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It's an age-old question of business economics: How does a company sustain growth when its market begins to reach maturity?

For companies that make handsets for mobile phones, the solution is to attack the replacement market, which consists of subscribers who want to switch or upgrade their mobile phones. So far Finland's


(NOK) - Get Free Report

, already the cell phone market leader, has been most aggressive at introducing phones that appeal to this group, ahead of



of the U.S. and



of Sweden.

The replacement market is looking attractive because more and more people already have cell phones. By the end of this year, roughly 58% of Europeans and about 40% of Americans will carry them, says Herschel Shosteck, president and chief executive of

Herschel Shosteck Associates

, an international wireless consultancy.

"Where is growth in the industry going to come from?" asks Johan Carlstrom, an analyst at Swedish investment bank


. "From replacements." Carlstrom projects that the number of net new global subscribers will flatten in 2001, while the replacement rate will increase from about 43% this year to as much as 58% in 2003.

Big Gains

Nokia is projecting larger gains, 40% to 50% of growth this year with the figure hitting 70% to 80% in a few years. (Carlstrom notes that handset manufacturers use a different method to calculate replacements, one that usually results in a higher figure.) "Our firm opinion continues to be that the replacement market will continue to grow and the share of replacements in the total market will grow," Matti Alahuhta, president of Nokia's mobile-phone division, told


last month.

Getting a larger share of that market will spur growth and may well boost Nokia's stock, which is down 33% from its 52-week high. At the same time, Motorola, down 64% from its 52-week high, and Ericsson, down 59%, could continue to lag if they fail to make significant inroads.

While Ericsson recognizes that "the replacement market is a very big portion of the total annual market for mobile phones," at roughly 50%, "we do not target this specific segment as such," says Jan Ahrenbring, the company's vice president of marketing for its consumer division. Calls to Motorola for comment weren't returned.

Of course, Ericsson and Schaumburg, Ill.-based Motorola, haven't been nearly as successful as Nokia in selling handsets in general. Nokia has garnered a worldwide market share of more than 30%, while Motorola has 15%-16% and Ericsson has 10%-11%.

Wanting More

Nokia wants to increase its lead, in part by jumping on the replacement market, which has lately been driven by "the introduction of new services and the shift from the phone as a communications device to a status symbol or statement of lifestyle, particularly among the youth market," says Shosteck, the consultant. (His firm has done no proprietary research for Ericsson, Motorola or Nokia.)

In addition, Nokia believes that "replacements are not really decided only from demand but also supply," analyst Carlstrom says. "If suppliers bring out attractive products at attractive pricing, then people will replace their phones." (He rates Nokia a strong buy, and his firm has done no recent underwriting for the company.)

So Nokia is tailoring features on new phones to attract replacement users in different segments. For instance, the 3310 model, introduced in September in time for the holidays, was designed for the youth market. It boasts a chat function that enables users to send short messages back and forth in real time, as well as a popular game called Space Impact.

Big Sales

Nokia hasn't disclosed sales figures for the 3310 model. But during September, Nokia sold about 2 million 3310 and 6210 phones combined, says Megan Matthews, a company spokeswoman. (The 6210, also introduced in September and targeted at professional users, supports wireless application protocol, or WAP. WAP allows a user to view a Web site via a mobile phone.) Those numbers are above average for new phone sales, especially considering that both were only available for two weeks of the month.

For now, features like these are more important than coming technological shifts, such as the move from cell phones that handle voice to phones that also handle data. "That will drive the replacement market as well, but only in the high-end, high-cost segment," says Carlstrom. "That involves professional users and other early adopters."

He also cites Nokia as the best-positioned company to target the replacement market, because it appeals to different user groups. "Nokia invented segmentation and split up the segments even further into media, fashion, basic and professional users," Carlstrom says. "Nokia has more than one phone in each segment, while




, Ericsson and Motorola are missing attractive phones in certain segments." (Carlstrom rates Ericsson a strong buy and has no ratings on Siemens or Motorola. His firm hasn't done recent underwriting for any of them.)