Sony Ericsson Sees Softening Demand for Some Phones

Mark Long, newsfactor.com Wed Apr 23, 4:32 PM ET

Sony Ericsson said it shipped 22.3 million mobile handset units in the first quarter of 2008 -- a two percent increase from the year-ago period, but a sharp fall from the 30.8 million units the company moved in the prior quarter.

The world's No. 4 handset maker also estimates that it held an eight percent share of the global handset market at the end of the quarter -- a one percentage point decline from the prior period.

"We have experienced a softening of demand for mid-to-high-end phones in the markets where we have a strong presence, particularly in Western Europe," said Dick Komiyama, Sony Ericsson's president.

Gartner Research Director Carolina Milanesi noted that the company is heavily dependent on the region for its overall sales performance. "No other player from the top five has a similar exposure to Western Europe," she said.

Falling Prices

During the first quarter, the average selling price (ASP) of Sony Ericsson's phones decreased both sequentially and year-on-year. Company executives stressed that this should be considered the overall market trend.

Milanesi thinks two different elements are playing specific roles in perpetuating the overall trend. "One is the lengthening of the replacement cycles, as operators sign up users for longer contracts on more expensive devices in the attempt to get some return on investment on the subsidies," noted Milanesi, who does not see this dynamic changing in the remainder of 2008.

Moreover, consumers currently might be a bit more careful with their spending and be opting for cheaper devices that do not lock them into longer contracts and high monthly tariffs. "I do not see this trend lasting into the second half of 2008, unless the economic situation gets much worse," Milanesi said.

Komiyama also cited the negative impact of "quicker than anticipated" growth in emerging-market sales of lower-priced phones -- "especially in the Asia-Pacific, where Sony Ericsson has traditionally been weak," he said. This helps to explain why company executives reported higher R&D investments as a percentage of quarterly sales.

"It is not just about having more products in the portfolio, but having the right mix of products to be competitive in the world market," Komiyama explained. "As a company, we have to address this."

Pressuring Margins

Milanesi said low-end devices have been popular for some time now in emerging markets, with Nokia leading the field. She sees the period between now and early 2009 as the peak for ultra-low-cost devices, as mobile subscribers in emerging markets begin to "replace their phones as well, and look to buy up."

"Of course, lower-priced devices can put a lot of pressure on your margins if you do not have economies of scale that allow you to rationalize your costs," Milanesi said.

Komiyama further noted that Sony Ericsson faced a critical problem in sourcing key components in the quarter, particularly in the area of small LCD screens. Though Milanesi said she had not heard any similar complaints from other handset vendors, Komiyama said everyone is struggling to maintain their fair share of production.

"It's a difficult proposition to see how it will continue for the remainder of the year," Komiyama said. "However, additional sources are coming into the supply group to help us keep up with demand."

Overall, Sony Ericsson forecasts that the global handset market will grow 10 percent this year, with the majority of growth expected in the world's emerging markets.