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The Wireless
Air War Rages On
by Andrew Leckey
An
all-out war is being waged worldwide.
In households around
the globe, the archrivals in the spirited battle for domination
of wireless telecommunications have become familiar names.
On the road, the ever-expanding
army of motorists who use their popular cellular phones have
sparked controversy because of a tendency to emphasize conversation
over driving.
In the world of stocks,
these ultramodern firms are firmly in the sights of the investment
community and average investors. Expectations are often ridiculously
high, prompting immediate price declines in their stock on any
indication of slowing results.
Finland's Nokia Corp.,
America's Motorola and Sweden's L.M. Ericsson Telephone are the
combatants in this confrontation over market share that should
only escalate in the 21st Century. Nokia and Ericsson are available
here for investors as American Depositary Receipts, while Motorola
is a famous indigenous name.
When Nokia recently
announced its third-quarter results wouldn't match is previous
remarkable results due to the cost of new product introductions,
its stock was hammered, with Motorola and Ericsson shares also
pulled down. All three are on the cutting edge of a world rapidly
undergoing changes in the way it communicates.
In cell phone handsets,
Nokia currently holds 28 percent of the worldwide market, Motorola
16 percent and Ericsson 12 percent. Industrywide sales were up
65 percent last year. It's estimated there will be a billion
users by 2002, when the cell phone may overtake the personal
computer as the primary way of connecting to the Internet.
As a "hip"
consumer-oriented company with a dominant brand name, Nokia leads
in introducing new types of handsets, creating new market segments
and turning out products on time. It exits any business in which
it can't increase revenue by at least 25 percent annually.
Continuing its pace
will require moving very fast, executing well, continuing to
meet product deadlines and keeping solid profitability in the
headsets it produces. Three-quarters of its business comes from
handset sales, and the remainder is derived from telecommunications
systems, where it must battle established giants such as Cisco
Systems and Nortel Networks.
Nokia investors had
gotten spoiled. Before the recent stock price decline, they'd
enjoyed an annual return of nearly 80 percent over the past five
years.
"Nokia was early
to recognize that the phone buying decision was increasingly
in the hands of consumers, rather than the phone carriers,"
said Mark Roberts, analyst with First Union Securities in San
Francisco, who says today's consumers spend 80 percent of their
purchase time picking a phone and only 20 percent selecting a
calling plan. "It also realized that handsets were a fundamental
productivity and lifestyle management tool, so it targeted different
market segments with phones customized to their needs."
However, the company's most recent quarterly earnings report was much more positive and management is confident that it's on course to improve its profitability. It is an impressive telecommunications conglomerate. Besides cell phones, its chip-making, digital set-top boxes and cable modem businesses are all growing 25 to 30 percent annually. Even investment analysts not convinced of its turnaround story acknowledge that Motorola's depressed stock price makes it worth considering.
"We believe Motorola has the scope to turn the business round, make it profitable and benefit from its strong market positions in handsets, infrastructure, broadband equipment and set-top boxes," said Adrian Brass, co-portfolio manager of the London-based Guinness Flight Wireless World Fund, the first fund devoted to wireless-related investments. "For example, its recently reported 4 percent profit margin in handsets, an improvement over the recent past, is moving toward its stated goal of 10 percent profitability for that business."
Ericsson, left completely in Nokia's dust a year and a half ago, has worked hard to try to accomplish a turnaround. Despite its reputation for corporate bureaucracy, earnings gains helped its stock price triple over the past year.
Besides handsets, the company manufactures telecommunications equipment used in wired, wireless, analog and digital communications networks, making it well-positioned for any prevailing global cellular standard. Demand for Ericsson's wireless infrastructure equipment has been dramatic, as wireless operators around the globe upgrade their networks.
Ericsson has also gained attention with a phone that can digitally transfer data over the Internet and a deal with Microsoft aimed at introduction of a voice-mail service.
"Ericsson is more of an infrastructure player, with about half its business in a very strong mobile infrastructure division and a quarter in handsets," explained Mark McKechnie, analyst with Banc of America Securities in San Francisco. "While Ericsson will face considerable demand over the next several years, near-term growth will be tempered by tightness in components used in infrastructure and an uncompetitive handset line."
Experts interviewed for this column recommend all of these tough competitors, the newly reasonable Nokia shares having an edge, followed by bargain-priced Motorola and the revived Ericsson. Yet, they're competing in a business where you're only as good as your latest earnings, line of cell phones or innovations in communications networks. The air war rages on.
