Sony Ericsson Maxes the Mix

The Walkman and Cyber-shot sub-brands are leading the joint mobile company close to its goal of being one of the top three in five years

Only a few years ago it would have sounded very nearly crazy. But when Sony Ericsson Mobile Communications President Miles Flint told the press last October that his company would be among the top three mobile phone makers within five years, it seems he wasn't just blowing smoke.

Sony Ericsson's recently released fourth-quarter results confirm that in the last two and a half years, the joint venture between Japan's Sony (SNE) and Sweden's Ericsson (ERIC) has transformed itself into the rising star of the mobile industry. Boosted by sales of its Walkman and Cyber-shot phones last year, the London-based company posted record quarterly revenues of €3.78 billion ($4.9 billion), up 64%, and more than tripled its quarterly net income to €447 million ($581 million).

For the year, revenues hit nearly €11 billion ($14.25 billion), up 51%. Perhaps best of all, Sony Ericsson managed by yearend to increase its market share by two percentage points to 9%, according to company estimates. That put it right on the heels of the No. 3 global mobile phone manufacturer, Samsung.

Over 50 Models

All this for the company that in 2003 was hemorrhaging money, hampered by a limited product portfolio and dogged by a reputation for late delivery. Since 2005, however, Sony Ericsson has vastly expanded its offerings to include over 50 models. It skillfully transferred the appeal of the Walkman and Cyber-shot sub-brands into the mobile phone world. And it reformed its production process to create a faster and more flexible supply chain.

When sales of Walkman phones soared in 2006, it was relatively easy for Sony Ericsson to ramp up production to meet the increased demand, something it had struggled to do in the past. "One question I often got from vendors was, 'You've got a fantastic portfolio, but can you really deliver?'" says Flint. "In 2006 we proved we really could."

Sony Ericsson can't afford to coast yet. To grow volume, it must focus more on fast-growing, but fiercely competitive, emerging markets such as China and India. And it will face rivals both old and new—including Apple (AAPL), with its much-hyped iPhone—who hope to bump the Walkman off its perch as the premiere mobile music phone brand (see BusinessWeek.com, 1/22/07, "Turning Cell Phones On Their Ear").

"Exceeded Everyone's Expectations"

For now, analysts say Sony Ericsson is in a sweet spot, with a judicious product mix—ranging from handsets of modest cost to $800 smartphones—plus powerful brands and a happy marriage of mobile technology and attractive product design. Even industry experts admit they are surprised.

"It was always well known that Sony would bring marketing and branding to the table and Ericsson would bring cellular experience," says Neil Mawston, senior analyst with market researcher Strategy Analytics, near London. "But the success with which the two have mashed together has exceeded everyone's expectations."

In the end, a large part of Sony Ericsson's success in the last two years can be summed up in a single word: Walkman. Just like Motorola (MOT) did with the ultra-thin Razr phone in late 2004, Sony Ericsson codified a new mobile sub-genre in August, 2005, by launching its first Walkman phone, the W800i. Though not the first handset to offer an integrated MP3 music player, the W800i was the first phone to put music playing at the heart of the product; Sony Ericsson even packaged each handset with a pair of earphones to convince consumers it was sincere.

Ripe for Imitation

The massive sales that followed have proved that the nearly 30-year-old Walkman brand still has plenty of life.

In 2006, the first full year on the market, Sony Ericsson sold 60 million music mobile phones, including 17 million Walkman-branded devices. By comparison, Apple sold 39 million iPods during the same period. Flint pointed to these figures at this year's MIDEM music industry conference as proof that the market for music mobile phones is vastly bigger than that for dedicated MP3 players.

That also means, of course, it won't be long before competitors catch on and challenge Sony Ericsson for a bigger chunk of the sector. "This industry is getting extremely cyclical," says Mawston, who reports competitors are faster than ever in mimicking successful ideas. "With its emphasis on cool products and cool branding, [Sony Ericsson is] likely to be copied by Apple."

To keep its lead in music phones, Sony Ericsson is belatedly going down-market with less expensive models. Last year, it released the W300i, the first low-end Walkman phone, and will follow up this year with the W200i, a sub-€100 Walkman phone. That will help pick up sales in emerging markets like China, India, and Pakistan.

At the same time, the company's longstanding emphasis on high-end phones—bolstered by its unrivalled position in the high-priced Japanese market—keeps the overall portfolio profitable. By comparison, Motorola and Nokia (NOK) have been bloodied in a race for volume and sales of low-end models in India and China, pushing margins down (see BusinessWeek.com, 1/19/07, "Shifting Gears at Motorola").

Keep Your Prices Up

By staying above the fray, Sony Ericsson has maintained an average selling price (ASP) of $188, one of the highest in the industry, compared with Motorola's $121. (Nokia has yet to announce its results for 2006, but analysts predict its fourth-quarter average selling price could be $113 (see BusinessWeek.com, 1/5/07, "Crunch Time for Nokia")).

"What's been most impressive, beyond [Sony Ericsson's] steady unit growth, has been how they've maintained the ASP," says Andrew Brown, program manager for mobile computing research at IDC in London. "They've managed the product mix extremely well, keeping things slanted toward the high end, which is terrific."

For all its success, Sony Ericsson is still somewhat of a niche player. Its annual volume of just under 75 million units is roughly a third of Motorola's, and less than one-quarter of Nokia's. But Flint sees plenty of opportunity for growth.

"Sony Ericsson respects all of its competitors, but we fear none of them," says the British-born chief executive. "Five years ago, we were a company that was almost written off before we started, and now we're a major player in this industry." If things keep going as well as they have recently, it may not be long before Flint's bold October prediction comes true.