Handset Showdown

Service providers soon will have more and better options to give customers

Carriers, take note: the cell phone is on the brink of change. A volatile handset market and the influence of the iPhone soon will provide opportunities to reshape consumer understanding of mobile devices, mobile computing and mobile connectivity.

“There are 10 million engineers in Asia right now working away on something that looks and feels like the iPhone,” says David Chamberlain, principal analyst for wireless at In-Stat. “Apple’s market share will not disrupt the market in any way in the next two to three years, but it will wake up these very drowsy vendors and force them to do something other than cookie-cutter phones. They’ve been adding features without disrupting the industrial design, and they realize now they’ve been in a rut, and it will cost them in the long run.”

In other words, the top cell phone makers have been resting on their laurels, some more than others. The strain of this is beginning to show, and the second-quarter earnings reports have set the stage for a nasty battle for domination during the fourth quarter and holiday season. The fallout should give service providers a wider range of form factors and functionalities to offer customers, as well as allow them to take on the iPhone-wielding AT&T Inc.

The once-great Motorola Inc., maker of the seemingly ubiquitous RAZR handset and top dog in North America, has fallen on hard times of late, losing 4.6 points of worldwide market share in its second quarter and failing to live up to its profitability forecast. “Motorola killed its own budget for innovation because they thought they were set,” Chamberlain explains. “When the RAZR came out, you could see the executive’s dislocated shoulders from all the clapping on the back they were doing. And they’ve now painted themselves into a corner.”

Analysts say that smartphones like this Nokia E62 will get an iPhone-created jolt with new functionalities and form factors.

Moto’s loss is everyone else’s gain. Worldwide market leader Nokia, accordingly, posted record shipments of handsets in its second quarter. Samsung Electronics Co. Ltd. bumped Motorola out of the No. 2 worldwide spot in the vendor rankings by some analysts’ numbers. Sony-Ericsson and LG Electronics are benefiting from the fallout, too. “The mobile-handset business moves fast; the rapid pace of innovation means that products that were red hot last quarter are ice cold the next quarter,” says Tina Teng, an analyst of wireless communications for iSuppli Corp., which predicts worldwide cell phone shipments of 1.1 billion units this year, an almost 13 percent increase over last year. “Motorola’s product mix in the second quarter remained largely unchanged compared to the first quarter, with a substantial proportion of upgraded RAZR handsets being offered.”

With the handset market an open race, analysts are predicting an onslaught of innovation as manufacturers battle it out. “Things are very much in flux,” says Chamberlain. “For instance, in North America, Nokia is seen as the weak sister, although it’s by far the strongest brand worldwide. With the softening of Motorola’s market share, it may have an opportunity to jump in.”

This is where the iPhone makes a difference. Jack Gold of analyst firm J.Gold Associates LLC, says that rumors are “hot and heavy” that Nokia soon will launch a competitor to iTunes, Apple’s music service. “It is unlikely Nokia will be offering an iPod music player clone, but is interested in music-capable phones for any such service,” he says. “The multimedia phone is definitely the next wave, including for Apple, and Nokia intends to compete fiercely. Since Motorola has fallen behind as of late, Nokia’s current target is pretty clear — Apple, though Samsung and LG are coming on strong.”

Nokia isn’t the only one looking to take on Apple. “We will be looking for the amazing new features from each new handset,” says analyst Jeff Kagan. “I think the pressure is turned up on the handset makers to come up with “wow” features going forward. The fourth quarter should be wild, because it looks like assorted manufacturers will be rushing their iPhone-like devices to market during that busiest quarter of the year.”

The Trouble with Patents

Some say Motorola has relied too heavily on the best-selling RAZR.

Further complicating the market for cell phones and the quest for innovation is a ban on Qualcomm Inc. chipsets, upon which Motorola Inc. and others were relying, notably for the highly anticipated RAZR 2. An adverse patent ruling by the U.S. International Trade Commission found that Qualcomm has infringed on a Broadcom Corp. patent for battery power conservation, blocking the import of tens of millions of units of future models.

The ban, upheld by the White House in August, has sparked an outcry from the wireless operator community, as overall about 25 percent of handsets are based on Qualcomm chips, and for some, much more — about 80 percent of Verizon Wireless phones are Qualcomm-based, for example. Carriers say the move will prevent innovation, put the United States behind the rest of the world and lead to higher costs being passed on to consumers. Case in point: Broadcom has offered to license its technology to Qualcomm to avoid future handset blockage, and Verizon agreed to pay $6 per patent-infringing handset. And now, Nokia has filed a similar suit, which may constrict the market even further.

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