Entertainment Options Flourish At CTIA

New Orleans—The city noted for an excess of entertainment options will host a wireless trade show that hopes to give consumers even more entertainment opportunities.

Handset suppliers here at CTIA’s Wireless 2005 will serve up a feast of phones with entertainment-oriented features that will appeal to new subscribers and give current subscribers more reasons to upgrade their existing handsets.

Music will play a key role in stimulating replacement sales, marketers contend. Nokia, for example, plans to put Microsoft’s Windows Media Audio (WMA) decoder in select handsets, and Sony Ericsson has vowed to increase its selection of handsets that double as music players. These models will add more internal memory to store music files, and more will come with memory card slots to store additional songs.

Recently, for example, Sony Ericsson unveiled a W-CDMA/GSM-GPRS handset with dedicated media player button and MP3, AAC, and M4A decoders. The Z800 operates in 900/1800/1900MHz bands and comes with 64MB Memory Stick Duo card, though it can accept 1GB Duo cards. It’s due in the second quarter, but the company didn’t specify in which countries.

Technology companies will also get into the entertainment act at the CTIA show, with at least one company — U.K.-based Sonaptic — demonstrating cellular surround sound over two built-in speakers.

During the March 14-16 event, attendees will also find demonstrations of infrastructure that will deliver new entertainment options to handsets. The technologies include HSDPA (high-speed downlink packet access), a W-CDMA advancement that in its Phase II variation will accelerate peak download speeds to 14Mbps, from 2Mbps. Previously, Nortel has demonstrated HSDPA infrastructure, and Ericsson has demonstrated HSDPA Phase II infrastructure.

Ericsson contends that Phase II will enable high-resolution interactive gaming, push-to-watch video service, speedy music downloads, DVD-quality video downloads and large e-mail attachments.

For fast transfers of downloaded video and attachments from phone to nearby PC, semiconductor maker Freescale and Samsung might reprise their 3GSM World Congress demonstration of a UWB-enabled cellphone.

Some advanced entertainment functions, however, need not wait for HSDPA. They can be offered through such technologies as EV-DO. In fact, Samsung might demonstrate an infrastructure solution delivering a trio of push technologies over EV-DO networks: push to talk, push to view (a multiuser videoconferencing application) and push to data (to share multimedia files instantly). Samsung also plans implementations over EDGE, W-CDMA and Wi-Fi networks.

Advanced services like these will encourage handset replacement sales in 2005, as will continued strong growth in net-new subscriber growth will also stimulate handset sales. The Yankee Group attributes the past two years of accelerated net-new subscriber growth to MVNO activity and carriers’ aggressive marketing of family plans. Yankee puts the number of net new subscribers in 2004 at 22.4 million, up from 2003’s 18.9 million. In 2002 and 2001, the number of net new subscribers fell, according to CTIA statistics.

But analysts expect a slowdown in handset unit-sales growth this year to single-digit percentage rates following consecutive years of double-digit percentage growth. "For the past few years, there have been a fair number of reasons to upgrade, including color displays, faster networks and ringtones," In-Stat analyst Neil Strother explained. "Two years of double-digit growth will be hard to sustain."

Although Verizon and Cingular are rolling out their high-speed data services, he explained, "coverage and handset prices are still an issue." In 2006, he said, "we’ll see a big EV-DO ramp up."

The Diffusion Group, a market research company in Plano, Texas, also forecasts a slowing in the unit-sales growth rate in 2005, when it forecasts a stagnating handset replacement rate of 56 percent. The company defined the replacement rate as the percentage of subscribers who replace their handsets every two years or less.

Despite the flat replacement rate, Diffusion forecasts a 9 percent gain in 2005 handset sellthrough to 119.4 million (see table). T

In 2005, handset sales will grow for several reasons, Diffusion said, including:

• expected growth in subscriber penetration rates to 67 percent from 2004’s 61 percent;
• the continued migration of Cingular/AT&T subscribers to GSM from TDMA in a process that will be "largely complete" at the end of 2005;
• the "mass introduction of highly functional handsets;"
• and high churn rates at Cingular/AT&T, fueled in part by local number portability.

In 2005, Diffusion forecasts strong growth in CDMA 1xRTT handsets, EDGE-equipped GSM handsets and combination Wi-Fi/cellular phones. "In 2004, the majority of CDMA handsets sold were 1xRTT," a Diffusion report said. "Exceptions to the majority tended to be older down-level versions in second- and third-tier carrier." In 2005, however, "all CDMA handsets will be 1xRTT or higher." CDMA 1xRTT handsets [excluding WiFi-equipped models] will account for 51.9 million in handset unit sell-through, or 43.5 percent of total U.S. handset sell-through of 119.4 million, the report said. CDMA 1x EV-DO sales will account for an additional 1.1 million sellthrough units, or 2 percent of all CDMA phone sales, up from a mere 300,000 in 2004.

Sales of EDGE-equipped GSM handsets will hit 6.3 million, accounting for 15.5 percent of all GSM unit sales, the company said. EDGE sales will be up substantially from 2004’s 1.1 million.

Because of Cingular’s small W-CDMA footprint and high prices on W-CDMA handsets, Diffusion expects W-CDMA handset sales to reach only 600,000, though that’s up from near-zero in 2004.

A growing percentage of phones incorporating these technologies will be smartphones, according to Jupiter Research. U.S. smartphone sales will grow at a compound annual growth rate of 28% through 2009, when they will account for 9.3 percent of handsets sold, up from 3.7% in 2004.

The use of advanced services will also grow, Diffusion said. Although only about 1 percent of CDMA subscribers will subscribe to EV-DO service in 2005, Diffusion contends, the figure will jump to 10 percent in 2006.

Likewise, EDGE subscribers will account for up to 10 percent of GPRS subscribers by the end of 2005, Diffusion said. At the end of 2004, GPRS was used by three-fourths of all GSM subscribers living within a GPRS footprint. By 2006, GPRS coverage will be "ubiquitous," the company said.

Suppliers also attribute handset-sales and net-new subscriber growth to the increased competitive activity created by MVNOs wsuch as Boost and Virgin. Many of the MVNOs have increased cellular’s youth-market penetration through prepaid plans, youth-oriented features, and marketing. In 2005, analyst Mark Lowenstein said, "a new wave of MVNO activity" will "accelerate" and will likely include cable-TV operators. For its part, Nextel’s Growing penetration rates among older Americans are also contributing to handset-sales growth, according to The Yankee Group. It found that 50 percent of people between the ages of 65 and 74 own a cellphone, as do 30 percent of people in the 75-94 age group. Those numbers are up from four years ago, when 15 percent of people over 65 were estimated to own a cellphone.