The decline of the mid-market cell phone

Jay Yarow
17 Jul 2008

Standing on a New York subway platform, Brooke Hunter, a financial analyst at Bank of America, punches the keyboard of her Motorola Q with her thumbs. She used to own 'some Samsung flip phone,' she says, but bought a more sophisticated device because it gives her access to her e-mail. When her train arrives, she steps inside a car where four other people stare intently into their BlackBerrys.

It's a view into the future of mobile communications. Hunter and her fellow commuters increasingly are switching to more advanced devices, called 'smartphones,' that can handle e-mail, Web browsing, and more. At the same time, sales of simple, cheap mobile phones are booming, as Nokia (NOK) and other phonemakers move into emerging markets.

Squeezed by the high and low ends

What's surprising in this picture is the dismal fate awaiting mid-market cell phones. Even as the overall market surges, sales of mid-level phones are expected to crash in the next five years, according to ABI Research. ABI anticipates that just 441 million such phones will be shipped in 2013, down from 854 million in 2007.

It's a reflection of the changes ahead for mobile phones. ABI calls these mid-tier devices 'enhanced' phones because they have some capabilities beyond just voice calling but don't have the broad features of smartphones. Enhanced phones such as Motorola's (MOT) Razr 2 and the LG Voyager use closed operating systems, so new software can't be added to the devices. Smartphones run open operating systems, like Windows Mobile or Symbian, so users can load on new software applications from independent developers. As the market for such software has begun to grow, there's been a surge in new applications. Consumers today can use their phones to watch videos, catch up on Major League Baseball scores, or blog from pretty much anywhere.

'The mid-tier phones, which are the largest [segment] now, will be squeezed over next five to six years,' says Kevin Burden, director of mobile devices at ABI. In 2007, mid-level phones represented 74% of the total units sold, while low-end phones represented 16% and smartphones 10%. In 2013, ABI sees those shifting drastically: Mid-tier phones are expected to account for 23% of sales, while low-end phones would be 46% and smartphones 31%.

Shifts in volume

Burden believes smartphones will grow in popularity as they decline in price, due in large part to companies like Nokia and Google (GOOG) developing free operating systems for mobile phones. The closed operating systems that run enhanced phones are typically built internally by phonemakers. Using open systems that are free saves money and gives customers access to a greater selection of applications, which aids carriers because they get more revenues when subscribers sign up for data plans to browse the Net. Tina Teng, a wireless communications analyst with researcher iSuppli says the Windows Mobile operating system costs between $8 and $15 per unit. Symbian licenses, which Nokia intends to make free, presently cost $5 per unit on average.

While free mobile operating systems save just a small amount on a per unit basis, they have a more substantial effect on lowering internal development costs. 'If companies adopt free software, it will save them some headaches. They can put their developing efforts into other areas,' says Teng.

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