Cellular Reinvents Itself, Spurring Sales Resurgence

By Joseph Palenchar On Jan 6 2005 - 8:00am




The cellular industry reinvented itself in recent years, spurring a resurgence in net-new subscriber growth and handset sales.

Carriers and handset makers are giving subscribers more reasons to turn in their old phones for new models sporting color screens, cameras, downloadable applications, PDA functionality and the ability to stream video content. In large part through mobile virtual network operators (MVNOs), carriers are reaching previously underserved market segments, from youth to Hispanics, through nontraditional distribution channels, marketers told TWICE.

Last year's developments point to a day in the next decade when handsets will become all-purpose multimedia devices for many users, replacing their MP3 portable or PDA.

To recount the market's recent victories and create a vision of wireless' near-term future, TWICE assembled a panel of key industry marketing and distribution executives. In responding to TWICE's e-mail queries, here's what they had to say:

HANDSET SELLTHROUGH

TWICE:How did handset sellthrough fare in 2004, and what are the projections for 2005?

Bob Laikin, Brightpoint: Channel inventories were relatively stable and in line with expectations in 2004, implying a healthy sell-through. Based on market research and reports, in North America, around 88 million units were expected to be sold in 2004 and approximately 94 million in 2005.

Replacements or upgrades remain the single largest factor fueling the demand. Newer technologies and associated features and applications are key reasons for the increased shortening of the replacement cycle.

Aggressive promotions by carriers and OEMs on airtime cost per minute and handset prices, respectively, are driving the F2M (Fixed-to-Mobile) migration. Niche players such as Cricket Communications and Metro PCS are designing rate plans specifically to compete with landline services.

In the U.S., market segmentation by demographics and channels is also driving the demand for wireless products. Other exciting and growing industry trends include Wireless LAN or Wi-Fi, the proliferation of Advanced Wireless Devices (or smart devices), especially in the enterprise space, and mobile entertainment content, specifically, music, games, ringtones, and wallpapers. Market research estimates that, by 2009, mobile gaming services in the U.S. alone will generate $1.8 billion annually, or approximately 4.4 percent of total wireless data revenues.

David Bent, Sony Ericsson: A strong replacement market driven by new designs, color screens, and camera phones in a wide range of models, combined with strong new-subscriber growth, drove handset growth in 2004. Unit growth reports vary from 12 percent to 17 percent.

According to Gartner, unit and dollar sell-through in the U.S. were expected to rise 12.5 percent and 4.5 percent, respectively. A growth rate in units of 10 percent is projected for 2005 vs. 2004

Michael Misuraca, American Wireless: In the indirect channel, handset sell-through growth for 2004 was driven primarily by carrier promotions and innovative handset designs coupled with new features. Wireless LNP did not impact handset growth much at all during 2004. Camera phones have been one of the fastest selling consumer devices, but they didn't necessarily increase handset sell-through. Likewise, PDA phones and smartphones had a small impact on sell-through, but not much.

We are starting to see some people move to displace their landlines, but on the whole, most people are not willing to give up their landline phones yet.

Carriers such as Boost, Virgin and others are keenly focused on the youth market, and they do an outstanding job serving and marketing to that demographic. Additionally, handset manufacturers and carriers are targeting this market with innovative features and services such as games, SMS and ringtones.

MVNO strategy is targeting the unbanked community that has typically been denied access to cellphones due to credit challenges. The majority of MVNOs today are prepaid, which allows them to tap into this market.

James Burke, Motorola: Handset sales increased across the board in 2004. Key drivers were features such as cameras and color displays that enable richer experiences for the consumer. The year also saw a significant shift toward more desirable form factors such as sliders and flip phones.

We expect the aggressive transition to more premium form factors, such as the flip phone and slider, to continue in 2005 with an emphasis on fit/finish and styling improvements. Even at mainstream, mass-market price points, many consumers are coming to expect the flip phone as a must-have.

In 2005, we expect industry growth, although at a more moderated pace than during 2004.

