Strolling down a city street, you may find it hard to believe that demand for cellphones is slowing. But the eyes can deceive, because sales, which had been growing at an annual rate of 25 percent for years, have fallen this year.
The drop in revenue and profits has not escaped the attention of investors, and the stock prices of cellphone makers have slumped sharply.
Until last week, better things were expected for next year. But Nokia of Finland, the world's biggest cellphone manufacturer, cast doubt on that assumption when it said sales would contract through the first half of the year.
It predicted a return to normal sales growth by the fourth quarter.
Michael Ching, communications equipment industry analyst at Merrill Lynch, took some time last week to talk about cellphones and the infrastructure that makes telecommunications possible.
Following are excerpts from the conversation:
NYT: A month ago, Nokia said 390 million handsets would be sold worldwide this year, down from 405 million in 2000. Last week, it pared that number to 380 million. Did the revised forecast surprise you?
Michael Ching: What Nokia said was not inconsistent with what we have been saying for several months. We have been lowering our global handset forecasts repeatedly and reduced our estimate for mobile network spending several times over the last 12 months.
NYT: Why have cellphone sales slowed?
Ching: Over the past few years, people have replaced or upgraded their phones very frequently. Right now, because of the difficult economic environment, the replacement cycle has slowed dramatically. We also think we are entering a phase of new technology introductions that further clouds the replacement picture. As new devices that are more data-centric get introduced, we are concerned consumers might delay purchases. This kind of replacement cycle doesn't happen in a vacuum. It also depends on how aggressively cellular carriers want to promote their service plans. For example, AT&T's Digital One rate was a very attractive promotion, and it encouraged people to turn in their phones. Right now, the carriers are not being as aggressive.
NYT: Even though sales are declining, Nokia said it would meet fourth-quarter earnings targets. Do you expect it to do that?
Ching: There has not been as much margin erosion as some had feared. Indeed, one of the most impressive characteristics of the last year has been how solidly Nokia's margins have held up. Most other handset manufacturers are losing money selling phones. Part of Nokia's ability to do that is because of a more cost-effective design. They use fewer components in their phones, and different models use the same components.
NYT: Do you anticipate an upturn next year, as Nokia suggests?
Ching: One of the things that we are watchful of is general economic conditions. There is some correlation between information technology spending and consumer spending on most of these types of products. And we are hopeful we will see some improvement next year. That said, we have a neutral rating on all the big cell phone manufacturers -- Nokia, Motorola and L.M. Ericsson.
NYT: Cisco Systems, another company you cover, is scheduled to meet with analysts this week. What do you expect to hear, and how do you assess the company's prospects?
Ching: A year ago, people went out to the meeting trying to find out if business was deteriorating. The sentiment at this meeting will be almost the reverse. People will be looking for confirmation that business has stabilized.
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