2009 Will Be a Painful Year for Mobile Device Vendors

I'm still bemused by the assertions of many people that 2009 will be a banner year for mobile devices. Pointing to the uptake of the Apple (AAPL) iPhone, many observers are imagining a sudden glorious transition of the population to "superphones", especially in the U.S.

I've seen breathless commentary about the entry of a new "manufacturer" of Android phones, the Australian company Kogan. "Kogan simply designed a device, had it manufactured in China, and loaded Android onto it". Hmm, a small company importing LCD TVs and other electronics "designed" a device? They did interoperability testing against all the HSPA network hardware variants? They designed the antenna? Given their own price went up by Aus$100 over initial expectations because of currency movements, who'd want to guess their margins a year out?

Well, one thing's for sure, they announced it the same week that Nokia (NOK) said that the global handset market is falling off a cliff.

It's tempting to say "Oh, well, it's still a billion+ devices a year, I'm sure new entrants can make money".

Same deal with all the new cool MID (mobile Internet devices) coming onto the market with shiny Intel (INTC) Atom or TI (TXN) OMAP or Qualcomm (QCOM) Snapdragon chipsets. Surely everyone wants a portable web device?

But think through the other ramifications:

• Nokia & Samsung will presumably take the opportunity to lower prices, benefit from scale economies, gain market share and squeeze/kill the less fortunate. Ditto the larger notebook vendors.
• Consumers will sign up for longer contracts as operators try to extend upgrade cycles.
• Consumers buying unlocked phones are going to think very carefully before parting with their hard-earned cash (or their hard-crunched credit).
• Enterprise buyers will defer upgrades and replacements of anything. Especially if they expect to fire 20% of their employees next year. And where they do buy stuff, they'll know that they can get great deals out of existing suppliers who have friendly and trusted salespeople desperate to keep their jobs.
• Suppliers are going to want cash upfront, especially from startups.
• Distributors and retailers will want to cut risk and costs. Putting large marketing budgets towards "cool new stuff" from "cool new companies" will be less likely.
• Nobody is going to want to tie up capital in large inventories of anything - components, finished devices etc.
• Various companies in the value chain will go bust, leaving holes in supply chains, distribution channels.
• Any operator giving a subsidy for anything will be doing doubly-diligent credit checks.
• It's anyone's guess what happens to currency movements. Bigger companies can hedge better than smaller ones. (OK, unless they're investment banks, it seems....)
• Any capacity-crunched networks are likely to stay crunched for a bit longer, unless a CTO physically forces the chequebook out of the CFO's hands.

Sorry to sound like a doom-monger on this, but really, I think some of the unbridled enthusiasm around high-end smartphones, MIDs, network deployments like LTE and broadband-enabled notebooks and netbooks is going to come down to earth with a hard bump.

Frankly, I hope I am wrong on this. It doesn't do my business any good either - not many companies tend to spend money on pessimistic advice. And there will certainly be bright spots - Apple, for instance, as long as iPhone revenues offset any weakness in iPods, and its operators don't start playing hardball in negotiations. Nokia's new N97 (and its scale and reach in low-end devices) should help it weather the storm better than most.

Overall, I'd rather start 2009 with the glass half-empty, and then hope to get a top-up. Too many people are going for half-full, without spotting the cracks.

Disclosure: None

Comments

[Hayweed:]

It may get really bad for the mobile phone vendors if Apple comes out with a 4gb iphone for $99. That would make most of the motorola, nokia, lg phones worth $0 to the consumer while allowing apple to keep production ramped for economies of scale. The old phone vendors including Rimm are getting taken to the woodshed by a computer company with more cash than all the competitors combined.

The fact that in a little over a year Apple has made such an impact in phones is due to the fact that making a product is not the issue it is giving it software that makes it easy to use that is the new wave. Apple has an operating system and thus puts it in the iphone, the touch, all the ipods, laptops, desktops, wireless routers, and the apple tv. What product category do you think they topple next. I wouldn't want to be tivo with apple looking for new product catergories.

2008 Dec 07 07:50 PM

[brewer:]

Apple will own the mobile market by 2011. There is no real weakness in the iPod market, that is a fantasy promoted by some on wall street. Sales are not constant, neither is the economy, but iPod has never had any serious competition whatsoever.

iPhone is part of the iPod market. It never fails, when I am out and several people have their phones out that the iPhone users can find or do just about anything in seconds and the others are fumbling around, with no applications market at all, and if that were not bad enough, everyone starts talking about how they want to get rid of the blackberry or whatever and get the iPhone.

