U.S. Cellular Rebound Seen In Fourth Quarter

By Joseph Palenchar On Nov 9 2009 - 8:00am

U.S. cellular phone sell-in will grow in units in the fourth quarter by anywhere from 3 percent to 10 percent after falling during the first two to three quarters of this year, according to analysts surveyed by TWICE.

The indirect retail channel will capture a larger share of sales than in past years, the analysts added.

The fourth-quarter turnaround will lift full-year 2009 sell-in by up to 4 percent to 5 percent, several analysts said, although one analyst opined that calendar 2009 performance could end up flat despite fourth-quarter growth. Single-digit growth will continue into 2010, most analysts said.

In 2008, full-year sell-in fell by about 3 percent in units, mostly because of the economy’s fourth-quarter collapse.

Analysts, retailers, and marketers attribute this year’s fourth-quarter expectations to an unprecedented number of smartphone launches that will encourage replacement sales, to cash-strapped consumers dropping postpaid phones for prepaid phones, to the indirect retail channel getting increasingly aggressive, and to carriers working more closely with retailers to promote products.

Cellular will outperform many other CE categories in fourth-quarter growth, analysts added, in part because cellphones for voice communications are no longer luxuries but are mass-market necessities.

For the holiday season, cellular will be one of the most dynamic, heavily promoted segments in the CE industry, in large part because of the unprecedented influx of new smartphones, analysts said. (See p. 66 for some new models launching the quarter.) “Never before has there been this much variety of new products,” said Strategy Analytics analyst Bonny Joy. Added Mark Asnes, COO/executive VP of the 400-store Wireless Zone franchise chain, “For the fourth quarter, there’s an amazing amount of new product.”

Down the road, wireless data will “be as essential as mobile voice communication,” said Verizon Wireless executive VP and chief marketing officer John Stratton in referring to data-enabled smartphones.

For more and more consumers, however, smartphones have already become essential. According to The NPD Group’s consumer surveys, for the 12 months ended in August, 25 percent of phones sold to consumers (excluding enterprise purchases) were smartphones, up from 16 percent during the year-ago period. ABI Research analyst Mike Morgan also pointed out that smartphone sales grew in calendar 2008 and during the first three quarters of 2009 in absolute terms even while total cellular sell-in was dropping, said

Analysts expect smartphones to continue growing in absolute numbers in the fourth quarter, in large part because carriers are eager to promote new handsets with mandatory data plans that boost their data revenues. Carriers are increasingly tying smartphones to data plans to offset lost voice revenues caused by voice-plan competition, generous texting plans, family plans, and the like, analysts said.

Other reasons for continued smartphone growth include iPhone visibility that created consumer awareness of smartphones, growing carrier promotional activity behind smartphones in the fourth quarter, and falling prices. When AT&T began subsidizing the iPhone in 2008, analysts pointed out, iPhone prices fell to $199 and $299 at a time when smartphones priced at $349 and up were not uncommon.

At the lower end of the market, consumers have increasingly traded down to prepaid phones to control airtime charges and take advantage of newly aggressive prepaid plans, analysts said. “Since the start of the year, people have been trading down to prepaid,” yielding strong growth for such prepaid carriers as Leap, MetroPCS, TracFone and Boost Mobile, said IDC analyst Ramon Llamas. By March, prepaid subscribers grew to account for 17 percent of the U.S. subscriber base, said New Millennium Research.

Whatever type of phone is hot in the fourth quarter, the indirect retail channel will sell a greater share of them than they would have a year ago, analysts said. They pointed to the expansion by prepaid carrier Leap Wireless into four major national chains, Then there is the recent addition of a third carrier — T-Mobile — to RadioShack’s portfolio.

On top of that, Amazon began this year to sell cellular directly rather than through partners, offering AT&T and Verizon phones with T-Mobile and Sprint phones coming “soon,” CE VP Paul Ryder said in mid-October.

One analyst believes indirect retailers gained about 5 share points since mid 2008 to currently account for about 35 percent of unit sell-through. Indirect share, however, has been greater in years past. In 1998, according to In-Stat survey from that year, the indirect channel’s share was 43 percent.

More people are buying from indirect retail stores not only because retailers are getting more serious about cellular, but now that cellular is a mass-market item, consumers expect to find cellphones in mass-market outlets, analysts contend. “Consumers are driving the change,” said ABI’s Morgan. Consumers have also come to realize that carrier stores don’t always offer the best prices on a particular model, he added.

For their part, carriers realize there are more reasons for mass-market consumers to enter a Best Buy, Walmart or RadioShack than there are to enter a carrier store, other analysts noted. Carriers also realize that out of 70,000 outlets selling cellular, only about 10 percent are carrier-owned stores, according to statistics supplied by Best Buy. As a result, carriers are more willing to support channels that generate high levels of foot traffic if they make the investment in training, merchandising and display, analysts said. In the past, Strategy’s Joy noted, the indirect channel had “limited involvement with carrier promotions.” Now, the clout of the indirect channel has grown to the point that Best Buy is able to negotiate longer exclusivity periods in which it alone introduces a device before other retailers and carrier stores, analysts said.

Although carrier stores are more profitable for carriers because carriers don’t pay activation commissions to their own stores, indirect channels drive needed volume, analysts conclude.