Mobile Phone Slump

The mobile-phone market is polarizing as the global econ-omic slump prompts some consumers to trade down to cheaper devices and operators feed demand for high-end handsets by promoting them with subsidies. Nokia, the world's biggest mobile-phone maker, is selling entry-level devices costing less than $50 and advanced phones with satellite navigation, music and e-mail as fewer consumers consider mid-tier handsets. Vodafone Group offers Research In Motion's BlackBerry Storm for free with an 18-month plan in the UK and Sweden's TeliaSonera sells Apple's iPhone 3G for one krona (12 US cents) with a two-year contract.

The global handset industry is forecast to shrink for the first time in eight years, with Citigroup analysts predicting a 13 per cent plunge as consumers are more hesitant to replace their phones. Espoo, Finland-based Nokia cut its industry outlook twice in less than a month in the fourth quarter and said in December the market will slide five per cent or more this year. "This year will reshape the industry quite a bit," said Mikko Ervasti, an analyst at Evli Bank in Helsinki. The polarization of the market may squeeze those in the middle. Sony Ericsson Mobile Communications, Motorola and LG Electronics have struggled to come up with hit phones or stumbled in their attempts to widen their product offerings.

Nokia, which ships 15 units per second, may boost its global market share to more than 40 per cent in 2009, said Geoff Blaber, an analyst at CCS Insight in London. Nokia's third-quarter market share was 38 per cent, more than its next three rivals combined. "In this economic environment, we expect some, not all, consumers to trade down to less expensive devices," Nokia chief executive Olli-Pekka Kallasvuo said on a call last month. "We are best positioned to take this tradedown opportunity." Nokia also has an advantage in its network of suppliers and distribution. Nokia was ranked first globally in sourcing, logistics and distribution last year, ahead of companies like Procter & Gamble and Toyota Motor, according to ARM Research. Nokia's size allows it to demand lower prices for the 120 billion parts it buys from suppliers.

The Finnish company may post a 47 per cent drop in profit to 975 million euros ($1.29 billion), the median of 16 analysts' estimate compiled by Bloomberg. "Nokia is set to be a winner on a relative basis, but they will be hurt too," said Martti Larjo, an analyst at Nordea Equity Research in Helsinki. "Apple and RIM will also be winners in relative terms as the smartphone market will still continue to grow, albeit at a lower pace." The growth in sales of so-called smartphones, which have computer-like capabilities, will be fuelled by the addition of features such as Web browsing, e-mail and video to cheaper models. Apple, whose iPhone is the industry's most-hyped handset in the past few years, moved to third place in the smartphone segment last year. The advance of Cupertino, California-based Apple is set to continue as most new touch-screen products to be announced in 2009 by competitors are likely to disappoint given the high standard set by the iPhone, according to CCS Insight. Apple stunned the market on Thursday by reporting an increase in net profit to $1.61 billion in the quarter ended December 27, up from $1.58 billion a year ago.

Nokia has trailed Apple in touch screen devices and started selling its first model in the fourth quarter, more than a year after the first iPhone went on sale. The Finnish company has said it plans to bring touch-screen models across the price range. "Even as Nokia missed some of the trends, they could pick them up in six to 12 months, come back and really crush some of their smaller rivals," said Greger Johansson, a Stockholm-based analyst at Redeye. Research In Motion is well positioned to advantage of the industry shift to smartphones, Co-CEO Jim Balsillie said last month, when the Waterloo, Ontario-based BlackBerry maker forecast sales in the fourth quarter ending February 28 that topped analysts' estimates. Sales have been buoyed by demand for the new Bold and touch-screen Storm models."Apple and RIM, they are almost niche businesses in a sense as they are focused on a very high-end segment, but it's the segment that is going to see better growth prospects and healthier margins as well," CCS's Blaber said.

Samsung Electronics is poised to increase its market share and remain the second-biggest phone maker, Blaber said. Suwon, South Korea-based Samsung reports earnings today, when it may say fourth-quarter profit at the unit that makes mobile-phones fell 42 per cent from a year earlier, while revenue increased 43 per cent, as competition drove up marketing expenses, according to a Bloomberg survey. Samsung's revenue from the handset business will probably rise eight per cent this year, with shipments increasing three per cent, according to UBS estimates. "This will pinch everybody," Nordea's Larjo said. "The weak will suffer the most and it will be even more difficult for companies with bad balance sheets and an inferior product offering to cope." Sony Ericsson, which has posted two consecutive quarterly losses and cut jobs, said last week it will refocus on pricier models. The venture between Sweden's Ericsson and Japan's Sony may struggle to return to profit this year