Super 3G Mobile Handsets Set to Top Global Market Share by 2012

Super 3G Mobile Handsets Set to Top Global Market Share by 2012

The worldwide mobile market change towards higher data-rate networks and associated handset availability has meant that by 2012, 'super 3G' devices will become the largest selling handset type, according to Informa Telecoms & Media.

The latest edition of Informa's flagship report, entitled "Future Mobile Handsets", reveals that, while the rate of overall worldwide mobile handset growth will slow from 2008, super 3G devices will account for 35.8% of all handset sales in 2012, up from only 1.8% in 2007.

Overall, the global handset market has more than doubled in 6 short years, reaching 974.7 million handset volume sales in 2006. This buoyant growth is expected to slow from 2007 onwards, with annual growth rates eventually dipping under 10% from 2008. Total handset sales are forecast to pass the 1 billion mark for the first time in 2007, to reach an unprecedented 1,105.5 million, according to Informa. Global volume sales are not about to go in decline, rather there will be a degree of levelling out in shipment numbers to reach a still remarkable 1.452 billion units by 2012, a CAGR of just 5.6%.

But the market has become polarized. On the one hand, the emerging economies are experiencing large increases in subscriber numbers, driven by healthier economies and the availability of low-cost, entry-level handsets. They present a good opportunity to keep headline sales figures healthy, but the issue then becomes one of available margins. Yet in more developed regions with high penetration rates, growth is largely restricted to a more active replacement of handsets for those with leading designs and enhanced technical capabilities. To further aid growth in replacement markets, efficient handset segmentation will become increasingly important for promoting the adoption of advanced services that are being made possible by the network speeds offered by 3G networks and beyond.

"While handset manufacturers are basing their business models on low margins and high-volume supply for basic phones and low feature phones, they are currently banking on high margins for feature rich phones, smartphones, value-added service (VAS) phones and mobile broadband devices supporting super 3G and higher generations. Given that the cost of these devices is still relatively high, manufacturers are forced to base their profit on the value of the device rather than on volume," commented Dave McQueen, Principal Analyst at Informa Telecoms & Media.

1. Regional breakdown

For the past five years, Asia Pacific has been the world's largest handset market, with sales estimated at 360.3 million in 2006 - 30.8% of which were sold in China alone. Far from saturating, growth in the region is expected to increase dramatically over the next five years, with the total number of handsets sold each year increasing by 68% between 2006 and 2012. By 2012, 24.9% of all handsets sold will be super 3G, led by the markets of South Korea and Japan each with sales penetration of over 88%.

The next largest region in terms of total sales is Europe, which saw healthy growth from 2003-2005 following a fallow period. Sales for the region stood at 252.4 million in 2006, with 63% taken by West Europe although the East European market is steadily growing. Growth in Europe is expected to continue to 2012, reaching sales of 328 million in that year, but the annual growth rate is expected to slow from 2009 to less than 5% year-on-year. By then, super 3G is expected to form 63.7% of total sales, a larger volume than Asia Pacific, with West Europe witnessing penetration of 85.7%.

North American handset sales reached 139.1 million in 2006, with growth anticipated to continue over the next three years. Sales by 2012 will reach 184.3 million, 62.8% taken by super 3G devices. The total market in Africa and the Middle East is also picking up pace, mainly through the large increases in subscriber numbers in what is a highly populated region with low penetration rates; it overtook the Latin American market in terms of volume sales for the first time in 2006. However, both regions are not expected to register over 14% of super 3G sales by 2012.

2. Functionality

With replacement handsets required in high volumes in developed markets and increasingly so in emerging markets, the challenge of adding more features into a mobile device will continue for some time. The reducing cost and potential revenue earning opportunities of integrating a feature into a mobile handset will see features like GPS included in many high-end and some mid-tier devices by 2009. Convergence with the consumer electronics industries is already well underway as some subscribers' mobile phones already replace devices like digital cameras and MP3 players. It is these new features and capabilities that are ostensibly driving handset sales in developed markets, but they are also increasingly supporting and exploiting the potential of next-generation data networks, including super 3G services, wireless LAN and beyond.

