The year in review and what’s ahead

Welcome to 2009! This is the last of five straight days of special Going Mobile newsletters. Each issue has dealt with one of the top news stories of 2008 and what it means in the future. You get my personal prognostications regarding what the future will hold. Next Monday we’re back on track with the current news and views that will feature MacWorld (ho hum) and CES (sigh). So, let’s start with what I consider to be the fifth top news story of 2008.

It’s the stupid economy!

That may not quite be a direct quote from the 1992 campaign of Bill Clinton and Al Gore, but the economic conditions facing President-elect Barack Obama are no less daunting than those left behind in 1992’s recession. When campaign strategist James Carville coined the phrase “The economy, stupid!” he could have been looking sixteen years into the future.

Only my real estate mortgage broker was forecasting the extent of the year’s economic collapse at the beginning of the year, which was appropriate since the real trigger came with the collapse of the mortgage industry and the banks it took down with it. But the signs were there and we can see them with perfect 20/20 hindsight. Motorola laying off 10,000, AT&T projecting 5000 layoffs, (http://tinyurl.com/6uojkd) Sprint establishing commodity-level voice and data service with the “All you can text, surf, browse, e-mail, chat, messenger, and talk program” at just $100 per month. http://tinyurl.com/9tmwkw It inspired rumors that T-Mobile would attempt a buyout of Sprint to prevent an all-out price war. The statistics that came in on year-end financials seemed to be holding strong, but by the end of the first quarter, device makers, operators, and software manufacturers were revising their numbers downward. At the first of March, Motorola CEO Greg Brown was adopting a wait-and-see attitude toward the coming recession citing the continued strong growth in the government sector as indicating it was temporary. http://tinyurl.com/a9577a

But when second quarter results came out, it was obvious that the rosy hue of the future was caused by red ink. The Wall Street Journal reported a drop in new phone sales during the first quarter in the U.S. for the first time in several years (http://tinyurl.com/6sk55g), even though global handset shipments were up 14% over a year ago. http://tinyurl.com/a9577a Microsoft reported that it was two million units shy of its 20 million unit sales projection for FY08 (ended June 30, 2008) even though second quarter global handset sales continued to rise at 15% year over year. The optimistic report from IDC report held out hope that the smart phone market was recession-proof. http://tinyurl.com/6e7ket But following an increase in global market share, Nokia set the stage by ordering a price-cut across its device line, sometimes as much as 10% on predictions that the growth rate of phone sales would decline. http://tinyurl.com/63vvjx

By October, as third quarter projections began coming in, Maynard Um, an analyst with UBS, halved his forecast for 2009 global handset growth to 3 percent, pointing to particular weakness in Europe and North America. Ehud Gelblum, an analyst with JPMorgan, was more optimistic but still reduced his expectations for 2009 handset growth to 6.1 percent from 8.1 percent. Gelblum said he had based his outlook on consumer reluctance to upgrade phones. http://tinyurl.com/gomo05a "All the vendors are struggling with a major slowdown in tech spending on both the business side and consumer side," said Bill Whyman, technology analyst at International Strategy & Investment. "Some companies are still trying to put a good face on things," he said, "but the reality is we are likely to have very, very weak spending in 2009. We believe that tech revenue growth will fall sharply over the next three to four quarters." http://tinyurl.com/gomo065

Fourth quarter and year end results have just begun to filter into view the past couple of days. ­The UK mobile market saw annual growth drop 0.3pp year on year to 4.4%, the second lowest figure ever recorded. In real terms, annual net additions stood at 3.15m, down slightly on the 3.21m recorded in the prior twelve months. Quarterly net additions totalled 0.97m, taking the total connection base to 74.07m and penetration to 121.5% at the end of Q3. http://tinyurl.com/8yleu6 ­ In spite of the phenomenal success of the iPhone as reported by Apple, Apple shares have lost more than half their value since the end of 2007, when they were trading at nearly $200. The stock finished Wednesday's trading session down $2.01, 2 percent, at $91.01. http://tinyurl.com/78cabx Quarterly net additions in the European mobile market moved to their highest level so far in 2008 in the third quarter, hitting 13.7m, after 9.8m and 11.0m in the first two quarters respectively. Proportionate growth followed suit, climbing to 1.8%, from 1.3% and 1.5% in the two prior periods. However, ­excepting the first two quarters of 2008 the net additions total was lower than any other result since Q2 04, whilst the proportionate growth figure was lower than any in history, which had the effect of pulling rolling annual customer growth down to a sixth successive low of 8.2%, down from 13.0% in the year to 30 September 2007. http://tinyurl.com/gomo117

So what does 2009 hold in store for us?

