Tuesday, February 03, 2009

Motorola posts $3.6 billion loss, revealing deeper problems with cell phone industry

I found two stories here, that I think show a serious problem taking place within the cell phone industry. The first story is from Bloomberg, reporting on Motorola's $3.6 billion fourth quarter loss:

Feb. 3 (Bloomberg) -- Motorola Inc., the second-biggest U.S. seller of mobile phones, forecast a wider-than-estimated first-quarter loss and suspended its dividend for the first time in more than 60 years, hurt by a lack of new products.

The stock fell 11 percent after the company said today that this quarter’s loss will be at least 10 cents a share, excluding some costs. That trailed the 4-cent average of estimates compiled by Bloomberg.

Motorola reported a $3.6 billion fourth-quarter loss, with phone shipments dropping by half. New products such as the touch-screen Krave have failed to generate the same demand as its Razr, once the top seller in the U.S. The company, which is slashing jobs to cope with the recession, said today it doesn’t expect to restore profitability this year.

Now I have not talked much about Motorola, except for this comment on my post regarding Nortel's bankruptcy. I noticed that Motorola couldn't compete against the smart phones like the Apple iPhone, or the Blackberry, when they were selling traditional cell phones. And that may be a serious factor, considering Motorola's $3.6 billion fourth-quarter loss.

I found some very interesting details in this New York Times story regarding the cell phone industries' potential growth problem:

Analysts and investors are beginning to ask whether the [cell phone] industry can continue growing. The challenge is both simple and daunting: how to expand when four billion of the six billion people on the planet already have phones. And even in developing countries where there are underserved markets, subscribers spend less on phones and services.

Craig Moffett, an industry analyst at Sanford C. Bernstein & Company, is one of the skeptics. “I don’t think anyone would argue that the salad days of the wireless industry are over,” he said. He added that in terms of subscriber growth in North America, “we’re awfully close to saturation.”

That is a huge problem for the industry--everyone in the developing countries who wanted, or needed, a cell phone, already has a cell phone. The U.S. market is saturated with cell phones, and even older cell phones that consumers replaced with newer cell phones. My first cell phone provider was Nextel, around five years ago, when I purchased an i60 from my brother, who was working for the company. I then received an i90 hand-me-down from my brother, after he upgraded to the i95c color phone. I left Nextel for Verizon, purchasing my first Verizon phone--the LG VX3200. I used this phone for about three years, until the little pin inside the power socket broke, around eight months ago. Then I could not use the car charger for the LG phone. I enjoyed the LG phone. It did everything I needed for a basic cell phone. I didn't need a camera, or cell phone games, or Java apps. But when I couldn't charge the LG phone by my car, I had to purchase a new phone. In this case, I purchased a a Samsung SCH-U410 phone. While I will admit that the Samsung is a nice phone, it has features I have barely used, or will not use. I probably will never use the Bluetooth capability, and have used the camera phone only two times. I only use a cell phone to make calls when I have too.

This brings us to the first big problem with the cell phone industry. It is how they sell their phones. The industry practically gives their phones away to consumers to entice them into the two-year phone contracts. I've checked the Verizon site, and there are plenty of free cell phones that you can get with a two-year contract. With the basic Verizon cell phone plan starting at $39.99 a month, you are paying 959.76 for a two year contract. And let us not forget that Verizon charges a $175 early termination fee for all of their cell phone plans. In other words, you are paying for the phone through the calling plan. Now, if you wanted to purchase a cell phone without the plan, the cell phone company would charge you the full retail price of that phone. For a Samsung SCH-U430 from Verizon, the successor of my SCH-U410, the retail price is $219.99. A Verizon Blackberry 8130 smartphone costs around $400 retail, but you can get it free with a two-year contract, and a $119 online discount.

So what is the point here? The cell phone industry wants you to upgrade your phone every two years--or earlier. They make it simple for you to upgrade your cell phone at a ridiculously low price while forcing you to continue your contract with them. If you are off the contract, and are paying month-to-month, it is easier for you to go from one cell phone plan to another, without having to pay any penalty fees. In other words, the industry is selling you disposable phones. And in order to keep you buying these disposable phones, the cell phone makers have to cram even more electronics, more gizmos, and more features into their phones to keep you purchasing them. Hence, the new phones not only have cameras, or Bluetooth capabilities, but they can play MP3 music, or have text messaging, or even have email and internet web surfing capabilities. And with more features, the wireless cell phone companies can charge even higher fees to their customers for these services. The Verizon Nationwide Blackberry email and messaging plan starts at $99.99 for 450 minutes. This has been the business model for the cell phone providers to get American consumers into purchasing cell phones, and the cell phone plans.

