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Sony Ericsson, the world’s fourth largest handset maker, came out with results for its third quarter .On the surface, they looked fairly good. Revenue rose 7% to $4.4 billion. But, net revenue fell slightly to $378 million.

Total handset sales were almost 26 million, up 31%. Since competitor Motorola (MOT) has been experiencing declining handset sales, the numbers for units were impressive.

But, the bad news is that average handset prices were 120 euros "down from 125 euros in the second quarter and from 147 a year earlier," according to Reuters.

A close look at the Sony Ericsson numbers and industry trends shows that handset companies face a very difficult problem. Sales in markets like Europe and the US, where people will pay for high-end phones, are relatively flat. Sales in fast-growing markets like India and China are growing. But, the phones sold in those markets usually have to be cheap. That is all the markets will bear.

While handset sales across the world may increase, margins at the companies that make them are about to come under tremendous pressure. Nokia (NOK) is adding software and content download services to help offset this. But, that may not be enough. And, a weakened Motorola (MOT) may just have to weather the storm.

Motorola’s problem is that the storm may not end. Securities analysts better revisit those forecasts

Douglas A. McIntyre