Hot topics for 2005 include the improvement of operator-branded service offerings; the development of richer capabilities for media creation and consumption (such as imaging, video and music); the migration of PDA functionality into more mainstream form factors; richer interfaces with bigger, brighter displays and hi-fi audio tones; multimode (Wi-Fi) integration; and land-line displacement.

Peter Skarzynski, Samsung: Samsung Telecommunications America has experienced significant growth and sell-through in 2004. Our shipments have nearly doubled this year.

2005 growth will be fueled by some of the same factors that drove 2004 growth, although in smaller numbers. The shift from black-and-white to color displays will be mostly complete by the end of 2005. In addition, the migration from TDMA/analog to more advanced technologies will be mostly complete as well.

Jon Maron, LG: Both carriers and manufacturers understand that in order to continue to drive sales in 2005, we can't just offer free phones as an incentive to continue using wireless services. As the novelty of mobile phones continues to wear off, and as more and more consumers familiarize themselves with the full extent of wireless capabilities, handset and service technology will have to keep pace and continue to offer that “why to buy” for the consumer.

Customers will always be asking, “What's in it for me?” The answer is continued convergence efforts, bringing more and more relevant technologies together in a streamlined, easy-to-use handset.

KEY HANDSET SEGMENTS

TWICE:What kind of unit sell-through share did various categories of phones enjoy in 2004, and what are the projections for 2005 and beyond?

Jon Maron, LG: Camera phones have increased LG's growth considerably in 2004, and LG's goal is to see integrated video capabilities make the same strides towards the mainstream in 2005 and 2006. When the first camera phone debuted on the market, everyone asked, “Why would I need a camera in my phone?” But in 2005, unit sales of camera phones will outpace sales of digital cameras.

There will always be users who want to maintain separate devices for separate purposes, but camera phones are a perfect example of how a feature that was initially viewed as a novelty is now a necessity for many users.

Bent: We have seen a rapid infusion of built-in cameras in a wider assortment of models that also support consumer demand for personalization, downloads like ringtones, games, themes and wallpapers.

Many phones already allow consumers the basic ability to synchronize their PC-based calendar with their phone, and we see more middle-market phones with this feature in the future.

A wide assortment of headsets, car kits and display devices will continue to provide strong growth of Bluetooth products. Gartner projected that 2 percent of handsets sold in 2004 were PDA phones or smart phones, rising to 4.6 percent in 2005.

Burke: Consumer demand for imaging experiences definitely took off in 2004. Many of the models in Motorola's 4Q 2004 portfolio have integrated cameras. We have video capture in some phones and video playback in others.

In 2005, we see technologies (EDGE, EV-DO, W-CDMA) that enable faster downloads, streaming video and more enhanced imaging and multimedia capabilities.

A look at 2004 would not be complete without mentioning Bluetooth, which makes life simple and seamless. Headset prices are falling to more mainstream price points, and Bluetooth is hitting the masses in 2004. Bluetooth will become a more prevalent feature in 2005, enabling not only hands-free communication but wireless data transfer for sharing images, music and more. We even see the potential for really creative Bluetooth applications — from applications like device-to-device messaging to more seamlessly embedding communications into everyday personal items like sunglasses and clothing.

Skarzynski: Samsung is heavily invested in camera phones, with about 80 percent of its lineup incorporating VGA or megapixel cameras.

PDA/smartphone sales have grown significantly in 2004, and Samsung is uniquely positioned as the only company in the industry to support all major operating systems.

As for multifunction products in general, the key to successful multifunction devices is to have as good a user experience for voice as with the other handset functions. Samsung has been a leader in incorporating MP3 players, PDA functionality and the like into handsets.

Samsung is making a strong push to be a leader in handsets that support advanced services, such as video streaming (VOD) and Music on Demand (MOD). As carriers roll-out EDGE, UMTS and EV-DO technologies that support higher data speeds and advanced services, Samsung is scheduled to launch multiple handsets that take advantage of the increased network capabilities.

