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Many wireless-telecommunications companies have been making big bets that third-generation, or 3G, networks will fuel growth over the next several years. But as the new high-speed services hit the market, many wireless-phone users may not be convinced they need or want applications such as voice recognition, text messaging, and Internet access. The lack of demand, along with the recent economic weakness in the U.S. and some parts of Europe, threaten to hurt both wireless subscriber growth and handset unit sales.
The worldwide mobile market added approximately 250 million new subscribers in 2001, bringing the total subscriber base to over 925 million. Ericsson (ERICY
), the leader in sales of wireless infrastructure such as base stations and provider of other technologies to telecom carriers, is the best predictor of new subscriber growth. Ericsson expects between 175 million and 215 million new subscribers will be added worldwide in 2002.
Taking the middle of Ericsson's guidance range, 195 million new mobile subscribers will be added this year. While this represents a solid 20% annual growth rate from 2001, it's still well below the almost 50% subscriber increase experienced during 2000. We at S&P also think Ericsson's forecast is optimistic, considering the economy is not yet picking up.
SUBSCRIBER GROWTH SHRINKS. Handset makers are having difficulty drumming up new subscribers because the major handset markets in Western Europe are saturated, with over 60% penetration rates. Rapid subscriber growth over the last few years and reduced prepaid subsidies have led to the slowdown in new subscriber growth there.
While subscriber additions in Western Europe slow down, the Asia-Pacific region -- especially China -- should experience strong demand. With about 140 million subscribers, China was expected to surpass the U.S. as the largest wireless subscriber region in 2001. Other significant markets such as South America and Eastern Europe have lower penetration rates, but present limited growth opportunity.
With new subscribers dwindling, the replacement market will become the key driver to industry growth. The rollout of data-enabled phones with multimedia messaging and color displays is expected to spur the replacement cycle this year.
HOLDING ONTO HANDSETS. With the exception of voice-recognition platforms, there hasn't been a major "killer" application introduced over the past several years to spur customer upgrades. While new services are being rolled out, such as Sprint PCS Group's (PCS
) PCS Vision -- a 3G wireless technology that offers Internet access and instant messaging along with the ability to send and receive color pictures and play enhanced games -- many wireless users may not consider these applications very enticing.
Plus, with the sluggish U.S. jobs market and lower consumer spending and confidence, mobile subscribers are less inclined to pay more for the subscription to high-speed services and the new phones they require. Instead, consumers are prolonging the life cycle of their existing phones -- which, on average, is about two years.
Worldwide handset shipments are expected to rise modestly in 2002 to between 400 million and 410 million units, after falling slightly last year. All told, the handset-replacement market accounted for roughly 40% of total units sold in 2001.
HOLIDAY FIZZLE? We believe phone vendor Nokia (NOK
) -- which has the leading market share of 36% -- is a good forecaster of handset sales. The Finnish company expects about 400 million handsets to be sold worldwide this year, with the replacement market accounting for roughly half of the total units sold. But to meet the forecast of approximately 210 million replacement units, carriers will need to convince consumers that they need faster data-rate phones to access the Internet.
And given the sales trends so far, it looks like the important holiday sales season may be disappointing. According to leading research firm Gartner, approximately 192 million units were sold during the first half of 2002. The quarter ending September should see another 99 million units sold.
That means fourth-quarter sales would need to register 114 million units, or post a 15% sequential increase, to meet the average mean unit sales forecast for 2002 of 405 million. This seems reasonable, but with the sluggish economy, investors shouldn't bet on a strong holiday season.
TIGHT COMPETITION. Finnish vendor Nokia remains the clear handset market leader, but rivals Motorola (MOT
), Samsung, and Siemens are beginning to make gains. By producing the largest volume of phones in the industry, Nokia has been able to counter fierce price competition.
We at S&P estimate that the company's handset operating margins will remain steady at an impressive 20%, but believe handset sales growth could slow to the low-single digits. Nokia's third quarter EPS guidance of 0.15 to 0.17 euros depends on an extremely strong holiday season and could be too high. We have an avoid ranking on Nokia shares.
Meanwhile, Motorola has a solid No. 2 position, with about 16% market share. The company's new handsets are gaining considerable consumer traction. And we expect a ramp-up of next generation GPRS (general packet radio services) phones to boost average handset selling prices. In a recent reshuffle, Tom Lynch, the former head of the integrated electronic system division, became head the handset unit after prior division president Mike Zafirovski was promoted to CEO. We have a hold ranking on Motorola shares.
AN ANXIOUS ALLY. Ericsson was the only one of the top five phone vendors to lose market share during the first half of 2002. In October, 2001, Ericsson launched a joint venture with Sony (SNE
) and began selling both Ericsson- and Sony-branded products. The alliance plans to launch the first jointly-developed handsets in 2003. The major product coming out soon is the T300, an inexpensive color-screen phone that can play and download high-speed games.
The company had hoped the joint venture would be profitable by 2003, but so far, it has struggled. According to press reports, Ericsson says it may cancel the venture with Sony if their products don't catch on. S&P currently has a hold ranking on Ericsson shares.
Analyst Bensinger follows telecommunications equipment stocks for Standard & Poor's
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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Copyright 2002, Bloomberg L.P.
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