Editor's Note: Tero Kuittinen's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was originally published June 6 on RealMoney.
Mark your calendar:
midquarter update Tuesday is likely to be a big event for the telecom sector.
The overall negativity toward information technology has reached a boiling point, making the market highly volatile. The
pop demonstrated as much late Wednesday, although the sentiment in corporate software is far less bleak than it is in mobile telecom. The mobile-telecom sector is likely heading toward a pop next week, especially if this week ends as badly as it looks right now.
The telecom sector was first brought down by sector-specific disappointments, then whacked by the overall U.S. market malaise, then ambushed yet again by
disappointments. Naturally, the sector as a whole is still rattling toward a grim charnel house, where the hopes and ambitions of a generation will be extinguished. The overcapacity issue refuses to go away, and that will create plenty of future turbulence. But the absolutist bear judgment encompassing the whole sector is too facile.
Any and every proclamation of telecom doom at the moment sounds like wisdom -- but that's only because the genuine make-or-break moment for the sector arrives during the second half, as the appeal of new mobile-phone models is tested on a large scale. Even if we're heading toward a
crash and a devastation of semi stocks, it's worth remembering that the telecom sector has already undergone a drastic correction.
It's quite possible that consumer stocks now hold a whole lot more downside than, say,
customers aren't going to switch to
because of bankruptcy fears, but in the telecom sector, substantial market share swings can happen over the next 12 months.
Predictions of total doom are not right just because the markets believe them at the moment. Markets will believe anything in the short term. The real test of the long-term health of the sector will come with consumer response to new products -- and the jury is not in. The currently fashionable hostile comments about Christmas 2002 phone sales are simply tailored to fit the market sentiment of May 2002. They don't tell us anything about the actual fourth-quarter outlook. Vacuous pessimism isn't fundamentally different from facile optimism. It just looks cooler at the moment.
Reading the Signs
Let's look at what small signals we have that can be verified from retail reports.
- One concrete sign of solid demand for new services is
KDDI's robust April sales of GPS-enabled phones in Japan. GPS-enabled handets can act as real-time maps, offering a variety of localization services. This is a development that has been anticipated for about two years; the fact that it's finally clicking in a major market is a step forward. Of course, KDDI has a past pattern of having one or two good months after a heavy promotional push behind a new product launch. This has usually been followed by a stumble as its rivals retaliate, backed with their superior phone-vendor backing.
DoCoMo's new I-Mode camera-phone lineup is likely robbing KDDI of its spring momentum. But map-phones have popped up as highly craved items in many Japanese surveys of consumer purchasing expectations, so the new trendlet does offer a glimmer of hope. It's the widespread consumer interest here that is interesting. There have now been two major waves of mainstream buzz in Japan within 18 months: camera phones and now the map handsets.
Ericsson's T-68 is catching on in Asia, and the European expansion is going well. This is the first major color-display phone outside Japan and Korea, so its importance as a gauge of Western and Southeast Asian demand for color models can't be underestimated. Ericsson's gamble of launching a relatively crude 256-color entry paid off. The rival entries featuring 4,096 colors are arriving later this summer, which is when this niche better break out in a big way.
The annual volume impact of color phones is going to be low (maybe 2% to 4% for some brands), but for 2003 projections, it's vital to see robust early demand for $300 handsets. Apparently it does exist. If the demand for this $300 color-handset category keeps ramping up to Christmas, the year 2003 estimates will beat current projections.
The market probably read Palm's gruesome warning incorrectly. The reason PDA sales are softening is that consumers prefer phone/PDAs over PDA/phones. The demolition of Palm,
Handspring (HAND) and
Research in Motion (RIMM) is a natural process as the gadget market evolution kills off dodos.
Finnish electronics manufacturing popped 28% in April year on year. This admittedly obscure statistic correlates historically with Nokia's early production runs of new models (before the manufacturing focus switches to low labor-cost markets). I'm reading the April number to reflect the ramp-ups of 5210 and 3410, the new low-end Nokia phones. The pivotal 3510, with its polyphonic ring-tone technology, is hitting the European shops by next week. The 5210, 3410 and 5210 are low-end phones with a price premium -- the product class that Ericsson,
Motorola (MOT) and
Samsung have ignored in their quest for ultra-premium glory.
Nokia's midquarter update Tuesday is going to pivot around this new low-end sales outlook. The 5210 entered the top five in some North European markets in April, and the 3410 has debuted in the top three of some major German and Scandinavian retail outlets during the first week of May. Meanwhile, there's a deafening roar of articles declaring Samsung and Motorola market share gains -- referring to the months just before the new product debuts.
The phone volume outlook for this year will be determined by the success of low-end phones with Java and/or polyphonic ring tones and their impact on the youth market replacement sales. The first quarter of 2002 is hardly going to have any relevance to the second half of 2002, which is driven by entirely new product concepts. So using the rearview mirror in doing market share predictions rarely works out.
The recent downgrades of annual phone sales came only weeks before the actual models that will define this year's volume situation arrived to the market. Ultra-bearish projections below 400 million units for 2002 were a response to the stock market doldrums -- as opposed to actually reflecting concrete information about consumer response to new models. They are mostly cheap sentiment-chasing.
This doesn't mean the worst-case scenarios are going to be wrong: They simply are irrelevant. Nokia's second-quarter guidance is for a 5% sales increase quarter-on-quarter, and the second quarter includes the end-of-school spike. Markets don't believe even that. So we've reached a point at which even having the normal seasonal blip with no genuine growth would be a positive surprise.
Tero Kuittinen wears several hats. He is vice president of wireless communications at investment firm Halsey Advisory & Management of New York; tech adviser to Opstock Investment Banking of Helsinki; and senior strategist to SpringToys of Helsinki. At time of publication, Halsey was long Nokia, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback and invites you to send it to