Smartphones offer hope in declining cell phone biz

Worldwide sales of cell phones dip 12.6 percent during the fourth quarter, with the only bright spot being smartphones such as the BlackBerry and iPhone, which actually grew 22.5 percent.

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
3 min read

Cell phone sales around the world took a nose dive in the fourth quarter, as the weakened economy hurt demand for new devices. But sales of smartphones continued to grow.

According to IDC, overall sales of cell phones in the fourth quarter were down about 12.6 percent compared to the fourth quarter of 2007. In the fourth quarter of 2008, manufacturers shipped a total of 289.0 million units, compared to 330.8 million units shipped during the fourth quarter a year ago.

''The fourth quarter was the perfect storm of factors to produce this result,'' Ramon Llamas, senior research analyst at IDC's Mobile Devices Technology and Trends team, said in a statement. ''A combination of weak end-user demand, currency volatility, and limited credit availability prevented the market from experiencing the usual seasonal increase in shipments."

Llamas went on to say he expects the first half of 2009 to be challenging for cell phone makers as they attempt to clear their inventory. And he said the market might not recover until later in 2009 and possibly not until 2010.

The one bright spot in the entire market was smartphones. These devices, which use advanced operating systems and provide Internet access and other data services like e-mail, were the hottest-selling devices in the fourth quarter. Device makers grew sales of these advanced phones by 22.5 percent compared to the fourth quarter of 2007, IDC reported.

In North America, smartphone sales were up by about 70.1 percent, and in Europe, the Middle East, and Africa, sales were up about 25 percent.

"As long as operators are able to continue to subsidize these devices, and developers continue to enhance applications, then this segment will be a silver lining to an otherwise gloomy market,'' Ryan Reith, senior research analyst with IDC's Mobile Phone Tracker, said in a statement.

Worldwide smartphone growth was fueled by traditional handset makers, such as Nokia, which still ranks as the No. 1 manufacturer in the world, but it also got a boost from newer players, such as Apple and Research In Motion, Reith said.

That said, Reith also noted that the fourth quarter also highlighted the need for manufacturers to diversify their product lines within the smartphone category. He used Apple as an example. In the third quarter, Apple blew the doors wide open, selling about 6.9 million new iPhones worldwide in the quarter. But shipments slowed in the fourth quarter, and the company sold only about 4.3 million new iPhones.

Meanwhile, Research In Motion, which sells several different versions of its BlackBerry devices, actually grew sales from about 6.1 million devices at the end of its fiscal second quarter to 6.7 million devices in its fiscal third quarter, which ended November 29. The company's fiscal fourth quarter ends February 28.

"I think everyone, including Apple, knew the initial bump in iPhone sales wasn't sustainable," Reith said. "And RIM's success shows the importance of a diverse product portfolio, where different products with different price points are sold across multiple carriers."

Moving forward, the smartphone market looks like the place to be. And Reith expects traditional manufacturers to focus attention there. He also believes that operators will try to further drive this market by increasing the subsidy on devices to spur adoption.

The reason is simple: mobile operators are making a lot of money on the data services they sell with these devices. That recurring revenue stream is worth the extra subsidy.

Verizon Wireless reported last week that much of the growth it experienced in the fourth quarter came from data services. The average revenue per user for data services was up 27.9 percent for the quarter, compared to the same quarter a year ago. The company also said 37 percent of new retail devices sold during the quarter were smartphones.

AT&T, which activated 1.9 million iPhones during the quarter, saw its wireless-data revenue grow 51.2 percent during the quarter. AT&T noted that the fourth quarter marked the 12th consecutive quarter that wireless-data revenue grew at a rate above 50 percent. And the company said its iPhone users, in particular, generate about 1.6 times more revenue than the average AT&T customer.