Many telecom analysts have spent the last six months claiming that telecom in general, and Nokia (NOK) in particular, are “safe havens” in case of a U.S recession. In reality, telecom is likely to underperform the overall market substantially in 2008. The mobile handset market is on the verge of a major slow-down and the mobile network CAPEX spending is likely to decline in 2008 compared to 2007. The phone and infra sectors tend to move in tandem, though investors often expect them to decouple. We have had a series of warnings from the mobile network sector, from Ericsson (ERIC) to Alcatel Lucent (ALU). Now signs of possible weakness are emerging in the phone market.
I believe the European upgrade market started weakening at the end of 4Q 2007 and there are some signs of softness from China. The mobile handset sector has had only one down year over the past 20 years – the year 2001. Back then, the volume decline came as a major shock to the industry – in February 2001 consensus expectation for handset unit growth for 2001 was still hovering around 10%. The handset market crash was likely triggered partly by the external shock of the dotcom crash and related financial market turmoil – partly by the decision of consumers to postpone phone upgrading. We now have major financial turmoil that is likely to trigger CAPEX spending cuts and conservative phone subsidy policies for major mobile operators. And we have a major shift in handset technology.
Back in 2001, the arrival of early color display phones actually depressed sales as many consumers chose to wait for a wider selection of color display models and cheaper prices. The first mass market color handset outside Japan was Ericsson T-65, which was a big hit when it was launched in 2001 – but also may have prompted many consumers to wait for better color models. In 2008, the arrival of large touch displays may have a similar impact. The handset upgrade market is shifting towards phones equipped with large displays – Apple (AAPL) iPhone, LG Viewty, certain Samsung models.
But major vendors like Nokia, Motorola (MOT) and Sony Ericsson have not debuted their important new big display models – these are expected to hit shops mainly in 3Q 2008 or later. Consumers clearly want to upgrade to phones with large touch displays – the iPhone has been a blockbuster for AT&T (T), the LG Viewty a runaway bestseller in Europe in December. But people probably won’t have a wide selection of leading brands offering the new feature until next autumn. It’s a potential formula for an upgrade slowdown in spring and summer of 2008.