Mobile phone industry facing bleak Christmas

Last winter saw bumper sales, but service providers are now proving meaner with subsidies

The final quarter of the year, which includes the lucrative Christmas trading period, has, historically, provided the mobile phone industry with a boost.

The final quarter of the year, which includes the lucrative Christmas trading period, has, historically, provided the mobile phone industry with a boost.

While the industry should still see that seasonal uplift in the final three months of this year, sales of mobile phones for the fourth quarter and 2001 as a whole are unlikely to repeat the bumper year that was 2000. For 2001, analysts reckon worldwide mobile phone sales will, at best, be more or less flat compared with 2000. Most, however, predict global handset sales could slump as much as 10 per cent on last year's figure. Specifically in the UK, high street mobile phone retailers reckon sales in the fourth quarter of this year could be 30-40 per cent beneath the levels seen last year. Ben Wood, European Telecoms Research director at Gartner, said: "There's no way that the performance of last year [2000] can be repeated. It's just unachievable. It was an exceptional year."

Estimates for the number of handsets sold worldwide in 2001 now range from 370 million to 400 million units, with some 90 million to 120 million handsets expected to be sold in the fourth quarter. Mr Wood added: "I have no doubt that Christmas is going to show its usual seasonality but whether it will meet the expectations that have been set is questionable."

Last year, Gartner estimates some 413 million handsets were sold around the world, a 46 per cent increase from the 283.5 million phones it estimates were sold in the year 2000. In the final quarter of last year, it reckons around 125 million handsets were shipped. While the industry has now accepted that sales of mobile phones this year will be lucky to even come close to last year's number, it is worth pointing out that the latest estimates are a shadow of the predictions that were around at the start of the year.

Eleven months ago, for example, Nokia believed 500 to 550 million handsets would be sold in 2001. After having repeatedly scaled back its forecasts, the Finnish mobile phone giant now believes the figure will be close to 390 million units.

The reasons for this year's slowdown range from the general economic problems to specific delays in the next generation of services such as GPRS, or 2.5G, which offers always-on internet access. Another reason is that the number of people who own a mobile phone in Western Europe, in particular, has risen dramatically in the last couple of years. Gartner Dataquest estimates mobile phone penetration in the UK in the third quarter of this year was as high as 77 per cent.

In addition, in the UK, the mobile phone operators stopped heavily subsidising the pay-as-you-go or pre-paid mobile phone deals to concentrate on increasing revenues from the more predictable and lucrative contract customers. Furthermore, mobile phone users themselves have been slower to replace handsets partly because of fears of a slowing in the economy but also because they are awaiting better functionality.

For the UK market, in particular, these factors mean the replacement handset market has suddenly become key with retailers and the handset makers keen to offer more fashionable devices with better functionality. On Monday, Nokia launched three new handsets including its '7650' model, which doubles up as a digital camera so users can take pictures and send them to other mobiles. Its recently launched '5510' model doubles up as a radio and digital music player.

The UK's mobile operators, meanwhile, are placing more emphasis on increasing their average revenues per user [ARPU] by selling extra services to existing customers.

John Allwood, an executive vice president at mobile phone operator Orange, said: "What's more important to us is not really the issue of which handset our customers choose but more what services we can provide through the handset."

Consequently, in the run-up to Christmas, competition on the UK high street is likely to be fierce for those customers wanting to replace existing handsets.

Nick Wood, managing director of The Link chain of mobile phone shops, said he reckons the newer, smaller mobile phones including models such as the Samsung A300 and the Motorola V50, will prove popular this Christmas as will fashion accessories and extra services such as 'football alert'.

"Overall, I think [UK mobile phone] connections will be down year on year and they could be down by between 30 and 40 per cent [in Q4], if not more. Last year was buoyed by people buying handsets for the first time," he said, noting: "The market is still a large market. It's not all doom and gloom." While he thought fewer handsets would be sold, he believed people would be prepared to spend more, saying: "Even on pre-pay, we're starting to see good levels of volume for phones of £129 plus."

Others reckon text messaging will continue to grow and predict that gaming on mobile phones will become fashionable as will mobile phones with colour screens. As for 2002, few analysts are willing to stick their necks out and forecast what might happen in the market purely because so many got it so wrong this year. Most agree, however, that the days of dramatic annual growth have evaporated and that the industry is now stabilising and moving toward more conservative growth rates. New growth will depend on replacement handsets as well as new technology and services. GPRS, once billed as a growth driver for the market this year, will not really make its presence felt until next year while 3G, its successor, is unlikely to make an impact until 2003/2004.

The Link managing director said: "We are having to work a lot harder than ever to get our money. Last year was a fantastic year and one that probably won't be repeated for three, four or five years until you get to 3G. But that doesn't mean there isn't a good, solid mobile phones business in the meantime."