What do cell phones and roller coasters have in common? Based on outward appearance, not much. But, cell phones drive the telecommunications industry, which has experienced more dips and turns recently than most roller coasters.
The telecom market took a severe plunge during the past 2 years. It’s finally beginning to climb upward. In fact, makers of mobile phones and telecom gear are bracing for a sharp rebound.
Spurred by newly expanded worldwide wireless services, increased data traffic and broadband service penetration, the dismal atmosphere created by over- capacity and saturation is giving way to optimism and innovative products. High-speed wireless devices that feature color screens, embedded cameras, computing capacity and other high-tech gizmos promise to revitalize the industry.
According to the Telecommunications Industry Association (TIA, Arlington, VA), the U.S. telecom market will begin to recover this year, growing 8 percent to $736 billion. "Total spending in the U.S. telecommunications industry from 2003 to 2006 will increase at a projected 9 percent compound annual rate, rising to $963 billion," predicts Matthew Flanigan, TIA’s president. "The overall international telecommunications market will expand at a 10.3 percent annual rate, reaching $1.9 trillion in 2006."
Other observers are equally bullish and say there is good reason for optimism. "The global telecom industry will begin a long, slow climb out of the cellar in 2003," says Robert Rosenberg, president of Insight Research Corp. (Boonton, NJ). He says 2002 was "a brutal year for the telecommunications industry filled with bankruptcies, layoffs and scandal."
International Data Corp. (IDC, Framingham, MA) predicts the worldwide handset market will quickly bounce back from its worst year ever. "A wireless revolution is waiting in the wings," claims Kevin Burden, IDC program manager for smart handheld devices. "When mass wireless adoption occurs, it will result in a paradigm shift comparable to that created by the World Wide Web."
Burden says shipments will increase from 391 million in 2002 to 606 million in 2006, a compound annual growth rate of 9.5 percent. "Modest growth in the handset market will come from first-time buyers and new subscribers in emerging markets," Burden points out. "But, it will be replacement sales in mature markets that will prove critical to overall market growth. A true market explosion, however, is contingent on the timely deployment of next-generation networks and the availability of compelling content and applications."
Finger PointingAccording to TIA, spending on all telecommunications equipment fell by 24 percent during the past 2 years. Investment in network equipment and facilities plunged 49.1 percent in 2002. Some observers blame the telecom industry’s recent woes on poor decisions by the major players.
"The malaise of the past few years can be laid at the feet of those companies that followed flawed business strategies based on false assumptions about the magnitude and nature of the changes within the industry," notes Rosenberg. "Many companies overestimated the number of new competitors that could thrive in a market, the advantages that scale would impart, and could not find convincing ways to differentiate their products."
For instance, Rosenberg says that 89.6 percent of telecom carrier revenue is still attributable to voice, "a commodity service that allows little differentiation." To counter that trend, the telecom industry is looking to new multimedia handsets that offer messaging and entertainment features to generate demand for smarter wireless devices.
"During 2003, handset vendors will introduce novel mass-market features such as color screens, Java, multimedia messaging services (MMS), and embedded cameras to stimulate end users to upgrade, accelerating regional replacement rates for mobile terminals," predicts Bryan Prohm, a senior analyst at Gartner Dataquest Inc. (Stamford, CT).
"Forecasts for global mobile terminal devices suggest that the global market is on the cusp of a genuine recovery in demand that will result in reasonable annual growth through 2006," adds Prohm. "Replacement cycles have stagnated in mature markets, partly because of a lack of compelling new devices.
"Only a handful of current mobile data application and services appear potent enough to energize the installed base to upgrade to new terminals," claims Prohm. "Novel handset features, such as color screens and polyphonic sound, will act as catalysts to drive replacement sales.
"The evolution of the mobile market can be described as continued growth of voice services and a step-by-step process of bringing data services to market," says Prohm. He puts much of the blame for recent telecom problems on network operators. "This process of bringing data service to market has met several roadblocks, including cost to build out networks, lack of compelling applications, limited handset availability, patchy rollout of service, poorly designed pricing plans and inept customer services."
According to TIA statistics, there were 143 million wireless telephony subscribers in the United States in 2002, representing 59 percent of the 10-and-older population. By 2006, that market penetration is expected to increase to 187 million or nearly 75 percent of the population.
"Today, there are more than 1.2 billion mobile handset users [worldwide]," notes Tom Lynch, executive vice president of Motorola Inc. (Schaumburg, IL). "And there is plenty of opportunity for more growth through both new users and those who want to replace or upgrade their handsets."
Herschel Shosteck, president of the Shosteck Group (Wheaton, MD), says handset sales are determined by two factors—subscriber increases and replacement sales. "Replacement sales have become the major driver of the handset market," he explains. "The replacement rate will increase from its low point of 2001, but remain below its peak of 1999 and 2000. Because of this, and the continuing decline in subscriber increases, total handset sales, including replacement, will reach 455 million in 2005 with only a minor increase through 2007."