If WallMart starts selling iPhone at $99, it's all over for any other smart phone vendor, period.

I think the windoze monopoly comes next for Apple after that. As if it were not already eroding. It's already to the point that a vendor simply can't ignore Mac users, as they used to do quite routinely.

2008 Dec 08 09:19 AM

[Dean Bubley:]

The amount of memory really isn't going to be the determinant of Apple's lower-end price point.

Bear in mind that the $200 iPhone price points only apply on long-term contracts (usually 2 years), that imply a large subsidy by the carrier.

The "real" price of the iPhone 3G is more like $350-500. Certainly, if you buy it on prepay, it's a $500+ device, and in some countries more like $800.

I certainly think that there's a reasonable opportunity for Apple to expand its market share, but of the overall global 1-billion phone market, it's probably chasing realistic addressable target of 5% or so for the foreseeable future, although 50m phones is a pretty tempting target.

A more interesting prospect is if Apple introduces a smaller "iPhone Nano", or better still a clamshell version, as there is a large part of the market that would never go near a large tablet-type device.

2008 Dec 08 09:23 AM

[brewer:]

I fully expect to see an iPhone nano type product in the next year. One that can be used on any carrier.

2008 Dec 08 09:32 AM

[Nick Gogerty:]

commodification from a feature set is hitting the phone market at the same time that phones last longer for consumers. A double whammy. Shrinking replacement market with a lower differentiability on the margin line. Looks like lower revenues and lower margins. Time to start looking for the next bubble.

2008 Dec 08 10:12 AM

[ArtfulDodger:]

In my view, these are the best times to buy Nokia. The company thrives on hard times when it can sit back with all its cash and no debt balance sheet and prepare to gain share when things turn around.

With tons of bad news out on the sector, the company's price has held up pretty well. That bodes well for the price, because how much more bad news could hit the company?

Besides Apple, there's no better managed company in any business.

I now own Nokia.

2008 Dec 08 11:08 AM

[Troubled:]

The market for smart phones does not look good. People are cutting back on non essentials. Cell phones are replacing landlines in droves or already have. Still an entry level phone will do all the basic functions of a top of the line phone sometimes for no additional cost at the start of a contract.
Consumers watching their money is tough on the cell phone companies and chip makers as the profit on the entry level phone is not as great. Last year's cell phone is old news and not worth much money. Look for the economy to keep cell phone companies and chip makers in tough times.

2008 Dec 08 12:43 PM

[Troubled:]

I agree Nokia is a good company they recently ended their near single source supplier relationship with TI. Very good move as I look for any phone I buy to have Qualcomm parts. Qualcomm is the largest supplier of mobile chips for a reason.


On Dec 08 11:08 AM ArtfulDodger wrote:

> In my view, these are the best times to buy Nokia. The company thrives
> on hard times when it can sit back with all its cash and no debt
> balance sheet and prepare to gain share when things turn around.

>
>
> With tons of bad news out on the sector, the company's price has
> held up pretty well. That bodes well for the price, because how much
> more bad news could hit the company?
>
> Besides Apple, there's no better managed company in any business.

>
>
> I now own Nokia.

2008 Dec 08 12:48 PM

[kris23:]

It's gonna be all about the upgrades in 2009 which is why these companies are pushing new phones so much. Hence RIMM and the Storm. But unfortunately rushing new devices does nothing for there reputation when they cant deliver a good product. Sentiment has become extremely bearish for RIMM (predictwallstreet.com/...) and I'd like to see how they recover in 2009.

2008 Dec 08 03:49 PM

[mollytjm:]

does anyone have stats on the opening of the Apple store in Germany? That store opened to huge crowds and lines, just like they do here. i don't know of any other store opening that can pull that off!

and you can bet that Apple will be going after the competition...hard. it's the perfect time, when Apple has all the $, momentum and high product and customer satisfaction ratings and no one else really has that combination.

i've been a Mac user since 1983, but nothing...nothing is like that iPhone! I've had mine a month and I just keep using it more and more...sometimes i even make a call on it:). The apps are wonderful and developers are falling over each other trying to develop software and applications for Apple. nice. and about time!

2008 Dec 08 05:56 PM

[monrio:]

The author is slinging the ball downhill.
Easy to do, but not particularly informative or insightful.
All I see is dark so let me describe it to you.
How inventive.

2008 Dec 09 04:51 AM