Ericsson a Handset War Casualty

Waving the white flag amid a heated handset battle, Sony (SNE) Ericsson (ERICY) says it is closing its struggling CDMA business in the U.S.

The move Tuesday highlights Ericsson's continuing woes and comes on the same day that the wireless gearmaker said it would outsource the remainder of its computer services to IBM (IBM).

Formerly one of the top three handset makers in the world, Ericsson, with its joint partner Sony, has quickly fallen to a weak fifth-place status. Compounding the Swedish tech outfit's problems is the drop-off in demand for wireless networking equipment, as telcos slow down their so-called 3G network upgrades.

Sony Ericsson says shutting down code division multiple access, or CDMA, operations will eliminate 500 jobs in Research Triangle Park, N.C., and in Munich. The company will continue to make its global systems for mobile or GSM phones.

Ericsson has not been one of the beneficiaries of the 2003 tech rally. The stock is down 32% from a year ago. Perhaps not coincidentally, Ericsson's revenues in the first quarter fell 30% below the previous year's levels and 30% below the fourth quarter. Ericsson fell 22 cents, or 2%, to $10.59 in midday trading Tuesday.

While the decision to bail on CDMA and outsource the computer operations is further evidence of the desperate need to cut costs at Ericsson, some observers see it as more signs that Nokia(NOK) is making strong headway in CDMA.

Some investor checks show that Nokia's 3585i phone is the second most popular selling phone at CDMA-shop Sprint PCS (PCS), and many observers believe Nokia is on track to win Verizon (VZ) approval as a phone supplier later this year.

Ericsson has cut its staff in half from its 107,000 levels in 2001, and has targeted a headcount of 47,000 by next year.

In April, Ericsson's executives said they expect the 50/50 joint venture with Sony to post its first profit sometime this year based on the success of its new color-screen Net-ready phones. But the company needs to have about 6% of the total handset market to reach that break-even point. At last count, Sony Ericsson was hovering around 4% in handset market share.

Given Ericsson's growing distaste for money-losing efforts, some observers say they would not be surprised if the plug is also pulled on the remaining handset venture.

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