ONE VERSUS ALL

TWICE:As cellphones evolve into multipurpose devices that function as a digital camera, PDA, and the like, what will be their impact on sales of dedicated devices?

Maron:Market trends show that camera phone sales are outpacing digital camera sales, but that doesn't mean that digital cameras will go away. There is a wider audience for camera phones because it is a multipurpose device. A marketplace that can currently support cameras and camera phones creates a wider consumer audience and offers more choices to fit increasingly specialized needs.

Are camera phones better? No, but they are often more convenient. In addition, we need to remember that picture quality from a camera phone, even a megapixel camera phone, is still not at a level to compete with newer digital cameras, and the carrier infrastructure is not there to move high megapixel photos yet.

Tim Eckersley, Nokia: The camera phone — having now been on the U.S. market almost two full years — now has enough of a track record to exemplify how converged devices will affect other markets. While there has been some sales impact in areas where camera phones are a direct competitor (disposable cameras being a good example), the effect on complementary markets is even more interesting. Instead of fighting the camera phone, the incumbent imaging-industry players are teaming with companies like Nokia to position their business to work with the camera phone revolution.

Examples of this are the inclusion of Bluetooth camera phone connectivity on Kodak imaging kiosks, direct upload of camera phone images to online photo processors, and even sales of camera phones in traditional camera retailers.

Bent: The impact is different depending on the segment. For PDAs, wireless communication capability is a very natural add-on, so consumers will probably not want to have a PDA without wireless communication features. So smartphones will gain market share.

When it comes to digital cameras, there is a wide spectrum of cameras in the higher-end segment that are more advanced than camera phones, and it's not just about adding more megapixels. It's about having zoom, autofocus, flash and a number of other features, which means that there is a big market for digital cameras in which camera phones won't compete.

Also, the use of camera phones does stimulate the interest for digital photography among consumers, so we think camera phones can actually help sales of high-end digital cameras. However, simple 1- to 2-megapixel cameras will face heavy competition from camera phones.

Burke:Adding these features into mobiles lets consumers have their favorite experiences on a device that they always have with them, although mobile phones may never actually make specific gaming, music and other targeted devices obsolete. They are meant to enhance, not replace.

Many in the industry have seen data projecting that 10 times as many images will be taken with phones next year as will be taken with stand-alone digital cameras. This is exciting! However, the imaging experience in phones really complements the experience that most consumers expect from their single-purpose digital cameras.

Motorola does not believe that phone sales will affect the sales of digital cameras for at least the next few years. Many consumers find that the digital camera in their phone is great because (1) they have it with them all the time, and (2) it is a great way to capture and immediately share a moment with friends — a picture really can be worth a thousand words.

Many of the images are deleted within the next few days, and few consumers see the camera in their phone as a means of capturing, for archival purposes, the photos they have in their family albums at home.

Motorola believes that music will emerge as another interesting driver for the adoption of mobile devices. MP3 players and removable memory are found in the V710 and the MPx220, and they will continue to make their way into devices from many manufacturers into 2005.

E-mail and other productivity capabilities saw a big leap in 2004 and will continue to grow into 2005. As the world gets more complicated, and consumers are continually more mobile, the need for multipurpose devices grows.

Misuraca:We are just beginning to see the merging of form and functionality into one device for PDA and phone products. Lower end cameras and media players will be the first to be overtaken, but the upper end may never be touched.

Skarzynski: When the user experience is the same for the multipurpose device as for dedicated devices, there will be an impact. Samsung is heavily focused on the convergence of technologies, and this is key to its product line. Features that naturally fit together provide users added benefit and eliminate the need to carry multiple devices. Among major handset vendors, Samsung is the leader in offering converged PDA/smartphones and integrated camera handsets.

HIGH-SPEED UPTAKE

TWICE:What new handset-based services have proven popular with the implementation of higher speed data technologies such as EDGE, EV-DO and W-CDMA?

