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Money, Money, Money. 29th April 2008

Welcome to the all-new Telco 2.0 weekly update relating to financial wheeling and dealing in the TMT sector around a specific topic each week. Our aim is not to regurgitate earnings releases amply covered elsewhere, but to look at the financial world through the Telco 2.0 telescope. This week we look at the latest batch of results and data around handsets.

Apple Advancing

Apple released its 1st Quarter results to a rather mixed review and we’re much of the same opinion. The good news was that core business of Mac PCs and laptopsgained market share and produced a mind bending 35% growth in both units and revenues - amazing growth for such a mature product in a mature market. Obviously, there is a feel good factor happening from their music business.

iPod unit sales have stalled at 10.6m units for the quarter. iPod revenue is slightly up, but that is more because of the introduction of the high-end Touch. The big question is now whether the cellular handset market will destroy the music player market in much the way as its destroyed the stand-alone PDA market before it.

We believe Apple’s hedge against this is the iPhone, which shipped 1.7m devices in the quarter. This compares against Nokia’s industry estimate of 295m shipped in the global market for the quarter. Press gossip is that the European business model of a share of revenues in exchange for exclusivity in going away. Either way, the pricing arbitragers (aka box-breakers) of the mobile industry will ensure pricing is consistent across Europe.

SonyEricsson Sloth

A veteran of the industry, SonyEricsson, reported a much harder time with quarter-on-quarter revenue drop of 8% to €2.7bn and a staggering 48% drop in profits. SonyEricsson reported that at the top end there is a slowdown in demand. Whether this is consumer or operator led, it must be worrying to the whole of the handset industry. Still they managed to shift 9m Walkman phones in the quarter out of a total of 22.3m.

Interesting to us is SonyEricsson’s first foray into the Windows Mobile world with the forthcoming launch of the Xperia range. Will a change in operating system also invoke a new baseband supplier?

Motorola Misery

Nobody should be surprised with another set of appalling results from the Motorola handset division. Sales had dropped an incredible 39% year-on-year to US$3.3bn with US$418m of operating losses and only shipping 27.4m handsets. Global market share is now below 10%. Compare this to Q1 of 2006, when Motorola were at the peak of their powers with 46.1m handsets shipped for a 21% share of the global market.

Keen Koreans

In direct contrast both the Korean manufacturers, Samsung and LG seem to continue winning overall market share. Samsung unit sales were up 33% to 46.3m units with a reasonable ASP of US$141, which compares favourably to the Nokia figure of US$123 (€79). LG had smaller growth in unit volumes to 24.4m, but is now ahead of SonyEricsson in the unit stakes, although still trails them in revenue terms (approx US$3bn vs US$4.2bn)

Corporate Credentials

HTC & Microsoft look like to have hit a home run in the corporate market: HTC did 9,918k units in 2007 at a huge ASP of US$375. For comparison in the 12-months to Feb 2008, RIM and its Blackberries shipped 13.8m units , the ASP being US$346. It is interesting that RIM reported US$860.6m of service revenue, which as far as we are concerned is all at risk over the next couple of years as messaging charges becomes included in the general data bundle. It will be hard for RIM to compete with Microsoft if it keeps charging for push-email.

Japanese Jujitsu

The most interesting handset market remains Japan, where the local players dominate over international manufacturers by working closely with operator specifications. MMRI have released the latest market data for 2007 showing Sharp leading with 12.76m shipped out of a total for Japan of 51m. Sharp is followed by Panasonic, Fujitsu, Toshiba and NEC, before a global player (SonyEricsson) makes an appearance.

The Japanese market only represents around 3% of the total global market of around 1.15bn and yet local players have managed to carve out a profitable niche.

Fuzzy Future

The future is always difficult to predict and there is no certainty that the current status quo will remain especially as we enter a turbulent period with new generation of wireless standards being developed. Operators, such as Vodafone, are looking closely at self-branded phones. New entrants such as Apple and Garmin are arriving, whilst old players such as Motorola are imploding.

Watch out for further splintering of the market as the traditional IPR barriers to entry become less important compared to targetting specific market niches. The days of vertical end-to-end control of the value chain by the handset manufacturers seem to be over for everyone bar Nokia.

We live in interesting times…

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