The first half of 2009 may see alarmingly slow handset sales worldwide and, even if the back half of the year improves markedly, all sources point to negative growth for the coming year. Forecasts for the magnitude of the anticipated slowdown, however, vary widely — a reflection, many say, of the speed and depth and unpredictability of the global, macro-economic downturn. The decline in global handset volumes is projected by most sources to exceed the 2001 downturn led by the bursting dot-com bubble. The cause: weakened consumer demand and so much inventory in the channel it may take two quarters to clear. Weakened demand in China, based on slowing exports, is oft-cited. Smartphone sales, which were roaring along at nearly 40% year-on-year growth in the third quarter of this year, will also slow. But according to most projections, they will show positive growth over the course of 2009. In the United States, carrier subsidies have given the sector a helping hand. The upshot: the strongest brands with the most alluring products may gain share as weakened competitors pull back in survival mode. http://tinyurl.com/gomo119

Due to a grim economic outlook and substantial currency fluctuations, the telecom services market will generate US$1.4 trillion in 2009, posting only 1% year-on-year growth compared with the 10-11% annual growth rates that have characterized previous years, according to a new report from Pyramid Research. The report also says that voice services will be hardest hit in 2009 while non-voice mobile applications and broadband Internet access are expected to remain robust. A contraction in the overall voice market of 3% in 2009 is projected, compared with a 6% expansion in 2008, while the data market, both fixed and mobile, will reach $411 billion in 2009, up 12% from 2008 levels. http://tinyurl.com/8yleu6

“The number of WCDMA and CDMA2000 mobile handsets sold (currently 39% of the total) is expected to exceed 50% in 2009,” says ABI Research Asia-Pacific vice president Jake Saunders. “Much of the brunt of the economic downturn will be experienced in the 2G categories. WCDMA handset shipments are projected to grow from 258 million in 2008 to 725 million in 2009. By 2013, more than 67% of all handsets shipped will be 3G/3G+ capable.” “Another robust segment is smartphones,” adds practice director Kevin Burden. “Smartphones captured 14% of the 2008 market and are expected to grow throughout the challenging period of 2009 and comprise 31% of the market by 2013.” Smartphones are among the most coveted pieces of prosumer electronics. http://tinyurl.com/gomo118

I’m scarcely as savvy a financial pundit as the analysts quoted here, so I’ll confine my comments to shear speculation on my part. Handsets will continue to drive market expansion and the major mobile operators will rise and fall based on the handsets they offer and the still-coming price war for services. Unfortunately, those consumers who wait until the second half of 2009 to get the latest, brightest, and shiniest devices will be sorely disappointed. Palm upset the delicate balance among the major smart phone vendors this week by showing a system that could reverse the flow of Sprint subscribers back into the fold. Today, with the conclusion of the acquisition of Alltel, Verizon Wireless reclaims the top spot among U.S. operators, but that just means it has the most to lose if Sprint is able to draw customers with an exclusive Palm arrangement. Devices in the second half of ’09 will be considered too little, too late.

The big winners among OS providers will be those that have one of two things going for them, and preferably both. First, deep pockets so they can simply hold on and wait for the larger global economy to recover. Second, the foresight to continue research and development into the future. The big losers will be the companies who “Me too!” themselves to death trying to catch up with the look and feel of devices that will be two years old or more by the time they hit the market. No matter how much internal improvement is made to devices this year, if there isn’t an external (industrial design and UI) WOW! the devices will be greeted with a ho-hum. In the way of devices, the ho-hums this year will include Apple (shot its wad a year and a half ago), Windows Mobile (still trying to look like Apple), and RIM (struggling to ride Obama’s coattails into the public’s love). Positioned to win big are Palm, Nokia, and Samsung. Networks: this year will see Sprint begin to turn the tide and reclaim its position near the top of U.S. carriers. Vodafone will continue to broaden its reach and attempt to stay the largest mobile operator by number of subscribers in the world by investing heavily in shares of emerging market carriers. China Mobile by sheer force of numbers will top out as the world’s largest carrier by any standard you want to apply.

Services will begin to make a big play this year. The Microsoft/Google battle will not be won on the merits of search engines alone, but by the services in the cloud that they get consumers to pay for. Microsoft will have to turn its left shoulder to its own operating system and embrace every type of converged device in order to capture the services market. As long as Microsoft services are seen as being “best on Windows Mobile,” people will assume that Google services are best on everything else.

And we have not seen the end of staff cuts that may reach even the strongest players in the market in all of the areas of mobile communications. Companies can almost always survive economic downturns if they are well-managed and have decent, well-priced products. That is not necessarily true for individuals. The first half of 2009 will continue to be gloomy. I’d like to say the last half will be looking up, but we’ll have to wait and see.

Monday

We’ll resume coverage of the events of the past week, especially focusing on CES and MacWorld. Inside Microsoft: If you would like to schedule a live presentation of the material in this week’s year in review, contact neverett@microsoft.com.

Masthead

This is issue #48 of Going Mobile. The stories that I refer to are all among the 300+ publicly published articles I scan each week, but the commentary is entirely my own and does not represent the views, opinions, or official position of Microsoft, the Windows Mobile management team, or any of the fine companies and news services mentioned herein. You can refer stories to me or make other comments below.

Thnx,
Nathan Everett
Editor