Eckersley: Streaming video has proven to be one of the first applications to take advantage of higher speed networks. The ability to watch live television using AT&T Wireless' MobiTV application, or to view NBA and MLB highlights using the Nokia Sports application, has captured the interest of wireless users already. We expect this type of content to expand even farther as Nokia introduces in 2006 the first DVB-H-based phone capable of receiving true digital video broadcasts.

Bent: We will see consumers benefit from these technologies through faster download speeds, ease of use, and improved overall experience as well as new music and gaming enabled experiences. These technologies will additionally provide more capabilities of sending images from higher megapixel camera phones

Skarzynski: At this early stage, the most promising services appear to be streaming video (VOD) and streaming music (MOD). Samsung is committed to continuing to develop products with these multimedia capabilities as higher speeds data technologies launch.

THE NEXT DECADE

TWICE:Picture the market in 10 years.

Maron: Ten years from now, the mobile phone will be the centerpiece of the networked home, controlling entertainment, security, purchases and more. Convergence will take on a new dimension as the mobile phone moves beyond integrating capabilities into the handset and into controlling a network of technology in and out of the home at the touch of a button.

Bent: You don't have to wait until 2015. The year 2007 is when things really speed up — literally. One example is HSUPA, the cousin of HSDPA. This upgrade for UMTS [W-CDMA] networks lets users upload data at speeds of up to 5.8Mbps. That bandwidth will help make UMTS even more attractive to enterprises and business travelers, who send large files as often as they receive them.

Business travelers also will benefit from a growing selection of multimode, multiband phones. These are true “worldphones” in the sense that they are able to use multiple UMTS bands as well as the most popular bands for GSM, GPRS and EDGE. These handsets also reflect the ongoing 3G evolution. For example, some carriers have deployed UMTS in cities, while using EDGE in less populated areas. The new breed of world phones complement those deployments by ensuring that users always have access to high-speed data — regardless of whether they're in the city, the country or even another continent.

Constant access to broadband also dovetails nicely with ongoing advances in audio and video. By the 2007 time frame, we expect to see handsets with 5-megapixel cameras. That's yet another example of how an innovative handset can eliminate the need to carry multiple devices —in this case, a separate digital camera.

Users also will be able to store those high-resolution photos and videos on hard drives built into their phones. Around 2007, we expect some phones to have 10GB hard drives — perhaps larger. With that amount of memory, the handset is now in a position to replace other devices, such as iPods. It's not a stretch to believe that by the latter half of this decade, handsets will become all-purpose multimedia devices for many users.

Finally, toward the end of this decade, we expect to see growing use of fuel cells to power handsets. This technology uses compounds such as methanol to provide more power than today's batteries — so much so that talktime will be measured in days rather than hours. Wireless will be able to leverage fuel-cell research already underway in other sectors. For example, the research firm ABI says that by 2012, fuel cells will power nearly 15 percent of laptops.

Beyond 2010, we expect software-defined radios to emerge. This technology is so exciting that it's difficult to find an analogy to explain it. Think of it like OTA firmware upgrades, or even your PC, but on the radio side. Just as today you can load a new application or operating system, in the future, by adding software, your phone will be able to change the bands and technologies it uses. A hypothetical example is someone with a 3G phone adding new software to take advantage of 4G networks. Another is a person about to travel to another country, and before leaving, loads software so that the phone can operate in the spectrum bands used in that country.

Misuraca: The handset will be a true multifunctional device with very few bandwidth restrictions; the indirect channel will always exist; and service plans will continue to drop in price. Finally, I see an even more competitive marketplace and a migration toward specialty services as a result of handset manufacturers and carriers striving to differentiate themselves.

Who will be ruling the roost in 10 years? The carriers or mobile application providers? Who will be the Microsoft of the mobile application world? In 10 years, it might be that mobile application providers will be the driving force in the market. It's too early to tell who the “Microsoft” of the mobile application world will be, but we are moving in the direction of data driving the device manufacturers and carriers, much like Microsoft in the computer industry.

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