Cellular Market Turning to High End?

What makes this year interesting is that a strong ASP increase was accompanied by a strong sequential volume increase of 2 million units. During the strong ASP autumns of 2003 and 2004, Sony Ericsson's volumes grew by only 400,000 units and 300,000 units, respectively.

In the past two years, Sony Ericsson has been able to deliver big upticks in the average sales prices of its phones, but only by making do with moderate volume growth.

What made this quarter so special for Sony Ericsson? Two new product innovations the company pioneered. SE was the first brand to get both music phones and 2-megapixel camera phones out in the mass market during the late summer. Both of these product categories have been seen as game changers. They have the potential to drive phone upgrade volumes in Western markets, but even more importantly, they possess the potential to improve phone ASPs of leading vendors.

Sony Ericsson's third-quarter performance is among the first tangible pieces of evidence that these new product categories actually can have a measurable impact on leading brands. I'm a believer in the appeal of 2-megapixel camera phones, but I've been skeptical about the prospects for music phones this winter. Sony Ericsson's numbers indicate the appeal of its Walkman products may be bigger than I expected. Combined with the clear blockbuster pull of the camera-centric SE K-750, there is a chance that consumers may be more interested in expensive new crossover gadgets than I anticipated.

The case isn't clear yet, though. Sony Ericsson is highly exposed to the Western European market, so the hot third-quarter numbers may simply reflect strong upgrade demand in Europe. Other vendors have higher exposures to markets like Asia and Latin America, where low-end growth may overshadow the impact of good high-end sales. It is also possible that Sony Ericsson has simply retaken the market share it earlier lost to Nokia and Motorola, so the quarterly performance may not reflect any major changes in consumer appetites.

Nevertheless, SE's third-quarter results give us a tantalizing glimpse of a phone market that may be turning more hospitable toward high-end phones. This is obviously crucially important for names like Texas Instruments (TXN Quote) and RF Micro Devices (RFMD Quote), which have been hammered in the recent tech selloff.

Could they be poised to issue better fourth-quarter guidance than the markets anticipate? I happen to believe that the Nasdaq is poised to tumble in a vicious manner over this winter, but there might be room for a mobile phone component rebound over the next week or two.

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