Challenges for Sony Ericsson's new chief

The first week of November should have been a time for celebration at Sony Ericsson. The Japanese-Swedish handset maker announced a slew of glitzy new gizmos for early next year and had a coming-out party in London for its new chief executive, Hideki 'Dick' Komiyama, a 64-year-old Sony veteran, on Nov. 6.

The change in leadership comes at a time when Sony Ericsson has successfully established itself as the world's No. 4 mobile phone maker. Revenues and unit sales have doubled in the past three years, and the company has increased its global market share by three points, to 9.5%, overtaking Korea's LG Electronics, in the face of intense competition on all fronts.

Alas, Sony Ericsson's festivities were overshadowed by developments elsewhere in the mobile business. Google (GOOG) at last revealed plans for its much-anticipated foray into mobile phone software (, 11/6/07). Nokia (NOK) announced a major strategic deal on services with Vodafone (VOD), a move analyst say will thrust the rival handset maker into a leading position as a content provider. And Apple (AAPL) launched its iPhone in Europe.

A rocky start to the partnership

The week's news was a harsh reminder of the competition that Komiyama faces in hardware, services, and software as he takes over the top job. 'Hideki Komiyama has a daunting challenge,' says Ben Wood, director of telecom consultancy CCS Insight.

To be sure, Sony Ericsson has come a long way since 2001 when Japanese consumer electronics maker Sony (SNE) and Swedish telecom equipment manufacturer Ericsson (ERIC) pooled their floundering handset businesses into a 50-50 joint venture. The company started life with a weak and fragmented product portfolio, struggling during the first few years to establish its identity, and suffering several money-losing quarters. Eventually, Sony Ericsson delivered some of the world's earliest camera phones, but serious shortcomings in manufacturing left it unable to fulfill orders for its most popular models.

When Miles Flint, a British national and Sony veteran, took over as CEO in 2004, he tackled the problem by increasing the company's control over manufacturing, supply chain, and procurement activities. He also spearheaded the successful move to borrow iconic Sony brands such as Walkman and Cyber-shot for handsets to help differentiate them in the market. The branding program was a masterstroke: Sony Ericsson has sold some 46 million Walkman phones to date.

Competition is picking up

Flint, now 54, also is credited with impressive revenue and profit growth. In the first nine months of this year, Sony Ericsson earned €741 million ($1.08 billion), up 35% from the same period in 2006, on revenues up 27% to €9.15 billion ($13.4 billion). Unit shipments in the first three quarters totaled 72.6 million, up 49%. 'Miles Flint leaves very big shoes to fill,' says CCS Insight's Wood. 'People are watching with a great amount of interest to see how the succession works.'

It's not just a matter of the transition from Flint to Komiyama. Competition is picking up, especially in the part of the market where Sony Ericsson has thrived: high-end multimedia gadgets with cool design and youth appeal. The biggest threat here comes from Apple, whose iPhone launched in June in the U.S. and  went on sale on Nov. 9 in Britain and Germany (, 11/9/07). Nokia's N-series devices are also tearing up the track.

Low-end phones are another issue. Sony Ericsson can't come near to matching Nokia's economies of scale and distribution for phones priced at $30 or less, which are crucial to expansion in emerging markets, says Richard Windsor, an analyst at Nomura Securities in London.


To that end, at Flint's initiative, Sony Ericsson entered into an agreement with France's Sagem (SAF.PA) in March of this year to license certain hardware and software technologies to help it produce more cost-effective low-end phones.

Playing catch-up with Nokia

Then there's the matter of services. Growth is slowing in the mobile market, and the average selling price per device is falling about 10% per year, so even if handset vendors maintain or increase unit sales, they could see lower revenues and profit margins. The only way to counter the trend is by offering services such as online music and navigation, says Gavin Byrne, an analyst at Informa Telecoms & Media (INF.L), a telecom consultancy.

Sony Ericsson now not only has to keep up with Apple's iTunes but also must play catch-up with Nokia, the No. 1 handset maker, which recently announced plans (, 8/29/07) to offer a host of wireless services both directly to consumers and in cooperation with operators. The first significant partnership was revealed on Nov. 7, when Vodafone, Europe's largest mobile operator, said it had agreed to distribute a range of Nokia devices carrying Nokia's Ovi Internet service.

Ovi offers users of Nokia handsets access to the Nokia music store, games, navigation, and social networking services hosted and delivered directly by the Finnish handset manufacturer. Until now major operators have been reluctant to allow access to third-party content and services that might compete with their own offerings. But after failing to attract much usage from subscribers, carriers are teaming up with major Internet brands such as Facebook, YouTube, and Yahoo! (YHOO), giving users access to familiar services to encourage take-up of mobile broadband.

Raising the content bar

Now, another barrier is tumbling down. Major operators have traditionally kept handset makers at arm's length. But the Nokia-Vodafone deal, and news that giant Telefónica (TEF) also will work with Nokia on services, signal a new era. 'This change has allowed Nokia to take a significant step forward in emulating Apple to become a major content provider in its own right,' said Mike Grant, head of the broadband and media division at telecom consultancy Analysys in a research note.

Following these deals, Analysys predicts, Nokia's Ovi will be broadly accepted by other operators as an integral mobile content service. That raises the bar for Sony Ericsson, which has a music offering of its own called PlayNow. Analysts describe PlayNow as less ambitious, but on Nov. 6, Sony Ericsson said it plans to expand the service to include full-length music track downloads from a variety of major labels and broaden its offer to include more games and other content.

Hard look at operating systems

On the software front, Sony Ericsson is a backer and user of the Symbian operating system, as is Nokia. But to differentiate itself, Sony Ericsson utilizes a different user interface called UIQ. At Flint's initiative, the company acquired UIQ from Symbian and recently sold 50% of the venture to Motorola (MOT). The challenge is to revitalize UIQ, broaden its base of licensees, and ensure that major network operators such as Vodafone and Orange (FTE) include it in their terminal platform, says CCS Insight's Wood.

Komiyama also will have to take a hard look at the operating systems used in Sony Ericsson's phones.


According to Informa, Nokia used the Symbian operating system in 53% of the phones it shipped in the first half of 2007, whereas just 18% of Sony Ericsson's phones used the software. Analysts say this gives Nokia advantages in speed, efficiency, and customization. But while pondering more use of Symbian software, Komiyama also must consider the effect of Google's new Android operating system and other emerging alternatives.

Says Neil Mawston, an associate director at Strategy Analytics, a research firm in Milton Keynes, England: 'The past is all about hardware, but the future is all about services and software.' He and other analysts say Komiyama's first week on the job is a good indication of what is to come: plenty of turmoil and new competitive threats on all fronts.

Schenker is a BusinessWeek correspondent in Paris.

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