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Recent warnings may portend wireless slump

Motorola's announcement that its sales forecasts have dimmed serves as confirmation of what many analysts and industry watchers have been saying for months: The wireless industry is slowing down.

Ben Charny Staff Writer, CNET News.com
Ben Charny
covers Net telephony and the cellular industry.
Ben Charny
4 min read
The wireless industry is finally stepping on the brakes after years of accelerated growth.

Motorola's announcement Thursday that its sales forecasts have dimmed for the year served as confirmation of what many analysts and industry watchers have been saying for months: The wireless industry is slowing down.

Industry leader Nokia, the cellular phone making giant, already warned this week of a sales slowdown. Qualcomm and Ericsson aren't expected to fare any better when they announce earnings later this month, according to analysts.

"What Motorola (talked) about this morning confirmed what we all knew," said Jupiter Research analyst Dylan Brooks. "There is a general softness in wireless."

Component parts shortages--including flash memory and display screens--have affected some wireless handset makers in the past year, and a low-cost trend has forced many manufacturers to focus on entry-level phones, which offer lower profit margins. Those sales and profit worries have scared investors, leading many wireless stocks to plunge with the rest of the technology malaise. As the market has matured, replacement sales to second-time wireless customers also have changed the market.

But some industry analysts say the wireless industry doesn't need to dial 911 just yet.

What slump?
Since when, they ask, is annual sales growth of 45 percent considered a slump? Rather, the wireless industry, which has had as much hype in recent years as the two weeks preceding the Super Bowl, has in many ways fallen victim to its own success.

After all, mobile phone sales have exploded since the mid-'90s, and many experts believe the U.S. market could continue to grow to match the level of use seen in Europe, where--at least in some Scandinavian nations--as much as 70 percent of the population owns a mobile handset.

"Despite some of the recent poor news concerning the slowdown in wireless, the reality is that wireless is still growing at a rapid pace," according to a recent report by Allied Business Intelligence, a New York-based technology research company. "Subscriber numbers have simply failed to meet the many irresponsible, grandiose predictions made for the market."

Jupiter Research's Brooks agreed, saying, "It's only relative to expectations. Growth continues at a pretty healthy pace."

Some analysts now say the hype and brash predictions for growth have created a mess of the wireless industry.

"Unfortunately, the market didn't grow at the 60 percent rate it had in the past two years," said Gartner Dataquest wireless industry analyst Bryan Prohm.

Nokia raised expectations with grand predictions. It had originally forecast 1 billion cell phone users by the middle of 2003. Now it says that will happen as early as 2002.

But Wall Street's reaction to Nokia's recent sales warning was negative, and related wireless stocks also have slipped. Analysts say the industry is still performing well and growing at what would be enviable rates for other industries.

Instead of "slump," analysts use the word "maturity" a lot these days when referring to the wireless world. They also say that growth will continue, and that the battle won't be for the next new customer, but to keep the existing ones.

Market shift
As with the maturing PC industry, analysts expect the market to begin shifting more toward replacement sales, whereby wireless customers trade their older cellular phones in for smaller, lighter new ones with more features and longer battery life. For example, Verizon

Wireless offers a program called "New Every Two," under which its customers can trade in their old phones every 24 months with certain restrictions.

"It's typical that growth in a maturing consumer electronics industry will slow as a market matures," Prohm said. "We are starting to reach the saturation point in certain markets--clearly in Western Europe, where penetration rates are up to 70 percent."

As the market matures, wireless companies must develop new ways to survive beyond simply selling handsets to first-time users. For their part, PC makers moved into the more lucrative server computer market, and many began bundling Internet access and other services to generate new revenue.

Wireless providers, particularly the carriers such as AT&T Wireless, Sprint PCS, Nextel and dozens of others, are turning toward wireless Internet access as a potentially higher-profit service in the future. However, just 6 percent of the more than 100 million cell phones in the United States are capable of accessing the Internet, according to Jupiter Research. The so-called wireless Web has yet to take hold as well as many industry executives have hoped.

Qualcomm, for one, exited many of its manufacturing and infrastructure businesses. The company instead hopes its wireless technology patents and mobile Internet development efforts will sustain its lofty growth as the wireless industry changes.