Sony Ericsson and low profit expectations in 2008

On March 19, 2008, Sony Ericsson warned of a sharp decline in profit expectations. The No.4 player in the cell phone industry cut its current-quarter profit forecast ($276 million) to less than half the year-ago level ($571 million). Reasons given were a slowdown in consumer spending on its mid-priced and high-end phones. The growth in the mobile phone industry is expected to be at 15% in 2008, about half when compared to a high of 31% in 2004. Sony Ericsson expects to ship about 22 million phones in the first quarter. It shipped 30 million units in the fourth quarter and 21.8 million in the first quarter of 2007.

Sony Ericsson’s announcement was expected when Texas Instruments cited fewer mobile phone chip orders for its lower guidance. Its key customer Nokia possibly has a inventory pileup. Sony Ericsson also said that certain component shortages for popular midprice phones had also contributed to modest unit-sales growth in the first quarter.

A low profit expectation is common in the first quarter – the slowest time of year for phone sales after the Christmas shopping season. However, the concern is the magnitude of Sony Ericsson’s shortfall. The same can be expected from Nokia and Motorola might even lose its third place position as a mobile phone maker.

The Sony Ericsson joint venture

In 2001, Sony Ericsson was formed as a joint venture between Telefonaktiebolaget LM Ericsson of Sweden, and Sony Corporation of Japan. Both partners had 50% ownership in the company.

Ericsson was established in 1876 and was a major player in the telecommunications equipment and related services to mobile and fixed network operators worldwide with presence in 140 countries. Sony on the other hand was established by Masaru Ibuka and Akio Morita in 1946 in Japan. At the time Sony was the world’s second largest consumer electronics company and famous for its innovative products like the Walkman, Playstation, and Aibo, the robot dog.

In the last quarter of 2000 and the first quarter of 2001, Ericsson made a loss of US$ 1 billion and US$ 558 million respectively. Shareholders of Ericsson wanted a sell-off. Sony was also making losses in its mobile phone business. Ericsson’s board decided to form a joint venture with Sony instead of exiting the business. In 2001, this decision was rated as the fifth best management decision by Sunday Business.

Walkman phones are no longer popular?

In February 2005, at the 3GSM World Congress in France, Sony Ericsson had announced its mobile music strategy. It looked to integrate of high quality digital music players into stylish mobile phones under Sony’s world famous Walkman brand. The strategy was to target a specific product portfolio and not look at providing various types of mobile phones across various price points.

In the third quarter of 2005, the Walkman phones were launched. The impact was visible in the subsequent quarter itself in terms of increased volumes, sales, and net income for the company. Similar to its success with its camera phones in 2004, Sony Ericsson reported a 36.4 per cent increase over its third quarter figures and 47.1 per cent higher than the figures for the same period in 2004. It even revived Sony’s Walkman music player which had lost market share drastically after the launch of iPod by Apple in 2001.

However, mobile phone users are known to be quite finicky and generally choose the most popular or the next cool mobile phone in the market. Earlier, users replaced handsets every three years, but with the economy slowing down this is no longer the trend. And with the popularity of Apple’s iPhone growing, Sony Ericsson may have reached the end of its good run with the popular Walkman phones. The general higher price of its phones than its rivals’ devices does not help either.

Be Number 1 or Number 2. “When you’re number four or five in a market, when number one sneezes, you get pneumonia. When you’re number one, you control your destiny.“ – Jack Welch

“Sony Ericsson will continue to try to reduce its dependence for growth on the European high-end sector and develop its presence in new markets. This strategy will continue, and our objective remains to become a top-three player globally by 2011” – Sony Ericsson President Dick Komiyama

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