The Wall Street Journal (30 November 2007)
Verizon Wireless's move yesterday to open up its network to a wider selection of cellphones could help transform the way the business works for consumers and companies. For a clue to how the future might work, take a look at the cellphone business around the world.
In Europe, where consumers can purchase phones anywhere, most people opt to buy discounted phones as part of calling plans, just as Americans do now. But in much of Asia, there are no discounts. Instead, mass cellphone production has led to very low prices and heavy usage.
Throughout a lot of Asia -- including China, the world's largest wireless market, and India, the fastest-growing -- consumers can easily switch among networks by popping SIM cards, the memory chips that store mobile numbers, in and out of their phones. In Hong Kong, for instance, there is slightly more than one phone being used per consumer, suggesting that some consumers use multiple carriers, one for local service, say, and another that offers cheaper service when they're traveling.
"In the U.S., if you want more than one subscription, you need more than one handset," says Francis Cheung, head of telecommunications research at CLSA Asia-Pacific Markets in Hong Kong. "Here you just carry a bunch of SIM cards."
And when Asian consumers do buy a phone, they typically don't go to a carrier -- as Americans do -- but to a retail store affiliated with a handset maker or to a second-hand shop. The range of models is much greater than in the U.S., where each carrier typically offers about a dozen phones at a time. At any given time in China, there are more than 1,000 cellphone models available on the shelf.
Many of those phones are cheap: the least expensive start at about $20 in India and $40 in China. That's largely because handset makers in the major Asian markets can sell the same or similar models to millions of customers, bringing down costs through economies of scale. Such economies of scale haven't been possible in the U.S. Not only is the phone's interface customized for the U.S. carrier so that the logo shows up on the screen, but carriers often specify which features they want a phone to have. Before it would sell a new Nokia-made smart phone, for example, AT&T Inc. required the maker to take out the Wi-Fi capability that existed in an overseas version and enabled the phone to access Internet service at hot spots.
Not all Asian phones are cheap, though. Cellphone prices in China can reach $675 or more. Most multimedia handsets, which can be used as high-quality point-and-shoot cameras, MP3 players or to access wireless Internet, cost at least $135. But Chinese customers with means don't balk at laying down a wad of yuan for the right handset.
And prices are the same no matter when consumers purchase the phones, compared with the U.S., where customers often have the incentive of a deep discount if they wait to upgrade until their contract expires. As a result, cellphone users in China tend to replace their old phones faster than U.S. users do. Industry insiders call China a more "fashionable" cellphone market, with the average consumer eager for a new look in more frequent cycles.
"In China, there isn't a feeling that mobile phones are overpriced. People will just buy phones based on their spending abilities," says Liu Bin, an analyst for BDA China Ltd. "For many users, buying a high-end phone [is like] buying a watch. If they get a premium brand, it's a status symbol."
There are other parts of Asia that function more like the U.S. In both Japan and South Korea, two of Asia's most sophisticated wireless markets, phones are locked to specific networks. Japanese operators subsidize their phones heavily but charge some of the highest service prices in the world to recover some of those costs. Japanese regulators are looking into unlocking phones from carriers so they could be used on any operator's network, but a final decision hasn't been made.
In South Korea, mobile operators also have a tight grip on handsets, and they charge some of the highest prices in the world for them.
It's the European experience that may have the most relevance for Americans. Europe has a hybrid arrangement similar to the one Verizon Wireless is proposing. Consumers can buy phones directly from manufacturers or at subsidized prices from carriers. For instance, Vodafone Group PLC in the U.K. offers the latest version of the Nokia N95 handset at no cost to customers who sign up for monthly plans of $83 or more. Nokia is selling the same handset on its Web site for $1,033.
Because of the higher costs, and to avoid the hassle of having to make separate trips to buy the phone and the service, most Europeans choose to get their handsets through a carrier. Less than 5% of consumers there get their cellphones elsewhere, estimates Carolina Milanesi, an analyst with Gartner Inc. Those people are typically either customers who are locked into a long contract and want a new phone because theirs is broken or those who are set on having the very latest models.
There are regional differences. In Italy, consumers do take advantage of the ability to pop multiple SIM cards into their phones, switching between providers to take advantage of better rates at different times of the day or week. The result is a cellphone service penetration rate of more than 150%.
Despite the uncertainty about the impact of Verizon's move, analysts and industry executives say the move could be good for handset makers. "Before, Verizon would pick three phones and say these are the features we want," says Simon Leung, president of Asia-Pacific operations for Motorola Inc. "When everything is unlocked, we can differentiate ourselves more."
While the structure of the U.S. market has tended to drive sales of low-margin handsets that appeal to the mass market, "this opens up the possibility of selling more higher-margin handsets aimed at a niche," says Hugues de la Vergne, a Dallas-based analyst with Gartner.
Shares of Nokia Corp., the Finland-based handset giant, rose 4.9% to $40.06 yesterday on the New York Stock Exchange, reflecting a perception that Nokia stands to gain. The world's largest maker of handsets, with 38.1% of the world market as of the third quarter, according to Gartner, Nokia has struggled in recent years in the U.S. It had a 10% market share in the second quarter, estimates Richard Windsor, an analyst at Nomura Holdings, partly because its business model -- which is based on creating models for sale in high volumes -- hasn't work well in the U.S.
Still, Nokia is playing down the impact on its business. "It is very difficult to estimate [the impact] at this stage, but generally we welcome initiatives that bring good services and devices to the hands of the consumers," says Arja Suominen, a spokeswoman.
The shift also opens up new possibilities for Motorola, whose handset division has been struggling since the collapse of the price of the Razr in 2005. With Verizon's tacit permission to sell directly to consumers, Motorola and other cellphone makers will gain greater control over which products and services they roll out, at what speed and at what price. Having an alternative way to reach customers may also strengthen their hand to negotiate better prices with the carriers.
"The predominant model in the U.S. is through the carriers, and we intend to embrace it and continue to work with them," says Stu Reed, head of Motorola's mobile devices division. "But if there are alternative approaches that bring innovative products to the customer faster, we intend to engage them."
