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Cell phones for the people

Sales of bare-bones cellular phones, which often handle just voice and text messaging, could grow 100 percent annually for the next five years.
/ Source: BusinessWeek Online

In mobile phones, the stars of the moment are multimedia wonders like the new Razr V3x from Motorola Inc. and Nokia Corp.'s top-of-the-line N-90 camera phone with Carl Zeiss optics. Yet for all the attention they grab, these pricey gizmos are a sliver of the 800 million unit-per-year mobile-phone business.

Increasingly, the real action is at the unglamorous end of the scale, among bare-bones Nokia and Motorola models priced under $50. Sales of such phones, which often handle just voice and text messaging, could grow 100 percent annually for the next five years.

There are now about 2 billion mobile-phone users in the world, and market penetration is above 50 percent in advanced countries. But as prices for phones and service drop, another billion customers could sign up by 2010 from places such as China, India, Brazil, and Russia. "All the growth in subscribers is coming from emerging markets," says David Taylor, Motorola's director of strategy and operations for high-growth markets.

For now, the only serious contenders in this segment are Nokia and Motorola. As the world's No. 1 and No. 2 makers, respectively, they're the only companies able to churn out ultracheap phones with the features, quality, and brand names customers want. "This market is suited to mega-vendors with economies of scale," says senior analyst Neil Mawston with researcher Strategy Analytics, near London. Samsung Group, LG Electronics, and Sony Ericsson Mobile Communications haven't yet announced plans to sell sub-$50 handsets, preferring to rake in rich profits at the high end. That strategy could backfire, though, as the market shifts.

Emerging low-cost Chinese makers have a different problem: Their volumes aren't high enough to match the efficiencies enjoyed by Nokia and Motorola, so they lose money on rock-bottom handsets. Also, they're not as adept at shrinking electronics and producing durable packages. Plus, status-conscious buyers in the Third World turn up their noses at unknown marques. "Brazilians want brand names and are willing to pay a bit more for Nokia and Motorola," says Sérgio Pelegrino, director of GSM for Brasil Telecom.

Of course, moving downscale also poses risks. On Oct. 20, Nokia reported it sold 15 million entry-level 1100 series handsets in the third quarter alone. But despite an overall 29 percent jump in net profits, Wall Street was spooked by a 5.6 percent year-over-year decline in Nokia's average selling price, to $122.40, and drove shares down 4.5 percent. Analyst Albert Lin with American Technology Research Inc. in San Francisco thinks investors underestimate Nokia's ability to prosper in the low-price segment: "These phones can actually have higher margins than high-end models."

Bargain service
Already, both Nokia and Motorola are making models for as little as $25, allowing gross margins of 15 percent to 30 percent at current prices. That compares with overall 33 percent margins across Nokia's entire handset portfolio; Motorola doesn't disclose figures.

Big volumes of low-end phones also unleash scale economies that reduce costs even for high-end models. "It's a key factor in getting our cost structure down," says Antonio Torres, the director of business development and industry marketing for Nokia's business unit. As sales shift to low-end phones, such savings should help Nokia maintain overall operating margins of 13.5 percent for years, forecasts analyst Richard Windsor of Nomura Securities in London.

Nokia is also churning out technologies to slash the cost of building and operating wireless networks by a half. Bargain service boosts the impact of cheaper phones — and should help the 4 billion people on earth who have never made a phone call.