Cell phone shipments hit highs, but profits sag

With the billionth handset expected to ship this year, makers are hitting sales records. But some are struggling to make money.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
2 min read
Cell phone makers are on track to ship their billionth handset by the end of 2006, but the record sales aren't translating into big profits for the top manufacturers.

In aggregate, the world's leading mobile-phone makers--Nokia, Motorola, Samsung, Sony Ericsson and LG Electronics--shipped 254.9 million phones in the third quarter of 2006, a 7.9 percent increase from the previous quarter. Shipments were up about 21 percent from the third-quarter 2005 results. If the current sales trends continue, the billionth handset will ship by the end of 2006, according to IDC.

"If sales continue to be strong, they'll surpass our estimates of 998 million handsets shipped in 2006," said Ryan Reith, research analyst for IDC. "Any industry shipping 1 billion of anything, whether it's cell phones or widgets, is significant. And I think the real important thing here is to look at the growth."

Reith said that handset shipments have grown every year since the market first developed back in the 1990s. Mobile-phone makers shipped 833.2 million handsets in 2005 and 714 handsets in 2004, according to IDC data.

But while handset shipments are hitting records, the growth is not translating into bigger profits for the top two mobile operators.

Motorola, the No. 2 maker of cell phones in the world, reported on Tuesday that its handset sales were up 39 percent in the third quarter from a year earlier, to 53.7 million units. Its revenue was also up 17 percent, but the company's earnings fell 45 percent year-over-year.

Nokia, the No. 1 cell phone maker, reported Thursday that it shipped 88.5 million mobile handsets in the third quarter, one-hird more than it shipped during the same quarter in 2005. Sales in that quarter were up 20 percent to 10.1 billion euros ($12.7 billion) from 8.4 billion euros ($10.6) a year ago. But Nokia reported that its net profit of 845 million euros ($1.06 billion) was down from 881 million euros ($1.11) in the same quarter a year earlier.

So how can these manufacturers be shipping more units, but not growing profits? One reason, especially in Nokia's case, is that many of these cell phones are being sold at rock-bottom prices into developing markets such as China and India. Nokia strips the phones down to the basic features and sells them for less than 40 euros, or $50 apiece. This has forced the overall average selling price on Nokia handsets to about 93 euros ($117) down from 102 euros ($128) in the second quarter of this year.

In an effort to stem the losses, Nokia is pushing its higher-profit margin smart phones and multimedia phones in more-developed markets like Europe. Motorola is also focusing on more profitable phones. It said during its conference call that it will expand the Razr family. The company also expects sales of its smart phone the Motorola Q to grow.