Cheap Phones Lift Wireless Spirits

Motorola, Qualcomm and others are enjoying the effect of a developing-nation boom few had foreseen.
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Worldwide cell phone sales growth is gaining speed, but not because of

Nokia's

(NOK) - Get Report

latest 3G offering or

Motorola's

(MOT)

edgy designs.

No, the biggest growth is coming from the category with the smallest price tag.

The recent arrival of the $40 phone has suddenly opened the doors to developing markets like South Asia, Africa and Latin America, where household incomes are smaller and conventional telephone infrastructure is lacking.

With the average cell phone costing about $150, vast regions of the world have been left out of the mobile phone revolution. In fact, after a huge growth surge last year, handset sales volumes were expected to cool off a bit this year.

But then came the $40 phone, and now the sky is starting to look like the limit again.

In view of the broader developing market opportunity, JP Morgan Chase analyst Ehud Gelblum now expects 788 million units to be shipped, and he raised his 2005 handset growth estimate to 23%. Those numbers compare favorably even with last year's torrid pace -- 630 million units sold, a 20% increase over 2003.

In fact, given the small wireless presence and large populations in some countries, Gelblum says the $40 phone will help take the industry's unit shipments to more than 1 billion by the end of 2007.

"This is a ridiculous number, and the sad part is that if anything, I think I may be being too conservative, because I'm just scratching the surface in the emerging markets and I'm not even taking into account the huge replacement cycle in the U.S. or Europe," says Gelblum.

As the cell phone becomes more of an all-in-one gadget with features including cameras, video recorders, music libraries and email, the device's popularity has soared everywhere. The demand for new phones to replace slightly old phones, however, is limited in more mature markets such as Japan, South Korea, Europe and the U.S.

But now that Motorola and Nokia are gearing up factories to churn out $40 phones, the growth shifts to other parts of the globe.

"We finally have a lot of low end handsets," says Gelblum. "That's opening up brand new markets like India, where penetration is 7%, and opening up places like countries in Africa," he says adding that the wired infrastructure is so bad "they have to do wireless."

Overall, says Gelblum, "a strong handset market has to be good for Motorola." He rates Motorola and

Qualcomm

(QCOM) - Get Report

buys.

Industry observers have a little concern over what sort of impact the $40 phone will have on the big handset makers. Fancy phones will need to stay popular to prevent a sharp drop in the closely watched average selling price figure. And at $40, it's not clear what margin the phone makers can expect to capture.

But for now, with so little growth anywhere else in tech, wireless has kept its special status on Wall Street.

Motorola shares were down 45 cents to $23.23 during midday trading Monday, off about 2% from their 52-week high last week.