What's Ailing Sony Ericsson?

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A year later, that had fallen to just 2%, and sales are now declining, says Neil Mawston, director of the global wireless practice at researcher Strategy Analytics in Milton Keynes, England. As a result, Sony Ericsson's global market share has slipped from a high of 10% in the second quarter of 2007, to 8% in this year's first quarter, knocking it from fourth to fifth in global ranking behind Nokia, Samsung, Motorola, and LG Electronics.

Macro trends explain only part of the problem. Analysts say Sony Ericsson also has made a number of missteps that have cost it momentum. For one thing, while competitors like Nokia have spread their bets around the world, Sony Ericsson's sales are still concentrated heavily in Western Europe. "This market is clearly the weakest globally today and seems to be heading for another year-on-year decline in units and revenues in the second quarter," says a research note from Dresdner Kleinwort (AZ). Forecasting only a gradual improvement in Sony Ericsson's profit margins, the brokerage on June 30 cuts its forecast for co-parent Ericsson.

Sony Ericsson also continues to be weak at the low end of the market, where the strongest growth is happening. The phonemaker can't come close to matching Nokia's economies of scale and global distribution for phones priced at $30 or less—crucial to expansion in emerging markets, analysts say. To help remedy the problem, Sony Ericsson entered into a licensing agreement with French electronics giant Sagem (SAF.PA) in March 2007 to help it produce low-end phones. The first model using the Sagem technology is due out later this year.

Faced with Declining Prices

Though it helped pioneer high-end smartphones that act like handheld computers, Sony Ericsson also is facing far more competition in that business today. While competitors have scrambled to come out with products that can compete with Apple's iPhone, Mawston of Strategy Analytics says Sony Ericsson has been slower to react. He faults the company for sticking primarily with "candy bar"-style designs as rivals Samsung and LG have added clamshells, sliders, and touchscreen devices to their product offerings. "There are plenty of alternatives that look more attractive, so you can see why some people have switched," Mawston says.

And then there's the question of services. Not only is unit growth slowing in the mobile market, but the average selling price per device is declining by about 10% every year. That's pushing hardware makers to move into the services business to counter lower revenues and profits. Sony Ericsson now has to keep up with Apple iTunes as well as Nokia's Ovi Internet portal. Analysts say the company probably has to develop its own service offerings to keep up, but first, they say, it must straighten out its hardware headaches.

That's a heavy backlog for Sony Ericsson chief Hideki "Dick" Komiyama, a 64-year-old Sony veteran, who stepped into the job last November (BusinessWeek.com, 11/9/07). Sony Ericsson spokeswoman Merran Wrigley says the company is aware of its shortcomings and is working to fix them. Among the efforts she highlights are the deal with Sagem, which will help the company move to lower price points, a handful of upcoming models that include slider and clamshell formats, and the anticipated launch later this year of a new line of phones powered by Microsoft (MSFT) Windows.

Gaining Ground in the U.S.

Wrigley also argues that Nokia's plan, announced June 24, to buy out mobile-phone software maker Symbian (BusinessWeek.com, 6/24/08) could be a boost to Sony Ericsson, which is a shareholder in Symbian. For one thing, under Nokia's scheme to give away Symbian software, Sony Ericsson will no longer have to pay millions of dollars in royalties. Plus, Nokia intends to merge a software interface used and owned by Sony Ericsson into the Symbian software, which should streamline product development and make it easier for all handset makers to create midrange and low-end phones using Symbian's advanced platform.

As for global diversification, Sony Ericsson has made some progress. True, the company's sales are flat in Western Europe and down in some high-growth markets such as Central and Eastern Europe, Asia, and Africa, according to Strategy Analytics. But it has gained ground in the U.S., thanks to a new distribution deal with AT&T (T), and has picked up some share in South America. "Our management is very aware there is need to continually review the business," Wrigley says. "We will be saying more about that on July 18."

Schenker is a BusinessWeek correspondent in Paris.