It's technically not winter yet, but over the past few weeks, profit warnings have been coming down like a flurry of snowflakes.
First, Nokia gave a warning on Nov. 14, cutting its fourth quarter and full year expectations from what they had been in October. Samsung followed suit on Nov. 24, warning of slow growth in 2009. Then, last week, Palm posted lower-than-expected revenues, Research In Motion and LG warned of lower profits and slower growth and Nokia issued another warning, revising its expectations down further. No news came from Motorola or Sony Ericsson, but those companies could be in such dire straits that mentioning "2009 outlook" in public may be cause for excommunication.
Beset by the recession, weakening consumer demand, dim economic prospects for the coming year and the challenges of intense competition in a fast-paced industry, the handset makers are now entering the winter of their discontent. It is a market that has so far proven extraordinarily resilient to the economic downturn. The conventional wisdom for this is that people everywhere simply have come to view mobile phones as a necessity and not a luxury to be discarded--they would rather cut their landlines or other indulgences than cut their cell phone.
And while this may hold true going into 2009, I can't help but wonder if the inexorable trend toward smarter, thinner and more data-centric phones will ultimately trip up the industry going forward. If the economic picture continues to worsen, handset makers will no longer remain insulated from the fallout, and a crowded market may see the departure or demise of one or more manufacturers.
Both GSM and CDMA-based phones have been trending toward the higher end of the market in the wake of the iPhone 3G. But smartphones require data plans. And data plans require a large monthly investment for consumers whose budgets are already stretched thin. So while the handset makers keep on churning out smartphones, the phones may sit on inventory shelves as more frugal-minded customers opt not to shell out $150 or more for a high-end upgrade and pay close to $80 or more for monthly voice and data plans.
Avi Greengart, an analyst for Current Analysis, said replacement sales for phones that get broken or for simple upgrades will be low-margin and will be hotly contested. In that kind of fiercely environment, there can only be so many winners.
Carriers will keep throwing subsidies at the handset makers to keep price points down, but in this climate, only the strong survive. Nokia, despite its warnings, remains in a solid position. Samsung and LG, with diversified portfolios, will also remain strong. RIM and Apple are selling hot products people are actually willing to buy and will be fine.
Who will suffer? The most obvious answer is Motorola. Stuck in a restructuring of its handset division, which cannot be spun off at this late hour, the handset maker seems to be perpetually stuck in late 2006, clinging to the RAZR as its beacon of hope. And while the company has made moves to get with the times--the launch of the Krave ZN4 comes to mind--it is difficult to play catch-up in such a fast-moving market.
Sanjay Jha, brought in from Qualcomm to help turn around the division, has promised a renewed focus on Windows Mobile and Android-based phones, as well as on handset design in general. But it may be too little, too late. With its debt recently downgraded by Standard & Poor's to basically junk, few are counting on the division to survive for long. In fact, a report by MultiMedia Intelligence out Dec. 9 says Motorola's U.S. market share is rapidly fading as Samsung and LG intensify the competition.
Someone will eventually have to fall, and it won't be pretty. To quote Bob Dylan: "It's not dark yet, but it's getting there." - Phil
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