Analysts: New Services, Marketing Could Turn Around Handset Sales

NEW YORK— Analysts served up a smorgasbord of solutions to accelerate wireless-handset sales during a wireless conference, where they cited the potential for new wireless-data services and new phone/PDA combinations to trigger a new replacement spiral.

More aggressive marketing to the under-24-year-old age group was also cited at the Wireless Connectivity Summit, a conference sponsored by Kagan World Media.

Handset sales have been hammered not just by the economic slowdown but by declining handset-replacement rates, market maturity, or both, several participants said. Market maturity contributed to lower than expected fourth-quarter handset sales, said Ann Miletti, co-portfolio manager of Strong Capital Management. "You didn't see the usual fourth-quarter uptick" because "everyone has a cellphone." She also attributed poor growth in part to the economy.

On the other hand, John Kornreich, general partner in Sandler Capital Management, dismissed the economic slowdown as a factor behind the category slowdown. "The economy isn't affecting subscriber growth; it's the maturing of the market."

If market maturity is the key, then it appears "handset manufacturers can turn that around," said Kagan analyst Sharon Armbrust, referring to panelists' market-igniting solutions.

Sam Arditi, VP of Intel's wireless communications and computing group, pointed to new types of phones that will download applications, triggering a replacement spiral. Arditi outlined a parallel between these phones and the evolution of new generations of PCs that used more powerful microprocessors. "New applications will require new phones," he said. "People won't replace phones because of size. They're small enough, and they have enough talk time."

Intel, he noted, is "promoting a platform friendly to this spiral." It was developed about seven months ago to create "a strong separation between the voice and computing pieces of the device" to deliver the "end goal" of allowing "anyone (to) develop an application," Arditi said.

The platform has been endorsed by AT&T Wireless, Research In Motion and Symbian, he said.

These types of applications will inject "excitement" in a handset market whose growth rate was near zero in 2001 compared to 70 percent in 1999, he said. In 1999 and 2000, he pointed out, replacement sales as a percent of total handset sales to consumers hit 40 percent each year but fell to 25 percent in 2001.

Research In Motion executive Paul Donald agreed that "phones with data devices built in" will "drive the handset replacement rate," although success will be ultimately depend on a carrier's "back-end applications."

The applications that will initially "break the [data] dam" will be productivity-driven, said Patrick Kane, Ericsson's strategic business alliances VP. Before that can happen, however, standardized end-to-end solutions must be developed to drive down costs, entice applications developers to create new applications, and enable "one device to talk to another no matter what network they're on." Players must also find a business model that will compensate the information provider and carrier while delivering end-user value, he said.

RIM's Donald agreed that productivity applications will spur wireless-data adoption. "It will give us our family-time back," he said. Those applications will include e-mail and other applications for enterprises that want to gain a competitive advantage, he said. "RIM has already proven that email can sell and generate significant revenues," he said.

Productivity applications can also target consumers, however. Consumer productivity apps tied to position-location services will enable carriers to deliver localized and personalized information to subscribers to enhance their productivity, Donald said. Such applications would let users find the nearest gas station, ATM, restaurant, or bank branch without having to enter the zip code of the area they're in or the nearest city. Another could be efficient phone banking so consumers don't have to spend time in a bank branch.

Productivity, pushing relevant information and battery life will be more important to the data market's development than wireless game playing and streaming video, he contended.

Robust applications will appear in the United States in mid- to late-2002, said Qualcomm's senior director of strategic marketing. Phones in use in Korea already let users download film clips, download applications for $1, or take pictures and email them wirelessly through a built-in digital still camera. A device like Samsung's NEXiO "will probably begin to replace your laptops."

With a middleware such as Brew, enterprises can write their own applications, he noted. And with position-location technology married to data services, carriers add value because "it gives you fewer lines to navigate to find a theater."

Handset maker Nokia will do its part, said Paul Chapple, Nokia Mobile Phones marketing executive. This year, he said, features such as application-downloading Java handsets and multimedia messaging over GPRS "will move to our volume-handset models," which he priced at around $100 to consumers. With them, consumers will be able to download games and new ring tones. He also said interoperable SMS "will begin this year to next to drive revenues [for carriers]."

Future growth will also come from tapping the under-24-age group, said Ned Zachar, telecom research director for Thomas Weisel Partners. Penetration rates for the group range from 25-30 percent, but he expects 80-90 percent penetration "because it's how they communicate."

Perhaps counterintuitively, carrier consolidation could also help drive up the replacement rate, some analysts said.

CTIA president Tom Wheeler agreed. "Consolidation could lead to a critical mass" that will boost the potential of wireless data service by promoting standardization and interoperability of applications. "There are too many people with too many ideas today," Wheel said.

A lack of standardization, lamented Kagan's Armbrust, adds cost and impedes usability, pointing to the proliferation of instant messaging standards for wireless and wired devices. One way to promote standardization, added Nokia's Chapple, would be would be for Sun to develop next-generation Java that would enable developers to write one application for different-technology networks without having to write a different version for each type of network.

Wheeler pointed out that 70 percent of Americans can choose from five or more providers, and 85 percent can choose from four or more. Five to eight carriers per market results in "a lot of capital inefficiencies" and "has no significant impact on airtime prices." Consolidation would also free up capital to improve service, he added.

Strong's Miletti the industry needs only three to four carriers per market and that "some poorly managed balance sheets in the industry" could pare the number of options. "Possibly one to two companies could be Chapter 11 or have an equity value of zero," she said.