Mobile-phone vendors focus on software as sales drop

LG beats the competition with cheap touch and QWERTY phones

Mobile-phone sales continue to be hurt by the faltering economy, so vendors are increasingly looking to software and services to lure buyers of new devices.

The challenges continue for Motorola and Sony Ericsson. Motorola, which announced its result on Thursday, sold 14.7 million phones, compared to 19.2 million phones during the fourth quarter last year.

The drop was expected and there may now be some light at the end of the tunnel for Motorola. The company has probably hit the bottom of its mobile-phone sales curve and won't go much lower, according to Shaun Collins, analyst at CCS Insight. Whether the company's upward slope is steep enough to carry it through remains to be seen, he said.

Sony Ericsson sales dropped to 14.5 million phones, compared to 22.3 million phones sold in the same period last year. The most recent figures are also a 40 percent drop compared to the last three months of 2008. The company is now the fifth-largest mobile vendor; Motorola ascended to the fourth spot from fifth.

Sony Ericsson suffers from a weak portfolio, especially in the important smartphone sector. Sony Ericsson will also have to solve its board room issues, with parent companies Sony and Ericsson having to decide if they want to stay in the family, according to Collins, who doesn't expect them to make a decision before the economic situation becomes more stable.

"What I really would like to see is Sony spending a significant portion of the time on Sony Ericsson the next time it does a big investment presentation, because it would show commitment," said Collins.

The mobile-phone market needs five major vendors, according to Collins.

"If anybody exits, it's highly likely that Nokia will benefit more than anybody else, which only makes them bigger, and I'm not sure that is the right thing for the market," said Collins.

At the other end of the spectrum is LG, which was the clear winner during the first quarter and the company that seems to be benefiting most from the challenges that Motorola and Sony Ericsson are having, according to Collins.

LG sold 22.6 million phones, which was the smallest drop for any of the five largest mobile-phone vendors compared to the fourth quarter last year, when it sold 25.7 million phones. That means it's now the third-largest vendor by a margin of about 8 million phones.

The key to LG's success is that the company has identified and exploited a couple of market segments -- especially the budget QWERTY and touch market -- in both the U.S. and Europe, Collins said.

When it comes to touch devices LG has, of course, been inspired by the iPhone, and the Apple device is still the best touch device out there. But the current model is starting to lose some of its luster.

Sales of the 3G iPhone have dropped from 6.9 million units in the third quarter last year to about 3.8 million during the first three months of 2009.

It's unclear how much of that is due to users feeling less inclined to buy iPhones specifically or phones in general, according to Richard Webb, directing analyst at market research company Infonetics. But the drop is putting more pressure on the company to bring out new products, he said.

That Apple will release a new phone or phones later this year has become a foregone conclusion - it has to, according to Carolina Milanesi, research director at Gartner.

Speculation is that a new phone, or phones, will feature a better screen, more storage, improved camera and a faster Internet connection - features that are already available with competing products. But Apple is not about imitating anyone else, so the hope is that it is going to take a step forward, Milanesi said.

However, if Apple wants to attract buyers who just want to buy a phone - as opposed to those who were waiting for the iPhone - it also has to take a look at the current contracts operators are offering. For example, more flexibility for consumers who want to use the phone as a music player, and don't need the biggest data packages, would be a step in the right direction, according to Milanesi.

Even if it brings out a phone with an improved hardware spec it won't let itself get caught up in, for example, the camera megapixel race, according to Collins.

The iPhone will increasingly be about what it does as opposed to what it is, he said. Apple boasting about 1 billion downloads from the App Store, and 25,000 available applications, is a good example of that.

But Apple isn't the only company focusing on software. Operators and competing phone vendors are focusing more on software and services in what has become one of the big trends this year, witnessed by the introduction of a number of application stores, and we'll see more and more of that, according to Milanesi.

For instance, in some countries, Nokia is selling the 5800 XpressMusic phone using its Comes With Music service and not focusing on the fact that it's the company's first touch device. It is also gearing up to launch its OVI store, and earlier this week it said it will work closer with third-party developers.

The 5800, which Nokia sold 2.6 million units of, was one of the highlights in an otherwise dismal quarter. Nokia still sells more than twice as many phones as Samsung, but Nokia had a bigger sales drop than its Korean competitor.

Samsung had, just like LG, a pretty good quarter. It sold 46 million phones, which was just 1 percent lower than what the company sold a year ago.

But the move to a more software- and services-oriented mobile-phone market can prove to be a challenge for Samsung and LG, because they're pure hardware companies, according to Milanesi.

At the moment, they're lucky because the shift from hardware to services and software has so far only affected the high end of the market. "It might not become an immediate problem, but it's something they have to think about," said Milanesi.

Samsung has already started to dip into that market with the introduction of a movie download service in the U.K., according to Milanesi.

During the rest of the year, the market will be more and more cutthroat because everyone is feeling the pinch, according to Infonetics' Webb, and there are more competitors coming into the mobile-phone space, he said.

The biggest one is the Google-backed Android platform, which is slowly starting to pick up speed. Samsung this week introduced its first model, the I7500, which will go on sale in Europe in June.

"Android is not a perfect platform, and one shouldn't expect it to be. But you can guarantee one thing: It will get better," said Webb.

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