Sony Ericsson's recent job reductions have sparked rumors that the troubled handset maker may be forced to wind down production of both high- and low-end devices as major losses loom.

Sony Ericsson recently reiterated its commitment to achieve 300 million euros ($414 million) in cost savings over the next year, which includes a total head-count reduction of 2,000 employees and consultants worldwide. This announcement has spread fear that the handset maker may abandon both its high-end smartphone and low-end cell phone business, severely shrinking its portfolio.

Nearly three months ago, the Stockholm-based joint venture between Sony ( SNE) and Ericsson ( ERIC) said second-quarter income plummeted 97% while the company's operating margins dove to zero, generating concern over Sony Ericsson's ability to compete with rival handset makers such as Motorola ( MOT) and Nokia ( NOK).

In late September, Sony Ericsson took the first step toward realizing those 2,000 job cuts, acknowledging that market conditions have changed very rapidly. The company added that "action must be taken to ensure that it can remain competitive in the dynamic and fast-paced telecommunications industry."

The cuts were centralized in research and development areas, prompting a firestorm of speculation about the company's future. Questions arose about the fate of the UIQ software platform, which is at the heart of Sony Ericsson's high-end smartphone R&D effort. UIQ is based on the Symbian mobile operating system, which was formed by a partnership between Ericsson, Motorola and Nokia, and it is used on Sony Ericsson's high-end phones.

Tero Kuittinen, senior director of research with Global Crown Capital, says that software developers in Europe are increasingly concerned that Sony Ericsson is now planning to end its involvement in the Symbian development program, which would involve the possible axing of an entire UIQ development unit in Ronneby, Sweden.

"This would be a stunning turn because, after Nokia, Sony Ericsson has widely been seen as possessing the second largest Symbian R&D program in the world," Kuittinen says.

Merran Wrigley, a global communications spokeswoman for Sony Ericsson, quickly shot down rumors that the company is ending its relationship with the Symbian Foundation, which was formed in June when Nokia, Sony Ericsson and Motorola announced their intent to unite Symbian, UIQ, and other technologies to create one open mobile software platform for all Foundation members to use under a royalty-free license.

"The rumors stem from the fact that we made some internal announcements to employees about which sites would be affected by the layoffs we had announced," Wrigley says. "Two of the sites that are going to be affected are known to be involved with Symbian/UIQ development. Some people put two and two together and got the wrong end of the stick."

Wrigley maintains that Sony Ericsson is committed to the Symbian operating system, but acknowledges that the company is going to review the R&D capacity that it has dedicated to Symbian.

"That's just because of the structure of the Symbian Foundation," she says. "The R&D will be done collectively. There will be much more sharing of code among the people developing handsets, which means the in-house R&D facilities are going to be realigned to take that into account going forward."

But the job cuts in R&D alone wouldn't normally spark such concern. Those cuts come after Sony Ericsson saw operating margin plunge to negative 0.1% in the second quarter due to a less favorable product mix, particularly in Europe, along with increased price competition in the market for mid- to high-end phones.

To make matters worse, the company said that challenging market conditions "are expected to prevail ... for at least the rest of 2008, and in particular for the third quarter."

Sony Ericsson's stumble comes as a result of betting the farm on the high-end handset market, analysts say. Sony Ericsson has reported that the average selling price of its handsets is already falling. The fear is that margins will be compressed and Sony Ericsson's bottom line will be reduced dramatically.

On the other end of its portfolio, Sony Ericsson has already offered some eyebrow-raising price breaks for low-end phones to European carriers in previous months, which Kuittinen say portends a winding down of certain product lines. "Sony is now seen as unwilling to risk the expansion to mass market business," he says. "Sony Ericsson may be forced to focus on the upper half of the midrange market."

If Kuittinen is correct and Sony Ericsson winds down its low-end phone models while discontinuing development of high-end models, the company would be left with only its Walkman and Cybershot product lines.

It's questionable, though, whether both lines can be stretched to lower price points. More importantly, though, Kuittinen says he believes Sony Ericsson could potentially see annual volumes decline by at least 30% to 40% after phasing out different models.

"The UIQ abandonment would point towards exiting the high-end smartphone market as well, which would only leave Sony Ericsson with Walkman and Cybershot lines to depend on," he says. "Whether a viable volume business can thrive on such a narrow base is highly debatable. There is speculation in Stockholm that Sony Ericsson could be wound down entirely unless Sony changes its hard line against bankrolling major losses."

Still, Motorola and Nokia haven't benefitted from Sony Ericsson's troubles over the last three months. After rising over $10 a share in August, shares of Motorola have lost 4% over the last quarter and sit just below $7 a share. Nokia has suffered more, falling more than 27% to $17.43.

For now, investors will have to wait until Sony Ericsson posts its third-quarter results in a few weeks for word on the company's outlook for the rest of the year and beyond. But with a warning that challenging market conditions will prevail particularly in the third quarter, no one is holding their breath.


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