremely small percentage of overall handset sales.

David Bent, Sony Ericsson product marketing VP: We saw strong demand across our portfolio for imaging and music phones. Sony Ericsson launched the world's first true music phone, the W800 Walkman phone in August. Global response to the first Sony Ericsson Walkman phone has been fantastic, exceeding unit forecasts by three to four times our original estimates. We have announced three additional handsets in the Walkman phone line, and we intend to continue expanding the portfolio of Walkman phones.

Converged Device Potential

TWICE: As cellphones evolve into multipurpose devices that function as digital cameras, PDAs, game players, personal media players and handheld navigation systems, what will be the impact on sales of dedicated devices?

Laikin: Cellphones with embedded digital cameras surpassed dedicated digital camera sales in 2005. High-quality, multi-megapixel optic phones such as Nokia's N90/91 have become significant threats to digital cameras and camcorders. As flash-memory capability increases in handsets, there will be a decreased need for dedicated digital cameras. Similarly, stand-alone PDA sales will continue to decline due to the growth in sales of the converged smart mobile devices.

Misuraca: We continue to see the merging of multifunction devices, but the high-end products will never get cannibalized. Consumers don't want to rely on multiuse devices for everything because while the device does many things, they don't do them well enough for most consumers.

The overwhelming majority of consumers still consider their digital camera their primary picture-taking device. Navigation on the phone is becoming more user friendly by the day and provides a nice solution to on-the-go travelers and mobile business users. However, navigation systems on cars are also coming down in price and provide a more of "sense" of direction being that it is stable and you have a real-time compass to easily figure what direction your car is headed vs. how you positioned your cellphone sitting on your seat or dash.

Burke: The size of the opportunity for wireless operators and device manufacturers will surely grow as categories merge and evolve. We believe that in the near term, many consumers will still be interested in devices with basic phone capability. As the converged devices begin to deliver “usage expectations and results" comparable to dedicated, stand-alone devices, consumers will migrate to the convenience of a single device.

The cellular phone will continue to be the one technology device most consumers have with them at all times. It's "your keys, your wallet and your phone."

The interesting story in imaging is not that we are capable of delivering 8-megapixel phones. The interesting story is that 2-megapixel capability — sufficient to print a 4-inch by 6-inch image with quality — is becoming available at mainstream price points and that the ecosystem for taking, managing and printing images is becoming easy-to-use for the mainstream consumer.

Skarzynski: One of Samsung's strengths is our ability to port consumer electronics functionality (camera, music, video) to handsets. We are the undisputed leader in advanced camera handsets (5-megapixel handsets) in Korea, where we've announced 7-megapixel handsets. In the United States, we were the first, and still only, handset vendor to launch multi-megapixel handsets and handsets with optical zoom. Converged high-quality camera/handset devices cannot help but have a negative impact on stand-alone digital camera sales.

Of the main handset vendors, Samsung was the first to market and is the leader in PDA handsets.

We are the first, or among the first, to market 2.5/3G handsets, which support streaming video, streaming music and advanced services. We will have launched three EV-DO handsets at Sprint by year-end 2005, and our closest competitor will have one. We have launched the most EV-DO handsets at Verizon (four). We have launched the most EDGE handsets at Cingular (four), and will be among the first, if not the first, to launch a Cingular UMTS handset.

Stone: We see the all-in-one phones that perform these functions well as being the most popular devices. For example, the new V phone from Verizon Wireless does many things (camera with picture and video capabilities and messaging, music player, gaming and video downloads, Bluetooth, etc.). There are and will continue to be application-specific devices in the marketplace (e.g. multi-megapixel cameras), but they will be more niche. Remember, the customer wants simplicity in devices and believes that less is more — when leaving the home or office, today's customer has three things: their wallet, keys, and mobile device. A single device that can serve multiple purposes is key to simplifying a consumer's life.

TWICE: What is the music-phone potential?

