Putting Cell Phones on Hold

Handset manufacturers, seeing slowing sales, are cutting back on the rollout of new products

As cell phone manufacturers absorb the body blows of sluggish sales, evaporating profit margins and a nonexistent upgrade trend by consumers, the fallout will be clear: fewer new products announced, shipments of planned smart phones delayed and rollouts of new networks postponed.

It seems as though no U.S. or European manufacturer is being left unscathed. In Europe, for example, giants Motorola Inc., Nokia Corp. and Ericsson SpA have each announced poor financial results recently.

"The margins on phones are going to continue to collapse," said Bob Egan, an analyst at Gartner Group Inc., in Stamford, Conn. "Youre on the threshold of seeing an acknowledgment of a focus on infrastructure."

Motorola announced last month that it was shutting down its Harvard, Ill., handset manufacturing plant and planning to outsource all manufacturing to foreign partners.

Ericsson followed suit in January, announcing the cessation of all handset manufacturing, with plans to outsource to Flextronics International Ltd., whose corporate headquarters is in Singapore.

Nokia last week announced that its first-quarter earnings will be flat. While Nokia CEO Jorma Ollila promised to stay ahead of Motorola and Ericsson, he said operating margins on cell phones will fall at the end of the year, while profit margins in the infrastructure division—which competes mainly with Ericsson—will remain steady.

But as companies such as Nokia shift away from phones and toward back-end products, rollouts of new and promised handsets will be affected.

Nokia, for instance, will be late with its GPRS (General Packet Radio Service) handsets, which were due next quarter but now wont be out until at least the third quarter. GPRS enables high-speed packet-data service, up to 170K bps for phones.

While Ericssons forthcoming R520 GPRS phone is due to ship in the United States some time this year, much depends on the networks, which lag behind Europes.

In other words: no network, no reason to buy a phone.

In addition, Ericsson is nearly a year late in shipping its high-end R380 Global System for Mobile Communications smart phone to the United States. The phone, which has been available in Europe, will cost about $600.

But even when it arrives, some users arent willing to spend that kind of money on a phone.

"I still await the arrival of the killer device, i.e., a combination phone/PDA [personal digital assistant] that is truly useful and easy to use," said Lester Morgan, senior manager of IT for the National Football League, in New York. "There isnt one yet. When it arrives, Ill buy it—when it costs $100."

That could take awhile. While the three companies maintain that product development will remain in-house, even if manufacturing wont, combination-device efforts may be impeded by the fact that there is less focus on handsets these days.

Psion plc., Europes biggest handheld computer maker, recently ended an agreement with Motorola to co-develop wireless devices. At the time, Psion officials said ending the relationship was another way for Motorola to cut costs.

Nokia and Ericsson report that plans for smart phones that run PDA operating systems (from Palm Inc. and Microsoft Corp., respectively) are still on track, but the companies have yet to give dates.