Mobile handsets - declining volumes

Outlook for cell phone makers worsens

Two major market research firms published figures for the fourth quarter of 2008 this week. And they each have bleak news for the cell phone industry.

IDC said it expects the volume of all mobile handsets to decline by 8.3 percent in 2009. And it expects sales of hot smartphones, like Apple's iPhone and Research In Motion's BlackBerry phones, to slow to about 3.4 percent growth. Smartphones have been a hot ticket for mobile phone makers over the past year. In December, IDC had predicted a growth rate for smartphones in 2009 to be about 8.7 percent.

But that forecast has changed. Ryan Reith, a senior analyst at IDC, said in a statement that the overall cell phone market was looking gloomier than expected due mostly to the economic crisis. And he said he expected all segments, including smartphones, to be affected in 2009.

Market research firm Gartner published similarly dismal numbers in its market share report for 2008. The firm said that smartphone sales in the fourth quarter of 2008 were only up about 3.7 compared to the previous year. And the firm noted that the growth rate had slowed from the previous quarter. In the third quarter of 2008, smartphone sales increased 12 percent compared to year earlier, and sales were up 16 percent in the second quarter. The firm blames the slowing growth on the deteriorating economic situation.

Still, market forecasters believe that smartphones represent the biggest opportunity for mobile device makers. IDC said in its report that consumers are hungry for smartphones that can access the Internet and run different applications.

But the tough economic times may prevent some consumers from upgrading their phones to smartphones in 2009, largely because the prices of these devices are too high. The sweet spot in the market seems to be in the $200 range. Apple's iPhone, T-Mobile's G1, and several BlackBerry devices sell in this range or slightly lower. These devices are subsidized by mobile operators and require users sign a two-year service contract. The data services attached to these devices are also expensive, typically in the $30 a month range. But as the economic noose tightens around consumers' wallets, it's expected that these prices could keep many potential customers at bay.

It's likely over the next year that mobile operators will subsidize the cost of these phones even more to push sales volumes. But the economic malaise might also create a market for smarter, less expensive, feature phones that don't run a full operating system. These phones, which could sell in the $50-and-under range, could still provide many of the Web functions found on smartphones, such as connectivity to social networking sites, e-mail and IM.

A company called INQ is working on such a phone, and another company called iSkoot just announced on Wednesday that it is offering software to allow all cell phone manufacturers to make their cheap feature phones smarter.

But IDC's analysts believe that the fact that the smartphone market can grow at all, when the total cell phone market is expected to decline 8.3 percent for the year, indicates the strength of this segment. And the firm predicts that when the economy turns around, smartphone sales will explode. I tend to agree. This will become especially true if the economic recovery coincides with nationwide availability of new 4G wireless services from Clearwire and Verizon Wireless.