Cell Phones: Who's Calling The Shots?

These days, service providers. By meeting their needs, Asian manufacturers gain

Marcia R. Suelzer is typical of many cell-phone buyers these days. The suburban Chicago tax researcher doesn't much care who makes her phone. She says her recently purchased handset is "a little Verizon flip phone" -- a reference to Verizon Wireless, her service provider. The manufacturer, LG Electronics, doesn't enter her vocabulary. "The brand of the phone didn't matter," she says. "I just wanted a small and light phone with the broadest coverage."

Fact is, phone brands aren't what they were. Handset giants such as Nokia Corp. (NOK ) and Motorola Inc. (MOT ) once held all the power and influence -- and consumers sought them out. While their rule is far from over, the ground is shifting underneath them fast. Nokia's warning on Apr. 6 that its first-quarter phone sales lagged market growth and revenues likely fell more than 6%, is one more sign that the heavyweights are losing some of their edge.

These days, carriers reign supreme. For several years, the likes of Verizon, Sprint PCS (PCS ), and AT&T Wireless (AWE ) have been playing up their own brand names on cell phones while downplaying the names of manufacturers. Now, with the carriers offering high-margin services ranging from Web browsing to games to picture mail, they want to ensure that they have the right phones to do the job. As a result, carriers increasingly are calling the shots, weighing in on everything from a handset's look and functions to its price. "Equipment manufacturers are constantly beat down," says Richard S. Siber, who heads the wireless practice at consultant Accenture. "The operator's brand is going to continue to dominate."

Cellular carriers began flaunting their power in Asia, starting with Japan's NTT DoCoMo in the late 1990s. In that market, the maker's name often is reduced to a single letter or absent altogether, and carriers have a lot of say over how phones are customized. In Europe, users still seek out Nokia's phones, but even there carriers are gaining influence. And now that the color screens and data content that are so popular in Asia have hit the U.S., the likes of Verizon, AT&T Wireless, and Sprint are following DoCoMo 's lead.

Nokia and Motorola may not like it, but the shift in power is good news for consumers. It means more competitors can rise up to challenge the giant handset makers. Analysts say that with Nokia's first-quarter stumble, it has lost 2 percentage points of market share to the likes of Samsung Group, LG, and other smaller rivals. That translates into more choice for consumers as the upstarts gain shelf space. And with carriers wielding the big stick, phone features are being determined by companies who are close to users. Through their everyday exchanges with customers, carriers understand the designs people prefer and the features that excite them.

More than anyone else, the Asian manufacturers are bending to the demands of carriers. Samsung, LG, and Sanyo are all gaining market share because of their willingness to downplay their brands and customize phones to carrier specifications. In March, 2003, phones made by by traditional powers Nokia, Motorola, and Sony Ericsson Mobile Communications totaled 60% of sales at LetsTalk.com, a popular cellular Web site. A year later, that has fallen to 44%. Meanwhile, leading Asian manufacturers Samsung, LG, and NEC (NIPNY ) have grabbed 43% of sales, up from 11% in March, 2003.


Globally, the same pattern applies. Asian manufacturers' share of the worldwide market jumped from 25.4% in 2002 to 28.3% in 2003, while European makers' share fell from 52.6% to 51.4%, says reseracher Strategy Analytics. Motorola, meanwhile, has dropped from 16.9% to 14.5%, according to Gartner Inc. Such service providers as France's Orange and Vodafone Group PLC (VOD ), Europe's largest, aim to dilute Nokia's dominance and promote other brands. And while Nokia is trying harder to cooperate with carriers, "Asian manufacturers are more willing to swallow their pride," says Roger Entner, lead wireless-services analyst at researcher Yankee Group.

LG is a good example of that. To build its sales in the U.S., the Korean manufacturer aligned with cellular leader Verizon. LG stationed nearly 50 of its engineers in the U.S. for weeks to help tailor its phones to Verizon's requirements -- from the location of buttons to how picture mail operates. By contrast, Nokia only recently began accommodating certain design requests from Verizon.

The phone industry's No. 2 hasn't been much more nimble. In the late 1990s, Sprint asked Motorola to design a new phone. But John A. Garcia, Sprint PCS Group's senior vice-president for sales and distribution, says Motorola balked at demands that it position its logo according to Sprint's specifications. That let Sanyo Electric Co. and Samsung emerge as Sprint's preferred suppliers. "We buy the phones, we determine where the name goes," says Garcia. Motorola has since done a 180: It's expected to announce a new co-branded phone with keypad functions tailored to Sprint's dictates. Says Geoffrey Frost, Motorola's chief brand officer: "We've embraced making alliances with other brands."

Wise move. If top dogs such as Nokia and Motorola don't adapt to the new cellular hierarchy, they could lose the chance to win the hearts and minds of customers like Marcia Suelzer.

By Roger O. Crockett in Chicago, with Andy Reinhardt in Paris and Moon Ihlwan in Seoul

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