A New EraMost cell phone users in the United States own voice-only devices. However, those phones are old-fashioned compared to the latest handsets that can access high-speed data services. Cell phones equipped with built-in cameras are very popular in Europe and Asia. In fact, sales of mobile camera phones are surging worldwide, outpacing demand for personal digital assistants (PDAs) such as the Palm Pilot.
"Operators are viewing camera phones as the Holy Grail of next-generation services," says Jane Zweig, CEO of the Shosteck Group. "This is putting pressure on manufacturers to discontinue the separate categories of color and color-camera, in favor of the latter." Zweig believes this transition will be facilitated as component prices drop—a transition that should occur no later than 2007 and possibly as early as 2005.
"In fact, [by] 2006, virtually all color phones will include cameras," predicts Zweig. "This will be triggered by demand from operators combined with competition among manufacturers. Recognition of this phenomenon explains why Japanese and Korean vendors are directing their efforts toward dominating the camera-phone market."
Many observers predict the market upturn will be fueled by this shift toward third-generation (3G) technology. "The telecom market is ready to rebound and an important component for recovery is next-generation technologies," IDC’s Burden points out. He says that wireless data technology will allow end users to connect to the Internet with a cell phone, download and play games and music, store color photos, and send and receive e-mail, including attachments.
"Consumers are acquiring a taste for whiz-bang services in their cell phones," adds Kenil Vora, an analyst at Allied Business Intelligence Inc. (Oyster Bay, NY). "The increasing appetite for instant messaging, games and pictures from friends is expected to contribute to the eventual dominance of the cell phone replacement market. Cell phone service providers also are expected to convince more business customers to toss away the old for the new," by promoting a variety of new services.
Applications such as text messaging, e-mail, instant messaging and picture messaging will extend the primary function of the cell phone. Because of 3G technology, Vora predicts the number of replacement handsets will increase from 211 million in 2002 to 591 million by 2008.
Deployment of 3G networks will allow telecom operators to gain spectrum efficiencies, ease network capacity constraints, reduce operating costs and expand revenue opportunities by providing data services.
"Third-generation is the next step in the evolution of wireless technologies from analog to digital to high-speed," says TIA’s Flanigan. "Analog was the first cellular technology and has since been supplanted by second-generation (2G) digital technologies, including digital cellular and PCS [personal communications services]. Digital transmissions significantly expand the number of wireless transmissions that can be supported concurrently. Third-generation will enable faster wireless transmission of data and allow high-speed Internet access and other high-speed applications."
"However, the road to 3G is not without pitfalls," warns Gartner’s Prohm. There has been a slow adoption of 3G services as carriers deal with rollout, handset availability, pricing, network interoperability, and network utilization issues.
"The start of that awareness is being reflected in mobile services [from a few standout carriers, but it will not hit] full stride until 2004, when there will be a strong ramp-up in data subscribers and usage," Prohm explains. "However, the transition to sales of 2.5G and 3G terminals will accelerate during 2003, accounting for as much as 60 percent of total global mobile device sales."
Wireless local area networks (WLANs), also called wireless fidelity or Wi-Fi, are another trend worth keeping an eye on in the wireless market. New Wi-Fi phones will be available later this year. They will allow end users to connect to Wi-Fi networks, which can be 100 times as fast as traditional cellular-data connections.
According to Prohm, the 802.11b Wi-Fi standard supports WLAN links at up to 11 megabytes per second, which is faster than many wired connections. When the devices aren’t in the vicinity of Wi-Fi links, end users will be able to switch over to traditional cellular services.
"The WLAN industry will continue to experience stellar growth as deployment in several key markets take place," predicts John Chang, a senior analyst at Allied Business Intelligence. "These markets include residential homes, small- and medium-sized offices, academic campuses, transportation facilities, health care sites and industrial centers."
New DesignsTelecom experts believe new, advanced handset designs will lure consumers to upgrade so they can access 3G applications. Cell phones will be equipped with high-saturation color displays, greater memory to store images, polyphonic sound, and higher capacity batteries to meet the greater power requirements. Application specific integrated chips (ASICs) are needed to integrate and manage those hardware components.
Engineers are scrambling to find new ways to pack more power into increasingly smaller packages. "As digital phones continue to shrink, demand will rise for components that use less and less space," says Raman Monga, a research analyst at Frost & Sullivan Inc. (San Antonio). "One means of reducing phone size is to combine several components. Manufacturers are increasingly selecting integrated modules that combine passive resistors, capacitors and diodes with other [components].
"Integrated modules simplify the development process, reduce production costs and shorten time to market," explains Monga. "The challenge for device manufacturers is to develop integrated modules along with smaller packages for those modules."
