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Mobile Handset Marketplace Spiraling Down

More than a dozen mobile phone handset vendors will be shipping sub-$50 models by 2008.

The ultra low cost handset (ULCH) marketplace is currently dominated by Motorola and Nokia, but Samsung, LG, and Sony Ericsson are showing increasing interest and other smaller vendors including ZTE, Kyocera, Huawei, Haier, Sagem, Ningbo Bird, Philips, and Rose Telecom are also beginning to address the growing market.

According to ABI Research industry analyst Shailendra Pandey, "Having a good IP portfolio is a big advantage for the likes of Motorola and Nokia, but other smaller handset vendors will also be able to address the low margin ULCH market by cutting costs through manufacturing locally in emerging markets. They can also save on marketing and distribution costs by forming partnerships with mobile operators."

A good IP portfolio means lower or zero royalty fees, as vendors can benefit from cross-licensing agreements. Smaller vendors and new market entrants without significant patents have to pay high royalty fees for the licenses. This makes it more difficult for smaller vendors to address the ULCH market, which offers very low margins.

Therefore these vendors are addressing the market by forming exclusive handset deals with operators, allowing them to save substantial marketing and distribution costs.

For example, ZTE and Rose Telecom have been providing ultra low cost handsets to Reliance Communications, the largest CDMA operator in India. Huawei is providing low-cost CDMA handsets to China Unicom and ZTE, and also has agreements with Vodafone for providing low cost handsets.

ABI expects that by 2011, almost one out of every four handsets shipped globally will be an ultra low cost handset. The research shows that India will be the biggest market in the next five years, growing from a little over 9 million handsets in 2006 to more than 116 million handsets in 2011.

I believe that the creative application of ULCH devices, and associated low-cost services, in developing nations will actually spawn new forms of wireless product innovation that will eventually spill over into the already saturated mobile phone markets of the developed nations.

Attempting to do more, with less, is the essential catalyst that start-up companies apply to differentiate themselves from the excesses of established industry players. The ULCH model is forcing all mobile handset designers to re-think prior conventional wisdom -- which is often the starting point for new breakthroughs.

Therefore, I believe that the current low-cost "race to the bottom" could actually have a very uplifting effect on the overall industry. Meaning, I can envision an upside to this apparent downward trend.

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