For Wireless Investors, It's 2001: A Wasted Odyssey

Wireless investors, put your hands behind your head and step away from the estimates. Stay cool and nobody gets hurt.

Nokia (NOK Quote) held up the investment community Tuesday, robbing it of its golden pick as the Finnish equipment maker warned of lower second-quarter earnings. Wednesday a more alarming heist rattled wireless-equipment faithful: the missing hope that the second half of 2001 will see mobile-phone customers and wireless carriers snapping up equipment at a renewed pace. As with so many industries before it, the wireless sector may be ready to write off 2001 altogether.

Nokia lowered its industrywide handset expectations Tuesday to "very modest growth" over year 2000's 405 million phones, forcing the Street to accept ominous tendencies in one of its favorite markets. Customers aren't replacing their old cell phones with new ones, eliminating the chances that the industry will continue its five years of rapid growth. Wednesday, Merrill Lynch cut its estimate for 2001 handset sales to 390 million, outdone by Morgan Stanley Dean Witter, which took its already low 415 million estimate down a notch to 380 million. Morgan Stanley expects the industry to produce 475 million mobile phones in 2002, a mere 25% growth.

Why Aren't Handsets Selling?

Two things are at work here. First, until the new data-capable GPRS, or general packet radio service, phones hit the market, there's no compelling reason to buy a cell phone. Nokia's news forced analysts to get serious about GPRS, a technology that will be introduced to the market in the fourth quarter of 2001. Before companies see a sales uptick from GPRS, however, the industry needs to roll out GPRS phones, work the kinks out of the transmission system and market the heck out the technology to entice consumers. Struggling Motorola (MOT Quote) has been generating buzz for a GPRS handset that has the potential to get it back in business -- but when?

Analysts differ on their estimated time of arrival for GPRS revenues. Some sense that the fourth quarter of 2001 will see big sales because companies will hype the service in its infancy. Others expect GPRS to take two quarters from its rollout to generate big money, a mid-2002 concept that might be painful for investors to bear.

No matter the timing, we get to the second question staring down investors: Will phones sell at the heightened rates of past wireless technologies? Credit Suisse First Boston's Tim Long explains that the current slowdown may not be a temporary matter caused by economic slowing and increasing consumer unwillingness to buy in a shaky environment. Long suggests "the current year represents a difficult transition from 50%-plus growth rates to medium-term 20%-30% growth." While Nokia is gaining market share, its market may not be growing at the explosive rates of the past.

The network equipment side isn't living up to the strength that gave Nokia 35% growth in the first quarter. Nokia tipped off the Street to a serious spending slowdown among European carriers similar to what we've seen from suddenly cash-conservative North American wireless operators. UBS Warburg estimates Nokia's second-quarter network equipment revenue will come in even or below the first quarter's numbers and that European carriers will keep spending flat for the rest of the year. Deutsche Banc Alex. Brown reports that North American carriers have started spending again "because the quality of service is falling to unacceptable levels." That should be good news for Ericsson (ERICY Quote), which disappointed in the first quarter on its network equipment side due to constricted North American spending. Alex. Brown analyst Bruce MacDonald assumes European wireless carriers will face the same pressures and start spending after near-term thriftiness.

Neither the handset business nor the equipment business appears to be growing. These are not the kind of safe conditions that will allow Motorola and Ericsson to rebuild their wealth. With Nokia tripped up as well, 2001 has been snatched right out of investors' hands.