Former Handset Leaders Could Be Left Behind

It is now clear that handset volumes in the first quarter of 2008 were actually very healthy indeed; global unit growth probably topped 17%. Yet that does not seem to offer sector investors much solace.

Key names such as Nokia (NOK - commentary - Cramer's Take), Motorola (MOT - commentary - Cramer's Take), Ericsson and Texas Instruments (TXN - commentary - Cramer's Take) seem to be heading for a difficult summer period in the high-end phone segment.

Tough Comps for Old Champs

Reasons for investor jitters around the old handset market leaders tend to revolve around two sets of issues. First, there is a display-tech revolution going on, and the biggest names in the phone business are not yet participating in it. Second, consumer demand for handsets costing more than $300 may be softening, particularly in Europe. These two issues may well be sharing an interesting set of feedback loops.

First, the scale of the Sony Ericsson phone volume shortfall combined with the strong volume performance of LG seems to strongly imply that European and Asian consumers have now started switching from handsets equipped with QVGA-quality, 2.2-2.4-inch screens to phones with higher pixel counts and 2.8-3-inch screens. This is the key difference between Sony Ericsson and LG.

Second, Nokia's market-share declines in Europe and Southeast Asia, combined with the slight unit softness in its smartphone volumes, seem to imply that this trend may be starting to have an impact on Nokia.

Third, the Texas Instruments revenue guidance of last night seems to support the notion that its key clients, Nokia and Sony Ericsson, are prepping for a soft summer.

Trouble on Display

I believe the investor unease about Nokia and TXN here stems from growing concerns about how the emerging shifts in consumer behavior could become far more pronounced and damaging over the summer. Nokia is now hitting the 10 million unit mark with its exquisitely "specced" and very high-priced N-95 phones. No other vendor has managed to sell this many smartphones priced at $600 to $900 in little more than a year.

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At time of publication, Kuittinen had no positions in stocks mentioned, although holdings can change at any time.

Tero Kuittinen is managing director and senior analyst for Avian Securities, a brokerage firm specializing in technology companies. Although Kuittinen is an employee of Avian Securities the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Avian Securities, nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback; click here to send an email.