Nokia and Sony Ericsson feel pinch from downturn - operators will also suffer, but how much?

Posted by Paul Lambert Friday, October 17th, 2008

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Nokia and Sony Ericsson have both reported a fall in earnings for 3Q08 as device vendors begin to feel the effects of the global financial crisis. While the impact of vendors has been largely expected, it remains a question how much operators will suffer from the economic downturn.

This is because demand among end users for mobile services is increasingly inelastic as they are now an integral part of mobile users’ lives. So, while consumers can be expected to rein in spending on new handsets, they will continue to use mobile services as much as they do, to an extent regardless of how much money they have.

But in the short term operators will feel the effects of the downturn because they will have to increase their spending to entice customers onto their networks as they increase handset subsidies and advertising. And if the downturn worsens, operators will be affected more because they will have to reduce prices to maintain usage levels.

Looking at the vendors that reported results today. Nokia, the world’s biggest device vendor, reported profit for the quarter of €1.46 billion (US$1.95 billion), down 21% from €1.86 billion in 3Q07. It reported that its revenues declined 5%, to €12.2 billion, from €12.8 billion in 3Q07. However, the vendor reported handset shipments of 117 million, up 5.5% from 111 million in 3Q07.

But Nokia Siemens Networks (NSN), Nokia’s network venture with Germany’s Siemens, saw sales decline 4.7%, to €3.5 billion, from €3.67 billion in 3Q07, as operators sought to reduce costs by signing fewer network contracts.

Sony Ericsson, Ericsson’s 50/50 joint venture with Japan’s Sony, reported 3Q08 earnings of €616 million, down 35% from €954 million in 3Q07, on revenues of €2.8 billion, down 10% from €3.1 billion a year earlier. Sony Ericsson shipped 25.7 million devices in the quarter, a figure virtually unchanged from 25.9 million in 3Q07.

Most of this decrease reflects the impact of exchange-rate fluctuations, as well as a shift of the product mix to more lower-priced phones,” Sony Ericsson said. “Gross margin also decreased year-on-year and sequentially due to continued price pressure at a time of adverse cost trends in the supplier base.”

Sony Ericsson also faces difficulties as consumer demand for new devices in Western Europe continues to fall. Meanwhile, Nokia has sought to offset falling margins by maintaining its device prices while competitors have cut theirs, and the vendor has not been helped either by the slower-than-expected release of a midrange device.

Nokia said that it expects industry mobile-device sales to be about 1.26 billion in 2008, up from the roughly 1.14 billion Nokia estimated for 2007, and that it will continue to target an increase in market share in mobile devices in 2008. Sony Ericsson said it expects the global handset market to grow about 10% in 2008, from more than 1.1 billion units in 2007, and the industry ASP to continue to decline.