Profitless prosperity of cheap phones

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….

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