Mobile Handset Revenues to Dip

New research indicates that wireless handset makers will soon be struggling to make as much revenue as they do today, based on growing demand for cheaper mobiles with more features and low-end phones in developing nations.

Slowed growth and falling prices in the wireless handset market will make it harder for mobile device manufacturers to generate the same revenue they are driving today, according to new research.

In a report released on Thursday, analyst firm iSuppli Corp. said that revenues in the mobile phone market likely peaked in 2005 and that the handset industry is not likely to see the same financial returns it recorded last year until at least 2009.

According to the study, worldwide factory revenue from the production of mobile phones will fall to $109.7 billion in 2006, a decrease of 4.7 percent from the $115.1 billion in revenues recorded in 2005, the industrys biggest year ever, according to iSuppli.

By 2009, the firm predicts that wireless phone manufacturers revenues will recover to that level of sales, but only after several years of smaller returns.

Analysts with iSuppli, of El Segundo, Calif., blame the revenue falloff on a number of issues, including the slower growth rate of mobile-phone unit production as the worlds largest markets have become saturated and sales are driven by replacement devices rather than new users.

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While mobile handset production rose by 30 percent in 2003, 25.1 percent in 2004, and 13.6 percent in 2005, the research company said that unit manufacturing will grow by less than 5 percent this year, moving from 810 million handsets shipped in 2005, to a projected 850 million handsets shipped in 2006.

The report said that another key factor in the decay of mobile handset revenues is the lowering of average selling prices for the devices.

While this figure typically falls each year, based on decreasing component costs, Scott Smyser, analyst with iSuppli, believes that price reductions will speed up in 2006 based on a number of trends.

Along with the markets demand for phone makers to lower the prices on high-end, third-generation models to spur adoption of new wireless services such as mobile video, the growing appetite for cheaper handsets in developing nations will also have a negative effect on revenues, he said.

"This isnt a gloomy outlook in any way, but the market is becoming very mature, and thats having an effect on pricing and revenue," Smyser said.

"Last years growth was impressive, but with more low-end handsets being built for developing regions and pressure to get pricing down for 3G handsets, it will be a few years until we get back to the same levels."

iSuppli said that handset pricing will fall to $129 per unit in 2006, a decrease of over 9 percent from the average cost of $142 in 2005. The research firm predicts that the pricing erosion will likely settle down in 2007, with the average price tag declining to $128 per device, a decrease of only 1 percent from 2006.

Between 2008 and 2009, the company only expects a 1 percent decrease in phone pricing.

By 2009, Smyser believes that there will be sufficient demand for more expensive third-generation phones as replacements for todays common handsets to drive market revenues above the 2005 results.

He said that all the major wireless handset manufacturers will continue to offer models at both the high-end and low-end of the market to hedge their bets and drive unit sales volume.

"The manufacturers realize that they have to hit both ends of the market to grow, just like service providers must have more enhanced offerings available to increase their revenue," said Smyser.

"It will take some time for higher-end handsets to be adopted by consumers; were in a plateau cycle right now, and will stay that way for several years."

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Some industry watchers believe that cell phones will also increase in pricing in saturated markets such as the United States, Europe and parts of Asia as phones become more ubiquitous and fashion-oriented.

Avi Greengart, analyst with Washington-based Current Analysis said that while basic phones may become cheaper, more people will be willing to shell out top dollar for handsets that are as much status symbols as communications tools.

Whereas just owning mobile phone may have been a fashion statement at the end of the century, he believes that customers will soon be willing to pay a lot more to have a wireless device thats considered trendy, as well as technologically sophisticated.

"Its the same idea as with cars, a Toyota can get you from point A to point B, but most people would still prefer the Lexus," said Greengart.

"I think its safe to say that vendors will figure out smart ways to market more expensive devices, and we might see a $1,500 cell phone in the not-too-distant future."

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