Handset sector feels the pinch

As the credit crunch takes its toll on the mobile market, some analysts have suggested that global handset sales in the traditionally lucrative fourth quarter may actually be down sequentially on Q3 for 2008.

So far, only two top vendors have reported their figures for the fourth quarter, with troubled Motorola posting a 25 per cent sequential decline down to 19 million units, and Sony Ericsson’s shipments slipping to 24.2 million, down from 25.7 million.

Analysts at Deutsche Bank this week released predictions which point to Nokia’s fourth quarter shipments coming in at around 115 million units, Samsung’s at 49 million, Research In Motion’s (RIM) at 7 million and Apple’s at 5 million. LG is expected to be flat sequentially.

This means that, cumulatively, the top vendors are forecast to ship about 247 million handsets in the fourth quarter, down six per cent on the previous quarter. This is a serious blow to the handset sector, which relies on bumper sales in the three month run-up to Christmas.

“All this implies that units for Q4 are lower than we are modelling and very likely to be down sequentially Q3 to Q4,” said Deutsche Bank research analysts, Brian Modoff and Jonathan Goldberg. “This is the first down Q4 that we can remember, for at least five years.”

Not all analysts, agree, however. Carolina Milanesi, research director at Gartner, told telecoms.com that she is revising her forecast for Q408 downwards from around 330 million to somewhere between 310 million and 315 milllion.

She also predicted that Motorola will slide out of the top five handset vendor ranking and that Sony Ericsson will struggle to hold onto the third position it reached in Q309 “more by luck than by credit.”

Motorola lags the leading pack in key areas such as software and user interface, Milanesi said. This, combined with a shift in geographical focus away from EMEA will cost the firm shipment numbers and an expected push from RIM could contribute to a relegation for a manufacturer that once led the world in handset sales.

Sony Ericsson, meanwhile, could be penalised by its reliance on Western European markets, which Gartner expects to remain flat this year.

The handset sector is under intense pressure from consumers reining in their spend and operators looking to slash costs wherever they can. In mature markets the trend over the past two years has been for operators to tie postpay users into longer contracts, either 18 or 24 months. This is slowing the replacement cycle in these markets, particularly as operators are now withholding mid-term upgrade incentives.

In the developing markets to which handset vendors are looking for shipment growth, the upgrade cycle they’ve been waiting for is not forthcoming, said Milanesi. “This year the great hope was that people in emerging markets that had become subscribers in the last couple of years would now start replacing their handsets. It was not believed they would spend large sums of money but, if they had a $25 – 30 phone as a first phone then maybe they would upgrade to a $50 – 60 phone with a colour screen or VGA camera. And this is not actually happening,” she said.

Pressures on the handset vendors may well impact on other sectors. Milanesi suggested that vendors will have to prioritise the functionality they build into their handsets based on what consumers are most likely to pay for and operators most willing to subsidise. “Adding a DBV-H tuner to a phone doesn’t help you in the market today, for example,” she said.