After A Year Of Change In Wireless, More To Come

By Joseph Palenchar On Jan 8 2004 - 8:00am

Wireless sales momentum is building. The number of net-new subscribers is growing again, and replacement sales continue to rise, thanks in large part to the proliferation of phones with color displays, built-in digital cameras, and other advanced features.

The advent of wireless local number portability (WLNP) promises only to accelerate the replacement phenomenon.

Further handset sales gain can be expected with the rollout of advanced data services on EDGE and CDMA 1X EV-DO networks, which will enable the transfer of larger multimedia messaging files, longer video clips, higher resolution images, and the ability to stream full-motion video content on demand.

With so much change confronting retailers, suppliers, and carriers, TWICE contacted industry executives nationwide to discuss the industry's short- and long-term future.

Here's what the participants had to say in a Q&A session conducted by e-mail:

Handing It To Handsets

TWICE: How well did handset sell-through do in 2003 compared to 2002, and what will drive 2004 unit-sales growth?

Neil Strother, In-Stat/MDR: It is doing better. I track manufacturer shipments, not sellthrough, and manufacturers are doing better, with shipments expected to be up at least 7 percent this year over last, so retail sellthrough should be doing well also.

For 2004, global handset manufacturer shipments will rise about 7.4percent year-over-year to 465 million units, and it could be even higher if the fourth quarter is strong.

What is driving sales is steady demand for replacement phones in established markets (Western Europe, North America, Japan, Korea); new-subscriber demand in Latin America, China, other Asian countries; and demand for camera phones, smartphones, and color-display models.

In 2004, drivers will include continued replacement rates, camera phones, better smartphones, gaming handsets (such as N-Gage), media handsets (such as Nokia's 3300), some landline replacement, and some WLNP changeover.

Dan Gralak, LG InfoComm: Many factors are driving renewed handset sell-through. One is the timing of product offerings — having the right phone at the right time. Another is being able to come up with the feature sets that the carriers are looking for. There's also a general resurgence in wireless. It's a hot topic, hot commodity, and the overall adoption rate is very high.

Other factors include the personalization of the handsets — through features, data and design. There is more focus on enhanced handset design than in the past. Services from the carriers — BREW, Java — are also raising demand, as are content providers such as Sony, Disney, and ESPN.

Still, there is a very strong market for voice-only products.

Many of these factors will carry over their momentum and drive sales into 2004. In addition, we believe that local number portability for 2004 will directly affect handset manufacturer's sales in a positive manner.

LG's sales volume increased by 40 percent in 2003 versus 2002, and we are anticipating 30 percent minimum growth into next year with the long-term goal of obtaining a 50 percent increase.

Pete Skarzynski, Samsung: For the industry as a whole, sell-through in 2003 is running about 10 percent greater than 2002. For Samsung handsets, we anticipate 2003 sell-through to be more than 50 percent greater than in 2002.

We estimate industry handset sales to increase 10 percent in 2004, with revenues increasing in the 8 percent range.

Because of Samsung's expanded carrier base and industry leading handset designs, we expect our growth to continue to run well above the industry average.

There are two main components driving sell-through in 2003. One is increased mobile penetration within the United States. The industry will add more than 16 million new subscribers in 2003. Second is the popularity of color screens and integrated camera handsets.

Samsung's success can be attributed to our strengths in color and integrated camera handsets. We were one of the first vendors to launch color handsets in 2002. Every Samsung handset launched in 2003 had color displays. For integrated camera handsets, Samsung will end the year with eight active integrated handset models across five carriers.

We see our 2004 growth coming from three main factors:

One is WLNP. Current estimates are that WLNP will increase churn across the entire industry by 0.3 percent/month. This equates to somewhere between six to eight million additional handset sales.

Among handset manufacturers, Samsung is uniquely positioned to take advantage of WLNP because of Samsung's success and focus on step-up and other mid-high tier handsets.

WLNP will increase the number of upgrade replacement handsets sold, and this is an area in which Samsung excels.

Second, continued popularity of color displays and integrated camera handsets.

Third, for Samsung, growth will be the result of an expanded carrier portfolio and a diverse, differentiated product line.

James Burke, Motorola: The mobile phone is evolving from a device on which to speak to someone into a true remote control for life.

The emergence of new technologies and features enable truly compelling new experiences that will change the way people engage with their wireless device. For us, it is not just about the features, but how the design, features, enabling technologies can be combined to create unique, compelling experiences that meet the needs of different consumer groups

These new experiences are contributing to handset growth in 2003 and into 2004 — specifically including various forms of messaging and picture capture. Into the future, we'll see growth in phones with streaming video and video capture, push-to-talk, Bluetooth, converged devices for the prosumer space, and more entertainment opportunities via music.

