2nd-Half Cellular Outlook: That's Entertainment

New York — Growth in second-half cellular sell-through will match the first half's 8 percent to 10 percent growth rate, down from about 20 percent during calendar and second-half 2004, analysts said.

They attribute this year's strong-but-slowing growth rate in part to a slowdown in net-new subscriber growth after two years of double-digit gains. They also contend that the consumer stampede to buy color-screen phones has slowed down.

Analyst Chris Ambrosio of Strategy Analytics forecasts U.S. sell-through of 125 million to 140 million units in calendar 2005, with second-half sales reaching about 75 million.

In the second half, so-called multimedia phones, capable of streaming or downloading full songs and videos, will gain share as carriers make “a big push around multimedia heading into the holiday selling season and into the first quarter of 2006,” said analyst Mark Lowenstein of Mobile Ecosystem.

Carriers are expanding their high-speed data networks to more consumers, with Verizon expanding its EV-DO network to half the U.S. population by the end of the year. Sprint plans to roll out EV-DO service in about 60 markets covering 150 million people by early 2006, with portions of major metro markets, including airports, getting service in early summer of this year.

For its part, Cingular and T-Mobile continue to roll out EDGE high-speed data service, and Cingular has promised W-CDMA service in the top 100 markets by the end of 2006.

With carriers expanding their high-speed networks, sales of high-speed data phones have likewise expanded, although they will represent only a small fraction of sell-through volume for 2005, Ambrosio said. Out of more than 60 million CDMA 1x handsets expected to be sold this year, he said, only 4 million to 5 million will incorporate EV-DO.

Also for the second half, carriers and retailers will offer an expanded selection of slider phones, messaging-oriented phones with QWERTY keyboards, and handsets loaded with embedded and removable memory to store music and video, analysts said. The devices include Verizon's $599 Samsung SCH-i730 slider, which is equipped with keyboard, 128MB flash memory, SD expansion slot, Windows Media Player 10 and MP3 player.

Another CDMA multimedia phone due in the fourth quarter is Nokia's 6265, which decodes AAC, MP3 and eAAC+ music files. It also features embedded 24MB, miniSD card slot and ability to stream video at 15 fps.

For its part, Sony Ericsson plans fourth-quarter availability of one of the first U.S. phones that store and play music downloaded by PC from an authorized download service. Only a handful of PDA phones based on Microsoft's Pocket PC platform offer that capability, analysts said. Sony Ericsson's Walkman-branded W600, which lacks PDA operating system, will be the first music phone in the United States to be compatible with Sony's Connect download service, whereas the other phones play back music available from multiple other sites in the Windows Media Audio format.

Camera phones will also take greater share in the second half, if only by default because digital cameras are included in a broad range of handsets at prices that have occasionally hit $49, Ambrosio said, citing economies of scale and carrier promotions. Earlier this year, Sprint promoted a two-for-one camera phone deal at $49, and toward the end of the year, Ambrosio expects more VGA camera phones to be offered free.

As a result, Ambrosio forecasts second-half camera phone share of about 50 percent, with full-year share reaching up to 46 percent.

Despite such promotions, the consumers' average handset cost will rise a "a couple more dollars" from the high $70s in 2004 as consumers step up to more fully featured phones, he said. Carrier inventories will likely remain stable through the second half, he added.