Revenues from mobile phone sales are expected to grow at 6.8% CAGR between 2007 and 2013, and should exceed US$200 billion by the end of 2013, according to Informa Telecoms & Media in its latest Future Mobile Handsets report. Emerging markets, including Brazil, Russia, India, and China (BRIC) and Africa, will make up the majority global handset market value, with 60% share in 2013. Growth disparities between developed and emerging markets will become apparent within the next five years.

Growth will not exceed 2% CAGR in developed markets according to the report, handset market value growth rates are slowing significantly in developed markets and, if the current economic slowdown persists, could even turn negative after 2009. Informa does not expect revenue growth from mobile phone sales to exceed 2% CAGR in Western Europe, 1% in North America, and less than 0.5% in Japan between 2010 and 2013. In these regions, the smartphone market will represent the major growth area. Revenues from this type of phone will represent more than 55% of total handset market value in North America, Western Europe, and Japan. However, this growth will only help offset the sharp decline of non-smartphone market value.

Handset market volume sales in these regions are reaching saturation, leading to increasing competition between handset OEMs. The price war will only intensify at a time when new entrants such as Apple and Google are increasing their pressure on competitors to reduce their prices mainly for feature phones and smartphones. "With the ongoing fall of feature phone and smartphone ASPs, several leading handset vendors are now looking for new ways of controlling handset manufacturing costs in order to maintain margins", said Malik Saadi, Principal Analyst at Informa Telecoms & Media and co-author of the report.

"With this in mind, vendors have already shifted the majority of production plants into low labour cost regions such as China, Taiwan, India, Vietnam and Eastern Europe and now they have to play the only remaining card: lowering the bill they pay for chipsets and terminal software", Saadi continued.

Device vendors have traditionally relied on customized chipsets for powering their products. Now that modem chips are becoming a commodity, and vendors are adopting off-the-shelf solutions, price competition is expected to increase significantly, requiring suppliers to generate significant economies of scale.

The mobile handsets industry is also turning its interest to open-source, a community based approach, which promises vendors a reduction in or the elimination of royalties related to terminal software and will also help them lower the cost of maintaining commoditised software because, under open source rules, this cost is shared among all members of the community rather than being borne by a single vendor.

With all these efforts OEMs will find it hard to maintain feature phone and smartphone margins in the future. This is due to growing competition in these market segments involving different types of vendors including incumbent OEMs, consumer electronics vendors, PC vendors, and internet content providers. "Looking forward, it is becoming clear that, in these regions, handset vendors can no longer rely on mobile phone sales to sustain growth. They will have to look at other opportunities, for example getting involved in content creation and service offering", said Saadi. This trend is already happening as a number of device vendors such as Nokia, Apple, and Sony-Ericsson are seeking to create end-to-end ecosystems linking their devices to services they offer. Not only this will enable them to differentiate themselves by offering enhanced user experience to their customers but will also create new revenue opportunities for them by either delivering their own services or partnering with mobile operators to deliver these services.

Healthy growth in emerging markets in emerging markets, the value generated by mobile phone sales will continue to grow aggressively throughout the forecast period; the CAGR for 2007-2013 in India and China will be 15.5% and 9.7%, respectively. The value of the Chinese market is set to reach USD 21 billion in 2013 - 10% market share - up from USD12 billion in 2007, while India's handset market value will grow from USD7.3 billion in 2007 to USD17.4 billion in 2013. The African market is also expected to grow massively from USD7.7 billion in 2007 to about USD13.6 billion in 2013.

In emerging markets, device vendors will have a vested interest to create additional distribution channels and will have to work closely with mobile operators to boost sales of devices as the growth prospects in these regions are still very high.

Smartphones versus non-smartphones

The growth in value of the mobile phone market will be driven by the smartphone segment, which will see double-digit annual growth until the final year of the forecast period. The annual value of non-smartphones will register almost at zero growth until 2011, partly due to the aggressive migration of subscribers in developed markets to smartphones with an adoption level exceeding 60% in 2011. After that year, the value of non smartphone sales will start to grow again but this time driven by the uptake of 3G and 3.5G services in emerging markets such as China and India.

In developed regions, including North America, Western Europe and Japan, growth in the value generated by smartphones will be sharp, making up for the decline of the non-smartphone market. In emerging markets, growth will continue to be driven by non-smartphones.

The value of the global smartphone market will grow from almost USD39 billion in 2007 to more than US$95 billion, 47% of the total handset market value in 2013. This impressive potential is encouraging device vendors to prepare strong strategies to tap into this lucrative market. A number of vendors are increasing their involvement in open mobile terminal software, which is a core foundation in the development of smartphone devices. Open source will play an essential role in bringing smartphones to the mass market. A number of mobile open source foundations have been created within the last two years; including the Symbian Foundation (SF), the Open Handset Alliance (OHA), and the Linux in Mobile foundation (LiMo). Virtually all OEMs and the leading operators are actively working within these organizations and preparing themselves to compete strongly in this market segment.

"This development clearly indicates the industry is entering a new era where product differentiation will increasingly shift from hardware to software. Vendors who have prepared themselves for this radical change will find themselves in a better position than those who continue to differentiate their products on the basis of hardware", said Saadi.

Other key findings from the report

1- Global handset sales volumes are expected to increase 8.8% in 2008 to reach 1.217 billion, continue growing in 2009 rising 6.6% to 1.298 billion and ending 2013 at sales of 1.552 billion.

2- Overall, the mobile handsets market will undergo some radical changes and will be controlled less and less by the top five vendors who currently hold an impressive 85% market share.

3- Smartphones will represent 47% of the value of the mobile handsets market in 2013 and this percentage could be as high as 60% in some developed regions.

4- Open source and single-chip will play a fundamental role in bringing smartphones to the mass market

5- In developed countries, growth in the value of mobile handset sales will drop to zero by 2010 and may decline shortly thereafter. The growth in the value of the smartphone market will only just make up for the sharp decline in non smartphone revenues. In these regions, vendors will have to create new opportunities if they want to maintain revenue growth. The creation of ecosystems bundling handsets sales and associated services (e.g. S60-Ovi, iPhone-iTunes, Android-Google) is a trend that will help vendors to sustain revenue growth.

6- In emerging markets, sales value in the handsets market will continue to grow significantly, boosted by increasing sales of feature phones in BRIC and Africa. Subscribers in these regions will enter first, second and third replacement phases, which means they will be increasingly migrated from basic phones to more attractive but slightly more expensive feature phones. A substantial contribution will also come for the ULC devices targeting new subscribers in emerging markets.

7- ASPs will stabilize at USD123-130 while average margins will continue to decline sharply. Vendors will need to control costs or face losing market share. This situation will push the market towards a period of strong consolidation within the next five years at every level of the value chain including chipset manufacturers and OEMs.