Sony Ericsson: "In Big Bloody Trouble"?

Alexandre Rito, a salesman at the FNAC electronics store on Paris' Champs-Elysées, can't hide his excitement over the new phones from Sony Ericsson Mobile Communications. Snazzy products from the year-old joint venture between Japan's Sony Corp. and Sweden's Ericsson have polished the image of Ericsson's handsets. Indeed, FNAC's best-seller is the Sony Ericsson t68i, whose color screen, sleek design, and optional digital camera add-on pull in droves of buyers. "Customers are really happy with it," Rito says.

If only Sony Ericsson could bottle that buzz and sell it. Problem is, despite enthusiasm for the venture's products and potential, it's not yet producing results. Global market share has been stuck at around 5% for the past nine months, half what the two companies separately tallied in 2001. In the highly fragmented mobile-phone market, that still ranks it at No. 5, but way behind Nokia's (NOK ) 36% share and Motorola's (MOT ) 16%. Worse, it's still losing money--$100 million last quarter--which could force its corporate parents to kick in more funding early next year.

Sony Ericsson's management professes not to be worried. "I'm very happy with our progress," says Executive Vice-President Jan Wäreby, a former Ericsson manager who runs the company's headquarters in London with CEO Katsumi Ihara, a Sony transplant. Analysts aren't as sanguine. Richard Windsor of Nomura Securities Co. figures the venture won't turn a profit unless it doubles its market share, which he deems unlikely given fierce competition. "They're in big, bloody trouble," he says.

It wasn't supposed to work out this way. When Sony Ericsson began, it got rave reviews from experts. "Sony will help Ericsson come back big-time," predicted IDC Europe mobile analyst Rosie Secchi at the time. After all, the deal combined Ericsson's tech prowess and strong links to wireless operators with Sony's talents in consumer electronics and marketing. Each also figured to help the other grow in regions where they weren't as strong--Europe for Sony (SNE ) and Japan for Ericsson (ERICY ). The sweetener: Sony's media holdings in film, games, and music would provide a source of snazzy content to drive sales of next-generation wireless services.

It sounded great on paper. But soon after the venture kicked off, reality set in. Unifying two product lines and different engineering cultures took longer than expected. Execution problems caused delays in new phones, and most of the lineup for the first year consisted of high-end models. With few products in the discount segment, Sony Ericsson enjoyed higher-than-average selling prices but lost market share to Siemens Mobile and Alcatel. "They're having a horrible 2002," says Gartner Dataquest mobile analyst Ben Wood.

Only two months ago, yet another blow fell. That's when The Wall Street Journal quoted Ericsson CEO Kurt Hellström saying he might cut off the joint venture's future funding unless it kicked into gear within two quarters. Sony Ericsson employees felt shafted, and investors got suspicious of Ericsson's commitment. Indeed, having to pour up to $500 million more into the venture next year could chop a hole in Ericsson's balance sheet.

Now Sony Ericsson is fighting back. On the heels of its t68i, the company has delivered another high-end color phone and two low-end models. The competition isn't sleeping, though. Nokia, for one, is flooding the market with new models. And on Oct. 22, No. 2 European wireless carrier Orange PLC rolled out a private-label phone made by Taiwan's High Tech Computer Corp. that's the first to use Microsoft Corp.'s Smartphone software.

Such operator-branded phones could undermine Sony Ericsson's margins and marketing--and amplify the threat posed by Microsoft's entry into the mobile software business. Gartner's Wood thinks Sony Ericsson will eventually gain ground, thanks in part to Sony's media magic. Question is, can it make money soon enough to satisfy its impatient parents?

By Andy Reinhardt in London, with Karim Djemi in Paris

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