As for wireless LNP, in other regions that have gone through a similar change, LNP has created a minor increase in handset sales initially, but has not left a major impact.

Kevin Sinclair, Wireless Zone: New services such as data and picture messaging are driving handset sales. Our 2003 upgrade sales to existing subscriber now equal sales to new subscribers. Color screens are big. Growth in 2004 will come from replacement phones and conversions from the competition due to LNP.

Dewey Walsh, Sony Ericsson: 2003 has definitely been a better year for the industry as a whole compared to 2002. We have seen a good up-tick of the replacement rate, which hit its low point in 2001. This all started with Sony Ericsson's introduction of the T68i as the first color-screen phone, which propelled the industry toward a fast migration to color. And it hasn't stopped there. Now consumers are interested in some of the 'wow' features such as mobile picture taking, picture messaging and music-like ring tones. And as these wow features become more accessible in the lower tiers, this upgrading trend will continue in 2004.

Handset Pricing

TWICE: Is the average handset price rising at the consumer level?

Dan Gralak, LG InfoComm: The consumer-level price point is really driven by the carrier. Our observation, however, is that it's definitely higher based on the fact that so many of the handsets have more advanced functionality and features, which are more expensive to produce. However, in entry-level phones, we've certainly seen a decrease in cost.

Pete Skarzynski, Samsung: We see average consumer-level price points stable to slightly rising in 2004. Increased features (such as color displays, integrated cameras, data capability) are putting upward pressure on prices.

The upward pressure is somewhat offset by the willingness of carriers to increase subsidies. Carriers are trying to raise the percentage of subscribers with enhanced handsets in an attempt to raise ARPU [average revenue per user].

Kevin Sinclair, Wireless Zone: Carriers are driving down the cost of the hardware that customers are willing to pay for. Contrary to other electronic devices, margins on low-end phones are higher in many cases than high-end full feature phones. This is due to the carriers pushing out quality full-feature products at no margin to gain the long-term revenue of data services, such as messaging.

Dewey Walsh, Sony Ericsson: Compared to the European and Japanese market, the American market suffers a bit from the "free phone" syndrome. There will always be a larger percentage of consumers in this market who are value-driven, and manufacturers need to continue to offer products that cater to this segment. However, there has clearly been a shift towards promoting and advertising highly featured phones. And consumers have responded.

James Burke, Motorola: The introduction of new features has been positive for ASPs and has stabilized industry ASPs, which had fallen more quickly during the early part of the year.

In-Demand Features

TWICE: Which types of handsets are posting the most sales growth?

Dan Gralak, LG InfoComm: We see a substantial difference between sales of built-in cameras and detachable cameras. All cameras will soon be integrated. The manufacturing and usage of camera phones will continue to grow next year. The number of models will increase because they're fun to use and often offer lots of integration with fun applications. The carriers also enjoy the revenue stream from the usage of airtime for downloading and sending.

We're also finding that consumers are incorporating camera phones into their daily lives and are getting used to, if not addicted to, sharing everything instantly.

Also, the technologies enhancing the cameras will soon have streaming video capabilities, as the camera features are part of an ongoing maturing technology.

If you look at what the carriers are doing, they make extra revenue by offering BREW/Java downloads, and the applications people are really starting to adopt the idea of personalization through downloads.

In addition, downloading is getting more user-friendly, the carrier networks are more robust, more handsets are incorporating BREW/Java platforms, and there's more content out there to be downloaded as well — games and so on.

As for multifunction products such as SideKick, N-Gage, and phones with such entertainment features as FM radio and MP3 player — many haven't done very well. We feel it's still very much a niche market, and maybe down the road LG might participate if we see a giant spike in interest from the carriers as well as the end-users.

Pete Skarzynski, Samsung: Attachable cameras are having a negligible impact. In the U.S., they have been very unsuccessful. To date, U.S. consumers have not shown a desire to purchase "attachments".

On the other hand, built-in cameras are becoming more and more common. Sell-through varies on a carrier by carrier basis. Integrated camera handsets may account for up 25-30 percent of handset sales at some carriers. In 2004, this number will continue to increase. Some analysts predict 40percent or more of all handsets sold in 2004 will contain an integrated camera. Already, retail prices of integrated camera handsets are in the sub-$100 range. This will only continue to decrease.

Carriers are requiring BREW/Java capabilities in all but their lowest tier handsets. The question facing the industry is what BREW/Java applications will drive consumers to make use of the BREW/Java capabilities of their handsets. To date, the industry has not found the "killer" application to drive significant data usage amongst wireless users.