The continued success of video and music on portable devices is inevitably pushing up their penetration onto handsets with expectations that over a third of mobile phones sold in 2007 will include video and nearly a quarter will have a music player. Informa believes the number of handsets sold with music capabilities will rise from 153.5 million in 2006 to 260.1 million in 2007 - a 69.4% increase. By 2012, the music phone segment will grow to more than one billion new unit sales, at which time over seven out of every 10 mobile handsets sold worldwide will be music-enabled.
In addition to the growing number of mobile video services offering TV content, it is the potential for digital media broadcasting receivers on handsets that operators are pinning their hopes on. Handsets built with mobile-broadcast-receiver technologies are expected to find their way into 12% of handsets sales by 2012 according to Informa with an inflection point expected in 2009 as network rollout and device availability allow the market to reach some level of critical mass.

3. Revising business models

The recent success of most of the major handset vendors is largely a result of their performance on a number of criteria, including market segmentation, R&D and cost control. As market growth slows and strength of competition increases still further, these factors will become even more important and will be exacerbated by the arrival of convergence. The difficulty of succeeding in this arena has helped a small number of organisations dominate it for a number of years. The economies of scale and brand awareness enjoyed by the 'Top Five' handset vendors help them offset the erosion of average selling prices (ASPs) that will continue in the industry.

However, reducing ASPs and competition are forcing a number of leading handset vendors to revise their business models, despite the margins some of them enjoy. They are seeking to diversify their revenue streams, particularly to include content, and investing in new markets that they feel will bring them greater financial returns. The advent of convergence is enabling many of these companies to explore, through acquisition or partnership, the delivery of content, with mobile as the main but not only delivery mechanism.

Dave McQueen comments, "Convergence is threatening to rewrite the rules within the mobile handset value chain. The introduction of new technologies could undermine the position of both the mobile network operators and also device vendors if they do not respond. The potential to offer more compelling experiences on mobile devices is encouraging new entrants to consider entering the lucrative mobile handset industry. The interest of companies such as Apple and Google in the mobile space is challenging some established industry practices, with the former reportedly enjoying a share of content revenues generated on the device and the latter potentially in a position to become a leading phone and Internet ISP."

4. Controlling costs and maintaining margins

With less revenue being generated by each handset, on average, vendors looking to maintain or increase revenues need to increase their sales volumes, while at the same time improving margins through efficient cost control. It is the objective of all handset manufacturers to control cost while bringing innovation in order to increase margins. In an era where competition is intensifying and price war among manufacturers is not diminishing, cost optimisation has become ever more crucial. The race towards intellectual property (IP) acquisitions by the leading players, such as Nokia, Qualcomm and NXP, is also a symptom of the need to reduce costs and increase margins.

ASPs are reducing by about 8% year on year across the top five vendors, which is due to three main factors: increasing competition; the desire to sell greater volumes at the low end; and the reducing costs of technologies. Informa expects overall prices of different hardware and software components to decline slightly over the next two years, but some components, such as processors and memory, will halve every two years depending on the level of competition as well as on volume demand. The average bill of materials (BOM) of a mobile handset is expected to decline from US$102 in 2006 to US$86 in 2012. However, it is important to note that with increased complexity in devices, plus the desire for added functionality and features, comes an increased cost. Single-chip designs have significantly helped in pushing down cost. Another increasingly vital element is software.

The average cost of 3G phones across all ranges of feature sets and segments will drop significantly within the next two years thanks to the growing economies of scale as mobile operators are currently migrating subscribers from 2.5G to 3G services. The aggressive decline in the average BOM of 3G devices is expected to continue in 2008 where it will reach US$112. After 2008, the year-on-year decline in the BOM of these devices will slow down reaching US$55 in 2012.

Super 3G mobile broadband handsets are relatively costly to manufacture. Informa expects to see only a slight decrease in the manufacturing costs of mobile broadband chipsets because of the complexity of designing, testing and implementing these components. It will therefore take some time for mobile broadband chipset technology to mature. Consequently the average BOM of mobile broadband devices is forecast to reduce with an average year-on-year decline of 6% until 2010. After 2009, sales of these devices is likely to take off sharply and as consequence the BOM related to them is expected to drop at a average of 17% year-on-year to reach US$153.50 in 2012.