Misuraca: The potential is tremendous and a natural fit for the industry. Consumers will want both capabilities, however, in order to maximize their home and on-the-go music libraries. There currently isn't enough cross-platform compatibility for music phones to challenge the iPod or other MP3 devices.

Burke: Will consumers prefer MP3 phones that play ripped and authorized-download files transferred from a PC? Will they go for over-the-air downloads to the phone? The potential for music phones is very significant, and "yes" to all of the above. Music is evolving rapidly as a category. Consumers expect to be able to do the same things with music on their "music phone" that they want to do with their stand-alone music devices.

Motorola believes that the large number of phones sold and truly easy-to-use music capabilities for the mass market are going to re-invigorate, and positively impact the evolution of, the legal commercial digital music business.

Skarzynski: Converged music/handsets can currently provide consumers with high-quality music devices and high-quality voice handsets. The ability to provide great user experience for both functions (music/voice) will make converged music/handsets a success. Stand-alone music devices will have to adapt by launching a converged device or risk losing sales.

Again, Samsung is well positioned in the converged music/handset market due to our consumer electronic success and strength. Samsung was the first to launch a converged MP3/handset. Unfortunately, this occurred several years ago, and we were three to four years before our time. Currently, we have music-oriented 3G devices at both Sprint (only one) and Verizon.

On these converged devices, consumers want to only pay once for a song and be able to play that song on any device they own (computer, handset, etc).

Bent: Today your phone is always with you as part of your daily life. What better way to access your music anytime/anywhere and listen to the music you love on the go? But as music is a natural extension on the handset, it must also be a phone first, without compromise, and then a credible music player. Mass-market appeal will come from a quality experience not requiring a steep learning curve.

Setting the right expectations is critical to not confuse or over-promise on functionality. This will come from a phased approach to getting music on a mobile phone, thus fostering consumer acceptance and satisfaction that will drive greater adoption of services in the future.

As we already see today, ripping CDs and moving music files from your PC to the music phone is establishing a simple solution to use the phone as a music player. Consumers are already familiar with this, and providing access to a consumer's existing music library is an important first step. This already can be accomplished today on a variety of our handsets.

In the second phase, consumers will seamlessly manage purchased music files on their PC and phone. A critical element is to consider the consumer. With open standards, consumers can manage their music regardless of source without restrictions. People want choices, and with more music services and devices emerging, confusion over Digital Rights Management could prevent a positive experience.

As open standards and high-speed 3G networks become widely available, the consumer experience will expand to support purchasing new music whenever and wherever seamlessly with more choices than ever before.

Stone: In the music arena, Verizon Wireless sees a market for multiple use cases. In terms of music-capable devices, the key driver will be a device that can support multiple formats, interact with a PC interface, and download songs over the air. Of course, the process needs to be simple and intuitive as well.

Buzz And Fashion Future?

TWICE: Are fashion and buzz becoming more important in driving handset sales? If so, are consumers beginning to buy the device first, then choose whatever carrier goes with it?

Laikin: The concept of consumers choosing the device first and the carrier second is more prevalent in Europe and Asia but will eventually become a significant driver in the United States. Today's fashion and buzz is all about personalization. Recent examples of devices driving this trend are Nokia N91, 9500 and Motorola RAZR and ROKR.

Misuraca: Absolutely. Consumers still want a reliable carrier but are looking for the latest and most fashionable technology to complement the service aspects.

Burke: Consumers are looking for a series of needs to be filled by their mobile phone — is it the right price; is it the service provider of choice; does the handset offer the features needed; and, equally important, does it look good? Motorola's (and our customers') experience with the V3 RAZR would indicate that sleek design and the device are clearly being acknowledged as a significant part of the purchase consideration for many consumers. We do not believe that consumers are motivated to purchase by just one element, though. The service and product bundle motivates a consumer rationally and engages them emotionally — resulting in a purchase.