Handset Woes Extend Beyond Sony Ericsson

Posted by: Jennifer L. Schenker on March 20

The fallout continues to be felt in Europe from Texas Instruments’ warning last week of disappointing mobile phone chip sales. Sony Ericsson, which issued its own warning this week that earnings would fall far short of expectations, isn’t the only victim. Add to the list Cambridge, England-based ARM Holdings, which makes microchip technology found inside some 10 billion mobile devices. On Mar. 19, brokerage Dresdner Kleinwort lowered its stock rating for ARM to “reduce.” The reason? The picture is depressingly clear: as BusinessWeek reported last week, there are signs that demand for high-end and feature-rich third generation handsets is stalling in Western Europe, which comprises over half the global market for such models. Indeed, indications of a slowdown are causing some analysts to rethink prospects for the entire year.
 
That’s bad news for both Sony Ericsson and Nokia. Shares of Nokia fell as much as 10.4% to a six-month closing low on Mar. 19, while Ericsson’s shares fell as much as 10.3% to a four-year low. ARM, meanwhile, is being hurt because smartphone and feature-rich handsets have been the bedrock of bullish assumptions for the company’s royalty stream. A smartphone can contain as much as $45 of ARM-related silicon, compared to just $4 in a low-end phone. Unfortunately for ARM, most growth is now coming from new subscribers in emerging markets, who are buying less sophisticated phones that provide royalties to ARM of less than six cents, on average. ARM shares rose slightly in London trading on Mar. 20 but remain near their 52-week low.