Market saturation puts an end to the mobile phone boom

THE OBSERVER , LONDON

Tue, Nov 27, 2001 - Page 24

Charles Dunstone, the ebullient entrepreneur behind the Car-phone Warehouse chain, was in sparkling form at the UK Institute of Directors' annual dinner earlier this month. Dunstone told his audience, which included Finance Minister Gordon Brown, that he loved downturns because "that's when business becomes interesting."

Well, Dunstone has got his wish, and for the boss of Britain's largest mobile phone retailer, business has just become terribly interesting.

Mobile operators had been praying for a bumper Christmas, just like last year's -- to reverse the trend set by sweeping redundancies, savaged marketing budgets and numerous technological setbacks. But unfortunately for the networks, this year Santa is more likely to resemble Scrooge.

Last week, in a move that shocked the industry, respected research firm Gartner Dataquest announced that the industry's days of seemingly inexorable growth were over. Gartner said worldwide shipments of mobile phones had fallen a whopping 10 percent to 94.4 million units in the third quarter of this year, compared with the same period the previous year. Much of the blame for the drop lay with the industry's powerhouse, western Europe, where shipments fell from the second quarter to the third -- contrary to all past trends.

The figures were released just as the mobile phone industry seemed to have turned a corner. Many in the City have been predicting that the industry's worst days are now firmly behind it, making the operators' shares attractive. Tim Rees at fund manager Clerical & Medical says: "There is a much greater appetite for risk, which means that investors are prepared -- again -- to believe in the growth potential of telecommunications."

Rees believes macroeconomic factors have helped stimulate renewed interest in telecom stocks. "Interest rates probably don't have much further to fall; with money this cheap and the market on both sides of the Atlantic up about 15 percent since Sept. 11, the medicine being administered by the central banks looks to be working."

Just as the telephone companies were among the first to feel the pain when the bubble burst in March last year, so they looked to be the early beneficiaries of a tentative return of investor confidence.

Take Vodafone, for example. Its share price fell to 118 points earlier this year; now it is trading above 180 points.

Then came the Gartner figures, sowing new doubts. "Everyone was riding on the euphoria of last year. People were predicting that the industry was going to sell an amazing 500 million handsets this year, compared with 413 million last year," says Ben Wood, Gart-ner's European telecoms research director.

Gartner now predicts total sales this year will be around 400 million and suggests that the industry is capable of "more stable growth" in the future, somewhere between 10 percent and 15 percent. With 77 percent of the UK's adult population now owning a mobile phone, the days of soaring sales growth are at an end.

Christian Maher, telecoms expert at broking group Investec, says a saturated phone market is not necessarily bad. "Margins are improving at many of the mobile companies as the growth in subscribers tails off. Don't forget that the build-up of subscribers was achieved by offering heavily discounted handsets and other benefits. As growth slows, costs come down."

The Gartner figures mark an end to an extraordinary time. The telecoms bubble -- and the mobile phone bubble in particular -- was far bigger and far more sustained than the internet bubble that blew up around it. As the industry enters a more mature, realistic phase, the question is how will the operators continue to drive revenue growth.

Their intention is to drive average revenue per user (Arpu). "Arpu was high in the early days, but as the operators have tried to drive penetration, it has plunged," says Peter Richardson, head of research with investment bank Soundview Technology.