Game over for Ericsson?

Sony Ericsson’s latest Wii-style handset was launched to a mixed reception last week. While some analysts see the F305 model as innovation in the mobile market, others see such headline-grabbing launches as a façade for struggling sales.

Meanwhile, speculation is rife that Sony is, once again, poised to make its own handsets. Whether this would lead to Sony splitting from its seven-year union with Swedish-based Ericsson, or in addition to, is unknown.

Sony Ericsson has struggled in recent months, although head of global marketing James Marshall remains upbeat. In April, Sony Ericsson posted a 47% drop in first quarter profits to £105m, slipping to fifth place in global market share behind Nokia, Samsung, Motorola and LG, as demand slowed for its more expensive camera and music handsets. Marshall said last week that the company would still keep its 10% growth forecast for the global handset market this year.

Nokia, which owns the mass market in reliable and easy-to-use handsets, dwarfs Sony Ericsson in terms of users. Apple and LG create “objects of desire” for high-end consumers, but Sony Ericsson falls “somewhere in between”, according to sources.

music handsets
A source asks: “Under what circumstances could you see a consumer hankering after a Sony Ericsson product?” He adds that the brand has been “appallingly managed” over the past few years, saying that without the Walkman moniker on its music handsets, Sony Ericsson would be “in serious trouble”.

Sony Ericsson also uses Sony’s Cyber-Shot branding for its phones and – in Japan – a Bravia model levering Sony’s high-end high definition TV range.
Ovum senior analyst Steven Hartley argues: “If you look at where Ericsson [pre-Sony] was, it has come a long way. In terms of devices, it is pretty well-received.” However, he points out: “It didn’t have a fun last quarter so it’s moving into the mainstream handset market.”

Some analysts link the launch of Sony Ericsson’s F305 gaming model with the rumours that Sony might try and go it alone. Strategy Analytics director Neil Mawston says: “It is strange that Sony has kept the PlayStation branding when it had previously given Ericsson the Walkman branding.”

The F305, which uses similar motion sensor technology to Nintendo’s Wii console, falls far short of Sony’s PlayStation Portable (PSP) console, which is aimed squarely at the lower end of the gaming spectrum.

Observers also point to the lack of PlayStation branding on the device. Mawston adds: “It makes you wonder whether [Sony] is keeping all the sub-brands to itself. If that did happen it would make relations pretty frosty between them.”

Industry insiders point to the fact that the relationship between Sony and Ericsson is already strained. One source says: “Did Sony make a strategic error in giving the Walkman phone to Sony Ericsson? It learned from the Walkman – don’t give your crown jewels away.”

And a PSP phone is not far off, according to sources in Asia. Some even predict that the handset will be available to consumers from Christmas 2009. If this is the case, Sony Ericsson will have a very restricted games platform. Yet without Ericsson, Sony may struggle to enter a global market dominated by multiple and fickle networks.

Some compare Sony Ericsson’s situation with that faced by rival Motorola, which failed to capitalise on the success of its Razr model. One insider says: “The Razr was a disposable piece of design that Motorola didn’t follow up. It was the beginning of the demise for them.” With Sony Ericsson, the source adds: “The market perception is that they are losing their way.”

Yet Ovum’s Hartley says the fact Sony Ericsson has focused on gaming is “very interesting”. Mawston uses Nokia as an example of a manufacturer that was one step ahead with the “modest success” of its N-Gage gaming model, which aimed to lure gamers away from consoles such as Game Boy Advance by including mobile phone functionality.

But the phones, which launched in 2003, failed to become the mainstream success that the manufacturer had hoped and by 2005 Nokia announced it would move its N-Gage games capabilities onto a series of smartphones. Now, N-Gage software sits alongside Nokia’s music and mapping software.

Nokia UK marketing director Will Harris says: “The strength of the N-Gage is that it works across different platforms.” Harris believes gaming is likely to overtake music as an industry this year and as a result Nokia intends to target both hardcore gamers and casual players.

But the industry is doubtful, saying the mobile gaming market will need to evolve immensely to take on such “hardcore gamers” – those who regularly use a games console or PC. Hartley says that although Sony Ericsson’s new device will attract “casual gamers”, the hardcore gamers will want a device with the kind of hardware that a PC or console has.

Tuong Nguyen, principal analyst at Gartner in the US, agrees that the gaming industry has a lot of growth potential, but he sees it as a newer market in terms of adoption. And Nguyen doubts that gaming models will be received as enthusiastically as music devices.

“It’s still a phone first. Like a lot of devices, this will appeal to people who are more after the novelty. A lot of people have a music player – it cuts down one device. When you are talking device convergence the music player is as good, you don’t want to see a compromise in quality.”

Nguyen sees the F305 phone as more of a “marketing ploy” to differentiate the brand. He also agrees that Sony’s decision not to put its gaming brand on the new model is likely to be a conscious effort.

With Sony Ericsson only the fifth biggest handset manufacturer and facing increased competition from the niche luxury players, Sony faces a conundrum. Does it continue with its Ericsson tie-up, or go it alone, creating a brand without the mass appeal of Nokia – or even Sony Ericsson – but one where it can leverage its existing entertainment properties and sub-brands over which it has full control?

Both Sony and Ericsson face a period of rethinking about where they can realistically be positioned in the market.