Until very recently, price points on Palm- and Microsoft-based PDA-phones have been too high to drive large volumes on the consumer side. Enterprise sales of such phones have been slow due to the sluggish economy, low IT spending, and the non-mature status of most wireless, industry-focused solutions.

As for Bluetooth, U.S. consumers have not shown a desire to purchase any "add-on" modules that impact the form factor of the handset. Form factor to support voice is the most important driver. Handsets with add-ons or multi-function support that compromise the voice form factor have not sold well in the U.S.

Consumer demand for, and usage of, Bluetooth-enabled handsets is low at this time and, we predict, will continue to remain low in the foreseeable future.

As for multifunction products such as SideKick, N-Gage, and phones with such entertainment features as FM radio and MP3 player, these products compromise a handset's ability to provide superior voice support and are not selling well. Initial sales results of the N-Gage in the US have been very low. SideKick has not been able to leverage the publicity surrounding its launch.

Samsung launched an integrated MP3 player handset a few years ago. Samsung was the first vendor with an MP3 integrated handset. Unfortunately, the handset did not sell well.

In the U.S., voice is still king. The majority of consumers want handsets that support voice well. A handset that supports FM radio, MP3, etc., without compromising voice support, has the potential to sell well, especially among specific segments, such as youth.

James Burke, Motorola: In general, 2003 saw the early stages for most of these technologies. In 2004, the uptake on these technologies should increase, including integrated camera phones outside of Japan and converged devices.

Most new phones will have either BREW or Java to enable downloadable customization. Sales of PDA phones will grow, including handsets powered with Windows Mobile software like our MPx200.

Bluetooth-enabled accessories will also become more prevalent in the marketplace. Multifunction products will also grow, specifically products that allow for improved messaging capabilities, allowing for new ways to message via SMS, MMS and PTT as well as via designs that include QWERTY keyboard.

Dewey Walsh, Sony Ericsson: From our perspective, 100 percent of our products support imaging, with either a built-in or attachable camera, creating a win-win scenario with our carrier partners. Sony Ericsson gives consumers intuitive, easy-to-use imaging phones, and operators are able to reap the benefits in increased adoption and use of picture messaging.

While Bluetooth has not yet reached mass-market penetration, there is a large and growing segment of the market that seeks out Bluetooth, particularly in products such as Bluetooth headsets and car kits.

TWICE: How quickly are consumers adopting data services as SMS, MMS, picture-messaging, Brew/Java application down-loads, and the like?

Neil Strother, In-Stat/MDR: In general, U.S. users seem to be on a relatively slow but steady adoption curve for these new services, with SMS making steady gains. With the growing popularity of camera phones, MMS should be on the rise next year as well.

My hunch is that business users will drive much of the heavy data usage, as well as some youth segments who like to send wireless messages, share photos, surf the Net, play games, and do on.

Kevin Sinclair, Wireless Zone: SMS and picture messaging are the top add-ons. But customers do not come in looking for these services; the services need to be sold at the point of sale.

Overall, carriers are all doing a poor job launching data. No carrier has mastered getting the information out on what is available, how it benefits the consumer, and so on. Many retailers also do a poor job with data because they do not use the wireless-data services themselves.

The Next Wave

TWICE: What new services will be possible with the implementation of higher speed data technologies such as EDGE and 1X EV-DO?

Paul Chellgren, Nokia: We see a number of enhanced services taking hold with new, faster networks. Larger multimedia messaging files will be possible, with longer video clips and higher resolution images, the ability to stream audio and video content — from servers to handsets and from handsets to other devices — will also become possible.

TV and radio will become outdated modes of content delivery as mobile devices and high-speed network make on-demand content a reality. This content will be optimized for mobile devices, and not just transferring existing content to a smaller, more portable platform. In this way, new wireless networks will ultimately change the way that the media industry does business.

Neil Strother, In-Stat/MDR: Video services, for sure, including news, music, and sports clips. Location-based services also stand a better chance of taking off with faster networks, especially for things related to mapping, directions, and real-time traffic. And, of course, richer email with faster (and presumably more secure) networks should be a winner.

I'm not sure that many people will use the videophone functionality all that much.

Indirect Benefits

TWICE: How has the indirect channel benefited from the rollout of camera phones and other phones that use data-enabled services?

Kevin Sinclair, Wireless Zone: The main benefit is continued traffic due to upgrades. Customers are upgrading every 10-18 months, and if serviced correctly, they will be back to the retailer for service.

Paul Chellgren, Nokia: With more and more advanced features and functions becoming common, most buyers continue to demand the hands-on approach and demonstrations that only a conventional sales experience can provide. So the trend is towards having well-educated in-store sales personnel who can understand and explain the newest technologies. The channels that can combine a well-educated sales force with well-developed demo stations at the point of sale will be the winners over the next one to two years.