How Bad Is the Mobile Meltdown?

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Fewer Phone Upgrades

Now, he says, "Handsets are pretty good. There isn't such an incentive to upgrade." And the shaky economy is only compounding the problem. As people worry about losing their jobs, many are keeping their older phones or opting for low-cost service plans that don't include a new, subsidized handset.

As the crisis worsens, manufacturers are trying to cut costs by reducing their workforces and trimming marketing or research and development. According to Finnish press reports, Nokia has offered buyouts to senior engineers. Analysts also expect the company to slow its launch of new products and delay a major push to increase its share in the U.S., where Nokia has never achieved the market leadership it enjoys in Europe and Asia.

All the manufacturers want to avoid a ruinous price war. Nokia is sending signals that it won't sacrifice profitability to maintain its nearly 40% global market share. But it may be difficult for handset makers to avoid price cuts as their warehouses fill up with unsold products. Companies will face pressure to fetch whatever they can before the devices become obsolete. "Inventory has a shelf life. It may be better to blast it out on the market," says Mark McKechnie, analyst at brokerage Broadpoint AmTech (BPSG). McKechnie, who downgraded Nokia shares to "sell" on Jan. 12, expects total handset unit sales to plunge 12% this year.

For Some, an Opportunity

To be sure, the crisis could prove to be an opportunity for players such as Canada's Research In Motion (RIMM), maker of the BlackBerry, or iPhone maker Apple (AAPL). RIM has been successfully expanding beyond its traditional market among corporate users, while Apple has been challenging Nokia's dominance in high-end smartphones.

Korea's Samsung and LG Electronics could also gain market share as a decline in the Korean won makes their handsets cheaper for foreign buyers. And even Nokia may ultimately benefit from the downturn as weaker players exit the handset business and the Finnish giant exploits its dominance in emerging markets. "The long-term fundamentals are still solid," says Mawston of Strategy Analytics. "There are still hundreds of millions of people waiting to get their hands on their first handset."

Still, it's unlikely that any manufacturer welcomes the worsening slump. Says Mawston: "The fear has spread from one region to another."

Ewing is Frankfurt bureau chief for BusinessWeek. With Moon Ihlwan in Seoul