Average Revenue Per Handset Now Below EUR100 -Set to Go Lower

The five largest mobile phone vendors have all now reported their first quarter sales. In aggregate, they have sold 208.9m handsets during the quarter, or slightly more than 81% of the (estimated) global total of 257m. Taken as a whole, the market has enjoyed its second best quarter ever in absolute terms, after Q4 2006, when an estimated 293m units were sold. Year on year, sales are up by over 14%, or 30m units.

If that suggests a uniformly healthy industry think again.

The performance of the five companies varied quite dramatically, at all levels. This quarter saw some material shifts in market share, most especially at Motorola and Samsung. The American leader indicated that it was not enjoying life much in late March, when it "revised guidance" for analysts and forecast a loss of market share - and also a financial loss. For some, this came as a shock. Motorola was on a roll throughout most of 2005 and 2006, as sales of its RAZR boomed, driving its market share from just 16.7% at December 2004 to 22.5% in December 2006. Unfortunately, as Motorola did not (and still doesn't) have anything appropriate in its pipeline by way of an encore, it took a beating in the first three months of the New Year, giving back all but one percentage point of that two year gain.

For Samsung, it was the other way round. In the June 2004 quarter, it hit a peak 15.8% share, a level it has not matched since. 2005 and 2006 were not kind to the larger of the two Korean giants, and by the December quarter it had fallen back to just 10.9% as sales - 32m units - barely managed to exceed Q3's 30.7m. The first quarter of this year has seen a huge resurgence, as Samsung took a 13.5% share of the market, selling more than it did in the last quarter of 2006 - something no other vendor managed, or even came close to managing.

Can it be any surprise that these changes have been magnified in the company's financial statements? Samsung doesn't strip out profits from handsets from the rest of its Telecom division, but quarter on quarter, that saw a 71% improvement in returns, while handsets account for 93% of its total revenues. Motorola has gone in the other direction. After several quarters of double digit profit margins, it faltered in Q4 2006 before plunging into the red in Q1 2007. It reported an operating loss of $260m, which equates to just under $5.73 for each and every one of the 45m units it sold during the quarter. At the other end of the spectrum, Nokia is still enjoying double digit margins - and high teen margins at that. Its Mobile Phone unit reported profits of €936m on sales of €5.58bn, while Multimedia, its high end phone division, came in with €424m from €2.25bn. Those numbers give margins of 16.8% and 18.8% respectively, implying a blended 16.24% on revenues of €8.2bn once the loss making sales in the Enterprise segment are included. This is much the highest return in the industry.

Nokia's only rival, at least as far as profitability is concerned, is the Sony Ericsson joint venture. For our money, this has been the only successful handset merger, Ericsson bringing technology and Sony design, marketing and its own technological excellence. Sony Ericsson is still far from the finished article, but in its five year existence, it has developed an entirely convincing range of products, addressing each key market segments. Contrast this with Motorola, which tries to produce handsets for every possible segment, using every possible technology, however unattractive some of these niches might be. Sony Ericsson's reward for this focus is that it has the highest profit per unit in the industry, its $21.16 bettering Nokia's $14.51 by nearly 50%.

Which brings us to the really interesting bit. Each quarter, much is made of the trend in average selling prices (ASPs), but we have a couple of difficulties with the way this figure is generally presented. First, there is a problem reconciling vendor's stated ASPs with their statements about units shipped and revenues booked. Usually, the numbers come close, but they don't always match. Then of course, there's the question of currency. We saw one comment that said Motorola was focusing on higher margin products because its ASP was up from $118.27 to $119.21. Frankly, the 0.8% increase doesn't provide a huge support for this assertion, not least because the improvement disappears altogether if we translate it into Euros... or most other currencies for that matter.

This is how we look at the numbers at The Mobile World.

We take the reported divisional revenues, take the stated unit sales and divide one by the other to derive a figure which is the average revenue generated for each handset sold. Because the revenue total includes accessories and replacement batteries and suchlike it isn't necessarily the same as an ASP... but it has two huge advantages. First, it's directly comparable from one company to the next. Second, it's based on numbers which if not exactly audited do have to pass muster with the relevant financial authorities. (Fancy overstating your numbers to the SEC? We don't think so.) We then take those numbers and translate them into a common currency, in this case Euros. We then multiply that number by the number of units shipped to generate a total and from that, an average - an average average selling price if you like.

And what we find is intriguing.

Over the last five quarters, our average has dropped consistently, from €115 to €111 to €106, to €100 and now €98, a decline of some 4.0% per quarter compound. This is despite the best efforts of Sony - down just 2.7% - and LG - up 0.6%. Three of the five are now below this average - Nokia, consistently - Motorola in the last three quarters and Samsung in the latest period.

In fact, in each of the five quarters, Nokia has been 8% or more below our average average, which suggests that it is, in fact, looking to lower prices sequentially and continuously as a competitive weapon. It knows that with over one third of the market and (once more) with twice as much of the market as its largest competitor and the best margins in the industry, it can survive and even prosper at price points that others can't get close to. This, of course, leaves it extraordinarily well-positioned to take the lion's share of the developing world market - the low cost handset market - which will be the industry's principal growth driver for the next five years.

It could be that Motorola is, for once, ahead of the trend and that what it suffers today may be visited on Nokia's other competitors in the future.

This article was extracted from The Mobile World Briefing, the weekly newsletter from The Mobile World. To download a sample issue of the Briefing in PDF format, please click here. For more information including full subscription pricing, please visit The Mobile World"

Posted to the site on 3rd May 2007