Intel Corp. (Santa Clara, CA) recently unveiled a new cellular processor that uses advanced "wireless-Internet-on-a-chip" technology to combine functions that traditionally require at least three different chips. Hans Geyer, vice president and general manager of Intel’s PCA Components Group, claims the integrated microchip is "the first to combine the key components of today’s cellular phones and handheld computers onto a single piece of silicon." He says the PXA800F cellular processor "promises to bring advanced functionality, longer battery life and more innovative designs to mainstream, data-enabled cell phones.
"Feature-rich phones that include integrated camera, color screen and games have multiple components," adds Geyer, "and represent the most expensive and sophisticated segment of the cell phone market. As the industry transitions from voice-only phones to advanced devices that combine voice and data, the ability to effectively and efficiently combine advanced processing, memory and communications technologies will be required to drive the next-generation of cell phones."
To generate demand for 3G service, Motorola recently unveiled the world’s first cell phone that uses Java software and a Linux operating system. Tom Lynch claims the A760 mobile phone is a multifunctional handset that features "an open application environment, as well as a color touch screen, Bluetooth wireless technology, an integrated camera, and an integrated video and MP3 player." The device combines the features of a PDA, digital camera, audio player, video player and speaker phone.
According to Lynch, Java and Linux are open-source software, as opposed to proprietary code, so any developer can more easily write a program for the new phone. Motorola hopes this openness will spur development of new applications. Traditionally, Motorola’s phones have used a proprietary operating system to give the company more control over its products.
"The integrated platform has the lowest part count in its class to help facilitate the manufacture of smaller, portable and low-power systems," says Lynch. "It is designed to allow advanced voice, image, video and data capability on a single platform with an open standards interface."
With all those features, cell phones aren’t just little black boxes anymore. Mobile handsets are becoming fashion items. New designs feature unique keypads, such as circular and U-shaped layouts.
Siemens AG (Munich, Germany) recently unveiled an entirely new product category that it calls the "fashion accessory phone." The Xelibri brand features wearable designs and simple voice functionality. The phones will be marketed as fashion items with two "collections" per year.
"With mobile phone penetration rates in many markets at 70 to 85 percent, and overall growth stalled, the mobile phone industry needs to be reinvigorated," says George Appling, president of the Xelibri division. "Creating a new category in the market and thereby building demand for multiple phone ownership is an innovative step to achieve this.
"Turning mobile phones into fashion accessories will generate demand for second and third phones," claims Appling. "In the future, even greater emphasis will be placed on mobile phone design as a differentiating feature."
Appling views his products as "fashion accessories that make phone calls. Today, most people buy the mobile phone that looks the best, and many have a habit of showing it off. This shows that mobile phones are potential fashion accessories like watches, handbags and shoes. We envisage the scenario where people will own many fashion accessory phones and wear the one that matches their mood, the occasion or their attire."
Other manufacturers are developing products that appeal to niche markets, such as video game players. According to IDC, 7 million wireless users in the United States paid to download a game to their phone in 2002. This year, more than 13 million end users are predicted to access games such as Monkey Ball or Space Invaders.
Nokia Corp. (Espoo, Finland) recently unveiled a portable device targeted to gamers. With its color display and game-pad controller, the N-Gage is more of a mobile game console than a mobile phone. Games will be released on tiny memory cards that are slotted into the side of the device. The game deck allows end users to join in multiplayer games against local and remote opponents.
The device has a large color screen with backlight and an eight-way directional controller for game play. Besides gaming, the N-Gage features a digital music player, a stereo FM radio and a tri-band GSM 900/1800/1900 mobile phone.
Infrastructure MalaiseMobile phones depend on a wide variety of behind-the-scenes network switching gear and transmission equipment to operate. Unfortunately, that has been the hardest hit segment of the telecom industry.
"The defining trend in the United States telecommunications industry in 2001 and 2002 was the sharp drop in equipment spending," says TIA’s Flanigan. "In the 1990s, the telecommunications equipment industry was buoyed by complementary trends. Productivity improvements, engendered by investment in telecommunications, increased use of the Internet, and increased use of public and private networks to transmit information, encouraged companies to purchase equipment and upgrade their infrastructures to remain competitive.
"Financial markets from 1997 to 1999 funded rapidly growing companies, which accelerated the upward trend. Anticipating large increases in network traffic, telecommunications carriers invested heavily in equipment to meet the anticipated demand. High levels of investment in telecommunications equipment propelled economic growth and helped boost profits. Higher profits, in turn, stimulated further investment, feeding the cycle." The combination of these interrelated trends contributed to record levels of spending on telecommunications equipment in the late 1990s.
"The developments of 2001 and 2002 represented an adjustment to the higher-than-sustainable spending levels from 1997 to 2000," Flanigan points out. "Going forward, the pace of equipment spending will be more closely tied to revenue and profit growth."
