The Cellular World Turns Ugly As Ericsson (ERIC) Cuts (AAPL)(NOK)(RIMM)(T)(S)(ALU)

January 21, 2009 by Douglas A. McIntyre

Blue_hillsThe business of selling handsets and cellular service was supposed to be close to "recession proof". A number of citizens in place like China and India still do not have wireless phones. The build-out of 3G systems in those nations was supposed to drive handset sales.

In the developed world, most people upgrade a phone every year to two. New multimedia phones are better than the old handsets that just handle voice calls. A new Blackberry (RIMM) or Apple (AAPL) iPhone is a more useful product than a Nokia (NOK) made in 2006.

People now fell poor and are feeling poorer as the recession bites harder. Someone who won’t buy gas probably won’t buy a new phone. The handset is becoming like the family car. Consumers can get an extra 20,000 or 30,000 miles out of their five-year-old Chevy. Their old handsets still work. Who can afford a $300 cellphone with a new and more expensive calling plan?

There are already indications that the cellular phone industry is struggling all over the world. Nokia, which has close to 40% of the global market, said 2009 would be rough. Motorola (MOT) only sold half as many phone in the fourth quarter of 2008 as in the same period a year earlier.

Now, the firms that build the infrastructure to carry wireless voice and data are weighing in with bad results. That may have a broader implication than falling handset sales. Building a wireless network can take years. If companies such as Ericsson (ERIC), Alcatel Lucent (ALU), and Nortel are seeing a drop-off in demand,  AT&T (T) and Sprint (S) must be preparing for several lean years. The carriers are not willing to invest in the future, which means that they must believe the next two or three years will not be much better than 2009.

According to Bloomberg, "Ericsson AB, the world’s largest maker of wireless phone networks, plans to deepen cost reductions and eliminate about 5,000 more jobs in anticipation of spending cuts by telecommunications companies this year."

One of the world’s great growth industries is not growing any more.

Douglas A. McIntyre