Here Come the Fun Phones

Snazzy features could revive the wireless Net in Europe

A year ago, Europe's phone companies were complaining. They had worked feverishly to cover the region with a high-speed wireless data system, known as Generation 2.5, and they didn't have nearly enough souped-up handsets to sell. Not to worry, said manufacturers. The handsets, along with a host of e-commerce services, would emerge during the year, and by Christmas, 2001, a shiny Gen 2.5 handset would be under every tree.

Dream on! The phonemakers are closing the books on the worst year in wireless history. A glut of handsets in 2000 led to the first-ever global decline for cell phones. Unit sales tumbled to an estimated 395 million in 2001, from 420 million units a year. With the exception of industry titan Nokia Corp. (NOK ), Europe's phonemakers and America's Motorola Inc. (MOT ) all gushed red ink. Christmas sales, according to Merrill Lynch & Co., were down 16% from a year ago. And these days, nobody's even talking about Gen 2.5 anymore.

In fact, they're barely talking about the mobile Internet. Now convinced that users are fed up with tech talk about platforms and protocols, the leading phonemakers--Nokia, Motorola, and Sony-Ericsson--have shifted to party mode. To put fun into the phones, they're stitching digital cameras and MP3 players onto handsets. They're equipping phones for gaming and gambling, and they're hurrying to add color screens. The key is simplicity. In Nokia's $450 camera phone, due out this spring, the user simply snaps a photo, selects a name from the address list, and hits send. The digital image, if all goes as planned, soon pops up on a friend's phone or computer. "People shouldn't have to read the manual," says Nokia Chairman Jorma Ollila.

It's not that Nokia and the others have given up their grander visions for the wireless Web. In fact, most of these new fun handsets run on the Gen 2.5 standard. But the phonemakers hope to lasso users with photos and instant chat to lead them into the broader world of the mobile Net. This is crucial if the phone companies' $300 billion investment in the Taj Mahal of mobile data, the so-called Third Generation, is going to succeed: Future 3G networks will deliver wireless text and video even faster than Gen 2.5. If phones gussied up as toys hook consumers on the wireless Web, they could deliver the boost the wireless industry is aching for.

For now, it's too early to tell. As the year begins, the fun phones are only niche items. But as the market shifts from new subscribers to replacement phones, manufacturers throughout the year will be relentlessly pushing the extras--color screens, stereo sound, cameras--into the economy models in Europe, Asia, and the U.S. This is the pattern Japan's handset industry, the most advanced on earth, has been following. Because of Japan's unique cellular standards, its handset makers have not yet been able to export Japanese trends. But if the fun phones hawked by Nokia, Ericsson (ERICY ), Siemens (SI ), and others take off in Europe, the world's richest mobile market, the trend should quickly circle the globe. Boston-based researcher The Yankee Group predicts these new features will help fuel global growth of 10% this year, to 435 million units.

Dangers? Anyone who witnessed the debacle of the European phone industry's first Net push is bound to be skeptical that a new wireless fad can take off. Two years ago, in launching the so-called wireless access protocol, or WAP, which worked on the predecessor to Gen 2.5, the phone companies hyped slow and near useless services, scaring customers and investors alike from the mobile Net.

Still, the Europeans claim to have learned valuable lessons from the WAP failure. Their mantra now is to sell applications, not technology. And the sexiest app by far is text messaging. Although the capability to send 160-character messages has been around for nearly a decade, Europeans now tap out a mind-blowing 860 million messages a day, says British researcher Mobile Streams. At an average 9 cents a pop, this blizzard of text accounts for 10% of Europe's mobile revenue.

The goal now is to expand that market to photos. With camera phones, users will be equipped to dispatch instant postcards--photos accompanied by text. These could be vacation snaps of the Eiffel Tower, steamy portraits to a lover, even an insurance estimator's on-site photos of a car crash. But there's a catch. The photos will transmit only to computers and to phones equipped with a picture screen, a tiny minority in today's marketplace. Here's where the phonemakers are looking for help from operators. If photo messaging looks like a big business, the phone companies--all eager to drive up data revenue--are likely to subsidize the camera-phones. "If it makes economic sense, it will get subsidized," says an official at Vodafone Group PLC (VOD ).

Another extension of text messaging is mobile instant chat. Operators, including British Telecommunications' mobile unit, mmO2, are busy testing applications that would permit groups of users to carry on chats seamlessly from computers to phones. And phonemakers are rushing out chat phones, such as Motorola Inc.'s V-box, that come with complete keyboards--not just traditional phonepads that clumsily double as keyboards.

This all raises the question of when the Asians will pile into the Western market for fun phones. Versions of many such products, after all, are up and running in Japan's market. And Japanese manufacturers such as NEC (NIPNY ) and Matsushita (MC ), along with Korea's Samsung, are busy testing advanced handsets and networks in Europe. But the big Asian push is not likely until Europe switches to 3G, in 2003. Meantime, "unless there's a boom, Japanese phone makers won't be very interested in Europe," says Kate Lye, telecom analyst at UBS Warburg in Tokyo.

Perhaps the best-positioned Japanese player in Europe is Sony Corp. (SNE ), which last year went into a handset joint venture with Sweden's Ericsson. The new London-based company is preparing a full line of fun phones, likely to range from game machines that download Java applications to chat machines. Sony-Ericsson also is gearing up to challenge Nokia with camera phones. "Imaging puts a face on the mobile Internet," says Sony-Ericsson marketing director Jan Wareby.

Microsoft appears to be bucking the fun phone trend. It's teaming up with hardware partners, from Germany's Siemens to Britain's Sendo, to roll out far more complex smart phones for Gen 2.5. The handhelds will offer nearly everything, from music players and gameboards to personal digital assistants--not to mention a phone. With their links to the desktop, the Microsoft devices are likely to start out in the business market--far from the light-hearted handsets aimed at consumers. But if fun phones find a market and the mobile Net finally takes root, everyone will be piling in.

By Stephen Baker, with Andy Reinhardt in Paris and Irene M. Kunii in Tokyo

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