According to Flanigan, equipment spending will be "stimulated by migration to new-generation technologies." For instance, he says Internet access and text messaging will provide a source of growth. "Currently, 3G wireless services can be offered on existing spectra, but as usage expands, new equipment will be required," notes Flanigan. "In addition to the equipment related to creating these networks, growth in wireless Internet traffic will boost overall network traffic, which will ultimately stimulate spending on network equipment."
Flanigan predicts the number of high-speed subscribers in the United States will rise from 15 million in 2002 to 40 million by 2006, generating substantial growth in network traffic that will force telecom carriers to upgrade their infrastructure. In metropolitan markets, bottlenecks are beginning to emerge, and some long-haul routes are at or near capacity. Second- and third-tier markets received less attention during the 1990s infrastructure building spree and now require more capacity.
"Despite a 22 percent decline in spending in 2002, the demand for wireless and mobile network infrastructure remains strong," says Shiv Bakhshi, research manager for the wireless and mobile network infrastructure program at IDC. "3G networks will enjoy widespread deployment over the coming years. The rising popularity of MMS and picture messaging, as well as the proliferation of public WLANs and hotspots, will . . . spur deployment of network infrastructure."
"As data services often consume voice capacity on the network, the more data usage there is, the more operators need to invest in their networks," adds Gartner’s Prohm. "The long-term outlook for mobile infrastructure remains positive. Operators will need to expand their networks as subscriber numbers and traffic volumes continue to increase, although at a slower rate than in previous years. As data applications finally start to gain traction among users, the infrastructure vendors will benefit, as capacity becomes a driver for network deployments.
"Any rebound in infrastructure equipment investment will depend on the uptake in mobile data services in 2003 and 2004," says Prohm. "We expect a relatively strong uptake of new services with products such as MMS and Java applications coming to market, and handset vendors keeping up with demand for these new services."
James Gunn, senior consultant at Forward Concepts Co. (Tempe, AZ), predicts the worldwide capital investment in base station and mobile switching system equipment will grow at a compound rate of 8.3 percent annually from $49.5 billion in 2002 to $68.6 billion in 2006. "Handsets cannot work without the base stations and mobile switching centers necessary to support the wireless network," notes Gunn.
Ericsson (Stockholm, Sweden) is the leading vendor of cellular infrastructure equipment, with an estimated 28.3 percent of the market. According to Gunn, Nokia accounts for 12.7 percent of the infrastructure market, following closely by Motorola at 12.2 percent. By comparison, Motorola and Nokia control 55 percent of the world market for handsets.
Assembly TrendsIn today’s competitive wireless environment, being first to market is more important than ever. However, product life cycles don’t last very long, which puts added pressure on manufacturing engineers. The ongoing transition to next-generation technology also affects assembly strategies. Producing the right product at the right time at the right cost is more important than ever.
"There is a misconception regarding economies of scale," warns telecom consultant Herschel Shosteck. "In order to gain the benefits, a technology must meet two conditions. It must mature to the point at which large volumes of equipment are being produced and it must be simple enough that the costs of greater complexity do not outweigh the savings of large production volumes. If these two conditions are not met, the technology cannot provide the full benefits from economies of scale."
To survive the ups and downs of the telecom industry, many manufacturers have turned to outsourcing. For instance, during the past 2 years, Lucent Technologies Inc. (Murray Hill, NJ) has outsourced 90 percent of its manufacturing.
Most cell phone production has shifted to offshore plants. Strategy Analytics Inc. (Boston) says China has become the world’s leading country for handset manufacturing, with a 27 percent market share in 2002. By 2008, Chinese assemblers will produce 46 percent of all cellular handsets.
"China is becoming known as the electronics workshop of the world," notes Neil Mawston, a senior analyst with the global wireless practice at Strategy Analytics. "Its very low labor rates and massive potential market make it the No. 1 location for long-term, mass-market handset production."
But, some cell phone companies still prefer to manufacture the old-fashioned way, using their own factories. Unlike Motorola and other rivals, Nokia outsources only a small percentage of its manufacturing. And even though the company manufactures more than 40 different models, its overall production costs remain low at state-of-the-art plants in Brazil, Finland, Germany and Hungary. In fact, Nokia’s production costs have declined."
According to Goldman Sachs & Co. (New York), it cost Nokia an average of $114 to make and sell a phone in the third quarter of 2002, which was $17 less than a year earlier. By comparison, Motorola spent an average of $139 to make and sell phones in the third quarter.
Unlike many other companies, Nokia encourages its brightest managers to work in manufacturing. Plant managers receive an annual bonus based on how quickly they can ramp up production of new phones. Nokia also designs its phones to share a high proportion of parts, which allows it to save money by purchasing huge quantities of components.