Nokia Bucks The Trend For Lower Margin Handsets
Despite the focus on low-cost handsets for the emerging markets, as evidenced by initiatives such as the GSM Association handset project, Nokia is actually expected to increase its operating margin over the next few years.
A new analyst report from Merrill Lynch expects that margins at Nokia's handset division will increase from 15% in 2005 to 18% in 2008 - thanks mainly to increasing sales of higher end multimedia handsets in these supposedly low-cost, low-margin emerging markets.
A recent report from IDC (http://www.cellular-news.com/story/12784.php) seems to support this opinion. According to the IDC study, the current mobile users are willing to spend on an average US$173 when upgrading their handset, compared to an initial handset purchase price of just over US$100.
"The average amount spend on the current handset is US$104; thereby an additional US$69 is likely to be spent while upgrading, a good news for the mobile manufacturers," said Nikhil Pant, Senior Analyst, User Research Group, IDC.
Merrill Lynch notes that Nokia not only increased its market share in India and China during 2005, the company also managed to increase the average selling price per handset.
This ASP increase in India has occurred in spite of significant unit growth in the lower-margin entry-level segment i.e. sales of Nokia 1100 phones to first-time mobile subscribers in the rapidly growing Indian market.
Merrill Lynch expects that Nokia is using its dominant handset market share position in India to harvest revenues and profits from sales of higher-end phones as part of the beginning of the first major replacement cycle in the Indian market.
The IDC report itself, expects that upgrades will be primarily driven by a desire for cameras, colour screens and built in FM radios, all areas where Nokia has an easy upgrade path from basic phones to multi-media units. This is thanks in part to Nokia maintaining a similar menu structure in all handsets which makes upgrading within the Nokia family an easier path than with some handset vendors.
The opportunity for handset vendors to upsell to more expensive handsets is in marked contrast to the fate of the network operators who will face increasing pressure to reduce call charges.
Strategy Analytics recently noted (http://www.cellular-news.com/story/13725.php) that average revenues fell 7% to US$30 per user per month in 2005. Strategy Analytics said that it expects further weakness in global ARPUs as increasingly prepaid-centric and low-ARPU China, India and other emerging markets remain the engine for user growth.
It seems that customers are increasingly happy to pay a premium for their new handset, but not to actually use it."
Posted to the site on 31st August 2005