Consumers who do not yet have a mobile phone can benefit this Christmas from a range of ultra-low prices, but investors are wondering what a price war would do to profit margins in the battered handset industry. Handset prices have come down sharply in the last 12 months, according to many industry sources and analysts. Mobile telecoms carriers, which sell around 80 percent of all handsets to end-users, can now buy entry-level cellphones for between EUR 60 – 70 euros, compared with EUR 95 last year.

Insight

There has been a perception of two opposing camps in the European handset business for some time. On one side, Nokia, SonyEricsson and Motorola are seeking to support margins through strong brands and the introduction of new features using platforms such as the Symbian OS. Challenging this model are Far Eastern ODMs and sub-scale European manufacturers with basic pre-pay handsets and a new generation of smartphones using Microsoft’s platform.

The arguement is that operators, who control most (about 80%) of the handset purchasing in the market, will want to work with smaller manufacturers which are prepared to offer deep operator branding and customisation. There has been some experimentation, but true testing of this model has been prevented by the inability of Microsoft’s to sign-up ODMs and for those companies to bring products to market on-time.

The fundamental issue is that consumers still feel a more powerful brand attachment to the handset manufacturer than to their network operator. When was the last time you heard someone saying they want a Vodafone or T-Mobile handset? Nokia’s investment in its brand is paying high dividends and helping it maintain a premium for its products. As the market becomes increasingly dominated by replacement sales, this will have an even greater impact – existing Nokia users won’t want to change and users who are upgrading will want the latest features.