Coping With The Changing Handset Market

The mobile phone market is still booming, with Strategy Analystics saying a record 810 million handsets were shipped in 2005 — projecting 930 million this year and 1 billion in 2007. Emerging markets accounted for half of total sales, underlining their importance in the modern market. This growth comes at a cost, though — the lower average selling prices and margins that dogged Nokia’s latest results.

Vendors can make a play for either extreme: take advantage of the high volumes and revenues these markets offer in exchange for lower margins, or focus on more expensive models at the cost of unit sales in markets with low buying power. Most, though, try to play in the middle, and don’t really do too well. They hope to cushion the ASP drops with sales of more expensive devices in mature markets, but there’s a key realization they need to make: just because people can spend more doesn’t mean they will.

Look at Nokia’s comments about sales in the US. It increased its market share to over 20% from 14.3% in the previous quarter, giving much of the credit to its 6101/6102 handset — a Series 40 flip phone that could hardly be considered high-end, and one that Cingular is giving away to customers currently if they’ll sign a 2-year contract.

It’s got a pretty average camera, no expandable memory for music playback, no Bluetooth, and so on. It’s decently equipped, but doesn’t have all the features of a high-end Series 60 smartphone. But, that’s not important — it’s cheap, and perhaps more importantly, it’s a clamshell, and it’s selling really well.

Lots of people — particularly in the US, but I’d venture it applies generally across the board — don’t see much reason to spend a lot of money on a phone. It makes calls, it sends text messages, it’s got a camera, it can download ringtones and maybe games, so they don’t see why they should spend more money to get a more powerful device. That signals a marketing breakdown on the part of the vendors and carriers, one that we’ve seen many times before, most recently in the case of 3G. Operators struggled to find something they could show people to sell them on 3G; they think they’ve found it now with mobile TV (but debating that point is for another post). Why should a user buy a smartphone? With the increasing trickle-down of features from the high end to the low end, that question becomes more pressing.

The implications of all this are that vendors are selling plenty of phones, but they’re doing a poor job of selling phones. Users see a cheap phone, see one that looks right, and they buy it, paying little attention to more expensive devices regardless of their advanced functionality. Until they’re presented with a good reason why, this won’t change. That’s the challenge for handset vendors, and it fits right in with operators’ struggles to sell users on advanced services. Both do a poor job of explaining to consumers why something’s worth more of their money.

We’ve been talking a fair bit lately about this concept of user benefit. It usually comes up in the context of mobile marketing, basically saying that if users are going to allow marketers onto their device, they’ve got to be offered something worthwhile in exchange. Let’s call that the “What’s In It For Me?” principle. The same thing applies here. Handset vendors want people to buy more expensive devices. Those people reply, “what’s in it for me?” They’re then hit with a bunch of meaningless acronyms and tech specs rather than any sort of idea of the benefits such features deliver. Until vendors and operators can better answer that question, plenty of consumers will keep passing up more expensive handsets, and those ASPs will continue to fall.

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