The problem for the industry has been the saturation of cell phones in the market. Everyone who wants, or needs, a cell phone, already has a cell phone. The only way for the industry to continue their growth is to offer more services from these phones at higher monthly service charges. But how many Americans are willing to spend $80-$90 a month for voice and email plans? In this recessionary economy? The industry believes that can grow with the introduction of data services in both their phones, and their plans. Continuing with the New York Times story:

Sanjay Jha, Motorola’s co-chief executive, said the industry would grow after the recession, but how much and how quickly is the interesting question. “While it may not be possible to return to explosive growth we’ve seen in wireless, there will be good, sustainable growth as data applications become essential,” Mr. Jha said.

He said he believes that data — Internet and text messages — can assume the mantle of growth from voice communications. “Data can be similarly influential in changing people’s lives.”

To be sure, nobody is looking at the cellphone industry and making comparisons with Detroit. There is little doubt that there are tens of billions of dollars to be made selling phones and providing services, particularly those involving data.

The industry is pinning high hopes on a new generation of more powerful (and expensive) smartphones. AT&T activated 1.9 million iPhones in the fourth quarter, while Verizon added more than a million BlackBerry Storms.

Over all, these devices make up about 10 percent of the domestic cellphone market and are considered likely to grow in popularity, driving people to upgrade and pay for more data to do things like download songs and send text messages. In the fourth quarter, for example, AT&T’s data revenue for each subscriber rose 27 percent, to $16.30, from about $12 a year earlier.

The cell phone industry may be pinning high hopes on wireless data transfers, but I'm not sure how bright a future that will be for the industry. Yes, AT&T saw a surge in their data revenue, but I'm guessing that is because the new service is attracting the tech junkies. And the tech junkies are going to be purchasing the latest and greatest tech stuff--regardless of cost. But when your are charging almost $100 a month for both cell and data use for your phone, or Blackberry, you are not going to get the average Americans to buy into this stuff. Again, how many Americans are willing to spend $100 for data services on their phones during an economic downturn? For the cell phone industry to grow, they are going to have to incorporate the data services within the regular cell phone package of around $40 a month. However, the industry will not give up what they believe is a huge revenue stream for them at $80-$90 a month for data services.

Naturally, the wireless industry disputes this notion. Continuing with the NY Times article:

Over the long term, the industry vigorously disputes the notion that it is anywhere near slowing down. “If there’s anything I can be extremely confident about, it’s that our customer base wants new phones,” said Denny Strigl, president and chief operating officer of Verizon, which owns 55 percent of Verizon Wireless (the Vodafone Group owns 45 percent).

Verizon and its chief rival, AT&T, each reported financial returns last week that hinted at challenges to sustained high levels of growth. Verizon Wireless gained 1.4 million subscribers, but that is down from 2 million a year earlier. AT&T gained 2 million subscribers, compared with 2.7 million in the fourth quarter of 2007.

SprintNextel recently announced plans to eliminate 8,000 jobs.

Some industry analysts say they believe the lure of data and the fancier phones that support it will not stop growth rates from falling over time.

Over all in the wireless industry, “there’s ton of money being made, but it’s not going to grow as fast as people have experienced or as quickly as they’re relying on it to in the future,” said Ed Snyder, an analyst with Charter Equity Research. “All this talk about data and other services bringing a renaissance of growth is wrong.”

It is interesting that Verizon's president Denny Strigl believes that the cell phone industry has such a bright future because people want to purchase newer phones. But yet at the same time, Verizon Wireless has seen a drop in subscribers--down from 2 million subscribers a year ago to around 1.4 million subscribers. It is like the industry is trying to hold onto this older business model in a market that has been saturated with cell phones, rather than attempting to provide better services to customers at a lower price. The cell phone industry has matured. The days of explosive growth rates, of penetrating new markets, are over. Already the number of smartphone handsets have been falling:

Smartphones notwithstanding, the number of handsets sold around the world has been falling in important regions — even before the recession. In Western Europe, around 191 million mobile phones were sold in 2007, a figure that fell to 171 million in 2008 and is projected at 165 million in 2009, according to Carolina Milanesi, an analyst with the research firm Gartner.

In the United States, people bought 176 million handsets in 2007, and 184 million in 2008. That number will probably remain flat this year, the Gartner analyst said. She said that Europe might provide some indication of where the United States was headed because, as highly populated as it is with phones, it is still slightly behind Europe.

The toll seemed to blindside handset makers in the last quarter. Motorola said last month that it sold half as many phones in the fourth quarter than it had the year earlier, and announced 3,000 job cuts at its cellphone unit.

It is not more and more phones that the industry needs to be selling, along with even more expensive cell phone and data plans. The industry needs to be providing better services at a lower price. They need to bring the data and email services down to a $40, or even a $50 a month plan. They need to provide the incremental changes of improving their services at the same, or lower, price that they charge for their customers. The cell phone companies should probably drop their termination fee, allowing the freedom of moving between the wireless cell phone companies--but they are never going to do that. The next couple of years are going to be very interesting for this cell phone market, and how they are going to react to the economic slowdown, and possibly to the slowdown in the cell phone market--even as the industry touts whatever bright future they believe they have.

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