No walkover for Walkman phone

Sony Ericsson has built its success on margins, but several challenges lie ahead before it can become a top-three player in one of the world’s most ruthless sectors. Robert Lester reports

ericsson_mobileSony Ericsson, the world’s fourth biggest mobile phone manufacturer, is expanding its global marketing team (MW last week) following a period of sustained growth. The company, formed in 2001 as a joint venture between Japan’s Sony and Sweden’s Ericsson, has seen its market share grow by almost 3% in the past year and earlier this month reported a 55% increase in pre-tax profits for the second quarter of 2007.

However, observers believe there are still several challenges to overcome before Sony Ericsson achieves its aim of becoming a top three player in one of the world’s most ruthlessly competitive sectors. The launch of Apple’s iPhone poses a threat to the company’s market-leading position in music phones, while analysts point out that it must increase its portfolio of low-end devices if it is to become a serious challenger to Samsung, Motorola and Nokia.

Sony Ericsson has already made strides in this area, introducing cheaper handsets such as an entry-level music phone that holds just 37 songs (MW January 11). Its expanding handset range helped pre-tax profits for the second quarter grow to €327m (£219.5m), up from €211m (£141.6m) a year ago. Sales for the quarter increased by 37% to €3.11bn (£2.08bn), but the average selling price of its handsets fell to €125 (£84) from €145 (£97) a year earlier, reflecting the introduction of low and mid-tier phones.

Sony Ericsson president Miles Flint described the company’s progress as “steady, profitable growth” while vowing to continue its focus on margins rather than market share.

Gartner research director Carolina Milanesi says: “It’s a tricky balance. Motorola made the mistake of going after market share at the expense of margins but Sony Ericsson seems to be getting it right at the moment. In the past it had one good quarter and then nothing after that but it’s a trend now rather than a one-off. It has a great portfolio and is set to get even better in the second half of this year.”

Much of Sony Ericsson’s recent success can be attributed to its strength in music (Walkman) and camera (Cybershot) phones. But the company admits it struggled in the early years. “Neither Sony nor Ericsson were doing particularly well when we formed the joint venture,” says a spokeswoman.

“For the first couple of years we were losing money and there was speculation we wouldn’t make it because joint ventures have a tendency not to last. When you’re in that position you want to stop the haemorrhaging. We did that and when we became profitable we were in a position to invest. For two-and-a-half years we were investing very aggressively, mainly to expand the portfolio with more products at more price points.”

The company launched its first Walkman phone in August 2005 and has sold 35 million in less than two years. It has sold a total of 132 million music-enabled phones since 2002 and has won plaudits for its Cybershot camera phone range.

But Milanesi believes Sony Ericsson must now make the step up to the next level. “It has mastered music and camera phones – now it has got to move into something else. We want to see it launch a phone with the same level of GPS as a Blackberry or an N95. It must add more to its devices. It has taken the first steps but we want to see Sony Ericsson be a little bit more aggressive now.”

ericsson_logoExperts predict that Apple’s iPhone, recently launched in the US and available in Europe before the end of the year, will be the year’s “must-have” device and Strategy Analytics director Neil Mawston says: “Music services will take a big hit from Apple. Walkman dominates the mobile music market and if a competitor comes in it will clearly have an impact, so it is a threat. But it is also an opportunity as it will raise awareness of mobile music.”

It is a point picked up by the Sony Ericsson spokeswoman, who adds: “We knew when we came up with the Walkman phone that others would follow when they saw its success. But the media interest in the launch of the iPhone will play to our advantage because more people are reading about and thinking about music phones. We feel our products are definitely up to the competition and that we’re the people to beat.”

Ovum director of wireless Martin Garner thinks the Walkman phones have a broader appeal than the “high-end” iPhone, while Verity Adams, a creative strategist at branding consultancy Venturethree, believes the strength of the Sony brand will give Sony Ericsson the upper hand. She says: “Sony is very good at building emotional connections between consumers and products and I think that will give it a competitive advantage when it comes to the iPhone. People’s relationship with iTunes is quite transactional.”

It seems certain that Sony Ericsson will continue to look to leverage the power of the Sony brand in the future. It is Grafik%20sid.31said to be gearing up to launch a PSP (PlayStationPortable) phone (MW June 7) and already sells a Bravia mobile in Japan.

However, experts agree its priority should be the lower end of the market. In March, the company signed a licensing agreement with Sagem to develop entry-level handsets but it stresses that it wants to bring the “Sony Ericsson experience” to all the phones in its range. “We want to build on our brand collateral,” says the spokeswoman. “We don’t want to rush into the lower price points and create phones that aren’t true to the brand promise.

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