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Summary:

The modern mobile phone business gives the phrase, between a rock and a hard place, a brand new meaning. The demand for cell phones has never been higher, thanks to the demand for voice and text message services in emerging economies around the world. India, China, […]

The modern mobile phone business gives the phrase, between a rock and a hard place, a brand new meaning.

The demand for cell phones has never been higher, thanks to the demand for voice and text message services in emerging economies around the world. India, China, Brazil, and Africa – everywhere you look, citizens are clamoring to talk on their mobiles. They don’t want expensive $500 iPhones – they want a handset that is good for SMS, voice, and maybe a few other basic features.

A report from ABI research says that “by 2011, almost one out of every four handsets shipped globally will be an ultra low cost handset [less than $20].” The math isn’t hard — more cell phones sold at lower costs means less profits. Unless of course the volumes make-up for lost margins, a tactic that so far hasn’t worked for many handset makers.

Motorola’s downer Friday — with job cut news and profit declines — is an increasingly frequent scenario for the mobile phone industry. It is not alone. Nokia has been through this – the company’s third quarter earnings were down compared to the same quarter the previous year, “because a greater portion of its sales came from low-cost handsets,” says ABI.

opk_nokia_ceo.jpgLater this week Nokia will report fourth quarter and full year earnings, and we’ll see if the world’s largest phone manufacturer fared any better than its rival. According to AFP, quoting from a 48-analyst survey, Nokia is expected to buck the declining earnings trend with a modest 4.4% jump in pre-tax profits for the quarter, but will see operating margins at 14.9% — down from 17.1 percent in the fourth quarter of 2005, though up from 13.1 percent in July-September 2006.

Analyst expectation for Nokia’s average selling price of mobile phones is also still dropping: “91.40 euros, down from 99 euros a year earlier and from 93 euros in the third quarter of 2006.” The low cost handsets are showing their true colors for Nokia as well.

While Motorola and Nokia are the biggest players in the low cost handset market, ABI points out that LG, BenQ, Samsung, Philips, Ningbo Bird, Haier, and Kyocera have also started to introduce handsets for this segment. This means more price competition, and ever further decline in margins.

Nokia, Motorola and others don’t have much of a choice. They have to show growth, retain market share or else take a beating on the stock markets.

As we were saying, between rock and a hard place….

  1. Isn’t this just a great market?

    There are a couple of trends that combined will result in an interesting mix that most people on the stockmarket will not like.

    The per minute charge for telephony is going down or at least its growth is stopping. Revenues in the fixed market are going down, in the mobile market their growth is stalling. Some movement shows that revenue per customer will need to go down. All hope is on mobile data to provide further growth.

    In order to keep in business the mobile operators want to lower handset subsidies. This becomes possible with cheaper handsets. Cheaper handsets have trouble doing advanced mobile data functions. Its hard getting people to use handsets that do data if they have to pay extra. Worse still this way people will never move to the mobile data services that are supposed to bring in the money.

    All in all, where does this bring us? well, to a world with cheaper handsets, cheaper mobile minutes and lower revenue. Vodafone and the like might just be relegated to bit-moving commodity provider. That must hurt! Instead of being able to say that you’re doing something cool with new media, you’re a commodity pusher with about as much differentiation as electricy or sand. Sell it by the ton, work cheap, buy low and change the BMW for a Landwind

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  2. “They don’t want expensive $500 iPhones – they want a handset that is good for SMS, voice, and maybe a few other basic features.”

    It’s what I keep saying…make sure that the phone is safe, can maintain a strong signal lock, and has optimal voice and speaker clarity FIRST. THEN go into cameras and MP3 and Internet capability.

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  3. I’m wondering what will define the minimum feature set of a low-priced phone in 2011.

    I’m wondering cutting what feature(s) will In other words, cutting which feature(s) will bring on the most cost savings for the manufacturers: cameras, high-res screens, folding cases, thin batteries, data?

    Raindeer thinks it may be data, but does anyone know if the report mentions anything?

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  4. So should we also wait for Apple iPhone to go under $20?

    I guess, people can still buy Nokia phones at a high price, if they keep introducing new features. And people can keep increasing the revenues of Vodafone, if they also keep increasing the services they offer in low cost. like- who would not like to see YouTube movies on their phone. Vodafone can support it with advertising.

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  5. The other side of the coin is that these companies have really not delivered any good high end handsets.

    Take Motorola, The best that they could do was come up with the Q … a flawed device powered by a pain in the ass windows mobile os. Nokia also has not delivered any smart phone as compelling as their old (delightful and simple to use) cell phones.

    Why should I, a consumer, buy a 200 dollar blackjack cellphone when it is not a great phone or a good communicator. No wonder RIMM’s shares have gone up so high. They were the one of the few with a compelling high end product (the pearl) in the marketplace. With such crap in the marketplace, I may as well choose the best free phone I can get !

    Say what you want about iPhones faults. At least there are good reasons to buy it.

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  6. yup. you guys are right. it is called “upsell”. in the philippines, our mobile market is a pretty good representative of the potential of the BRIC markets. essentially, we started out as a mainly low end phone market. however, as penetration increases, users tend to gravitate towards more features.

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  7. I think the high end handsets are far from being ‘high end’. There really isnt much difference between a $500 700wx (my phone) and the 20 pay as you go. The problem is that how can one rationalize the need for an high end phone when they are not that much different.

    The money isnt with the handsets anyways, its with the monthly subscriptions that we are on.

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  8. These are 3rd world countires where they cant afford a Broadband connection because of price and better yet they dont have the infrastructure in the right places to connect, they dont have a PC or an ipod.

    Whatever the phone is or who its made by, the $500 seems cheap to have all the things mentioned above available to them. Out of experience I can share that they would rather pay more for a device that can do it all than having to pay for 3.

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  9. The VLE (Very Low End) market arising from growing demand in third world countries such as China and India will provide just as great of a growth opportunity for the large OEMs as the cutting edge markets of this side of the world and the Far East will. As consumers’ voice costs drop, which they will eventually have to, service improves (which I’ve always thought should be happening by greater leaps and bounds than it is) and data services along with alternative revenue models are brought in to pick up the slack, we should start seeing a new paradigm come into play. The carriers will hopefully loosen their reigns a bit and innovation will begin to flow in. OEMs will finally have the room to breath and get the chance to differentiate as they so much desire to do. Third-parties will join in and create great new use-cases enabled by the new, more open model.

    This will primarily affect the aforementioned more high-end market, but as in many cases, the low end will suck on the trickle down effect and create offerings that blend the appealing of the higher end functionalities with the affordability and down-to-earth-ness in demand by the masses such as we’re seeing here with the consumer marketed smart phones taking from the business-oriented ones. Looking forward to seeing how this plays out, how entrepreneurs take advantage of this opportunity (copycatting Western successes in the dev. world, creating new ones and blending the two) and how adoption, business models and usage takes shape.

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  10. I picked up an interesting snippet recently – in countries where a mobile phone is the only IP access available (mainly developing countries), people are using phones differently than in the OECD – and that is starting to impact phone design.

    Apparently it is Chinese manufacturers who are most responsive to this trend, most OECD / Western ones still being wedded to the current mobile mindset.

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