The Wall Street Journal-20080213-Wireless Technology- Low-End Cellphones Seen As High-Growth Market

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Wireless Technology: Low-End Cellphones Seen As High-Growth Market

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While every mobile-phone executive is gunning for a device that outdoes Apple Inc.'s high-end iPhone, handset makers and wireless providers are also diving into the other end of the market: ultracheap phones aimed at emerging areas.

Mobile phones with black-and-white screen displays and few features beyond text messaging are huge hits in some parts of Africa, India and elsewhere. The phones might lack games and the ability to surf the Internet, but they have FM radios and flashlights.

For companies such as Nokia Corp., Sony Ericsson and Vodafone Group PLC, low-income consumers in emerging areas represent a lucrative market and huge growth potential. Some analysts expect the ultralow- cost market to grow to 175 million devices in 2010 from 12 million in 2006.

"We thought there would be demand," says Kai Oistamo, Nokia's executive vice president of devices, "but the speed of growth has beaten all expectations."

Still, there are perils. It has been a struggle for some companies to keep costs low enough to achieve the slim profit margins available in the low-end business, where consumers still demand expensive- looking devices. Motorola Inc. made a push into low-cost handsets in emerging markets but has mostly retreated because it wasn't making money. Its offerings failed to create much demand. Motorola said last month that it may spin off or sell its flagship handset division.

"It's a soul-searching time for these guys," says John Jackson, an analyst for research and consulting company Yankee Group in Boston. "By definition, these lower-priced models have lower margins."

Some companies have had trouble keeping pace with Nokia, which was first to make a go at the low end and now dominates the trade, thanks to a massive distribution network.

Wireless carrier Vodafone is contracting with Chinese manufacturers to create inexpensive handsets. And handset makers like Sony Ericsson and South Korea's LG Electronics Inc. are trying to muscle their way into emerging areas mostly by going after the replacement market when users trade up.

Sony Ericsson, a venture between Japan's Sony Corp. and Sweden's Telefon AB L.M. Ericsson, is moving some manufacturing to India to cut costs as it makes handsets for India, China and Brazil. In the fourth quarter, the expansion helped sell 30.8 million phones, up 18% from a year earlier, as costs rose 16%. Its lowest-priced phones are $40 each.

The companies say the biggest issue is the most obvious: pricing. For low-end consumers, a mobile phone is a big purchase, and they are picky about quality, features and design.

"They want something that looks quite premium and makes a statement about them, as well," said James Marshall, senior product manager at Sony Ericsson. "It's a common mistake [to assume] that people in emerging markets don't want something that looks nice." To that end, Sony Ericsson offers a handset with a brushed-metal finish that "looks more premium," Mr. Marshall said.

Vodafone, 20% of whose revenue comes from emerging markets, has found that brand recognition is high in low-end markets. The company says it sells more phones by putting its name on the handsets Chinese manufacturer ZTE Corp. makes for it. Its lowest-priced phones cost about $20 each.

Vodafone works with distributors in low-end markets to sell an account-information chip, called a SIM card, along with phones in a package it calls "the magic box." Those who buy the box, which comes with credit for calling time, get a discount from the price of the card and device sold separately.

Nokia offers prepaid phones with air time in increments at the equivalent of about 20 cents or 50 cents for a few minutes. Its researchers had learned an old lesson: People on tight budgets buy things in small amounts even if it costs more in the long run than buying in bulk. The company says the strategy has increased usage.

Sony Ericsson learned that consumers in urban areas want loud ring tones. Also, there is huge demand for FM radio, and most companies include it as a standard low-end feature.