This column was originally published on RealMoney on Oct. 17 at 3:07 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
logged remarkably strong 17% sequential growth in phone units in the third quarter, going from sales of 11.8 million phones in the second quarter to 13.8 million in the third. At the same time, the average sales price (ASP) rose by a robust 12 euros.
This combination of rising volume and sales prices is rare. It may be early evidence that Western consumers are flocking to high-end models with rich features and hefty retail prices. This, in turn, would be very good news for the component industry.
The mobile phone market is often regarded as swinging like a pendulum between periods dominated by new technologies and those ruled by design innovation. Sony Ericsson typically excels during periods when technological innovation is central and sometimes struggles when consumers are swayed mostly by fashions.
Sony Ericsson's second quarter was surprisingly tepid compared to the third quarter. Could the strong consumer response to the cutting-edge novelties SE launched in late summer indicate strong demand for new high-end mobile products?
In the second quarter, the company's global market share actually slipped marginally as
dominated with models that featured relatively boring specifications. But during the third quarter, something happened -- Sony Ericsson added a spectacular 2 million units of sales. This was more than a million above what most observers expected, and even more importantly, the sales boom was driven by expensive models like the W-800 music phone and the K-750 camera phone. As a result, the average sales price of Sony Ericsson models rose from 137 euros to 149 euros.
Sony Ericsson has seen quarterly ASP swings of this magnitude before. ASP rose about $10 from the second quarter to the third in 2001, fell more than $10 in the third quarter of 2002, and rose about $20 during the autumns of both 2003 and 2004.
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
RF Micro Devices
, 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
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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Tero Kuittinen is a Senior Product Specialist for Nordic Partners, Inc., a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, Inc., the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, Inc., nor attributable to the company. At the time of publication, Kuittinen had no position in any securities mentioned in this column, 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;
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