Sony Ericsson Mobile Communications is getting out of the "cheap" business. Starting next year, the company will only manufacture and sell smartphones, making it one of the first major wireless handset vendors to acknowledge what is becoming a trend in the business: Smartphones are going mainstream, and eventually only a few vendors will sell feature or plain vanilla handsets.
This development has implications for the electronics industry supply chain. As smartphones become the wireless handset of choice for most consumers worldwide, components suppliers will have to devote a larger portion of production resources to parts headed for high-end wireless handsets than the cheaper alternatives, a development that can result in demand-supply mismatches. Sony-Ericsson's decision will certainly result in semiconductor vendors getting higher margin products into OEM manufacturing centers, helping to ease pricing pressures on commodity parts.
In some ways, the industry has Apple Inc. (Nasdaq: AAPL) to thank -- or blame, depending on where your company sits in the supply chain -- for the latest development. Although smartphones had been on offer from companies like Sony-Ericsson and Nokia well before the first iPhone appeared in 2007, the product did not really gain wide acceptance until Apple made them more widely available to consumers. The rapid growth of Google Android phones has further eroded support for standard feature phones.
It's easy to see why Sony-Ericsson wants to focus primarily on the smartphone market. First, more consumers now opt for the higher-end devices than cheaper alternatives because of the additional functionalities offered. Also, telecommunication companies are using smartphones to drive the adoption of value-added and higher-margin services. Most smartphones in the United States, for instance, are activated only on the condition that consumers buy data services that add $30 or more to regular subscription costs.
Furthermore, the wireless handset replacement market is becoming a core sales driver for many OEMs and service providers as adoption rates rise above 100 percent in some regions. In Western countries, for example, the pool of new handset subscribers is getting smaller, forcing service providers to find ways of retaining old customers. The easiest way to do this is to offer higher-end smartphones. This trend is also spreading to emerging markets, regions where wireless communication is still relatively new and there is a growing middle class able to afford smartphones.
It's evident in recent sales figures that smartphones will continue to outgrow feature phones. Apple's iPhone 4S, for instance, has reportedly sold out at most retail outlets in the US. The company sold more than 4 million devices in the first few days after it was introduced, according to reports, putting pressure on the supply chain. In fact, Apple has reportedly told iPhone 4S buyers they must pre-order at retailers.
If Sony-Ericsson is turning its supply chain to focus solely on smartphones, will other vendors follow, and does this mean Apple won't introduce a cheaper version of the iPhone? The second question is easier to answer. It's not advisable right now for Apple to debut a stripped-down version of its iPhone, and I doubt the company will do this anyway, despite some speculations it was planning such a move. What would be the justification for this at a time it cannot stock enough iPhones to satisfy current demand? With fears of other vendors cannibalizing its market receding, at least temporarily, Apple may want to keep its higher-margin offerings on the shelf for a lot longer.
Will other manufacturers ditch feature phones? Undoubtedly. The efforts that go into making the products and distributing and marketing them may not be worth the meager profits companies get from feature phones. Some OEMs will abandon the low-margin end to smaller players, although not all of the top five wireless handset makers will exit the feature phone market. Companies like Nokia, for instance, will probably remain players in the sector, pulling in customers and retaining supply contracts with telecom service providers.
It may be safe, though, to conclude that as smartphone penetration increases, feature phones will likely stay on shelves a lot longer and decrease as a percentage of total handset sales.