IDC was never backwards about coming forwards. It’s not the US research company that gets it right the most often, but perhaps it is the US research company which makes most money out of prediction. Now it has pulled a number out of the hat for handset shipments for the year ahead, down 8.3%.
But like all fairytales you shouldn’t be afraid of the Ogre, he’s never as bad as you think.
In the 25 years or so that we have followed IDC predictions one thing has always been true, the IDC prediction always sound reasonable, almost as if after they have built their model, IDC analysts ask an audience of their peers if the prediction ‘sounds about right’ and make last minute adjustments.
And true to form this one is a ‘straight line’ prediction. We remember the 2001 PC figures when IDC predicted up 10%, a straight line from what had gone before, but the market fell by 10% instead. It was not a popular forecaster at that time, and some people have never forgiven it for ignoring the general economy.
IDC once again failed to predict the downturn in handsets (it had a straight lie going up), so it is revising its predictions to be like the result it has just seen, disastrous, and the tone of this prediction is nothing if not hugely pessimistic. Remember, we are talking about handsets, a market which still has a few billion handsets of growth left in it until everyone agrees it is saturated, and we are predicting for the year AFTER a period which had the worst quarter in living memory for handsets, in percentage terms. So while 2008 might have been up 4.3%, at the mid point of the third quarter, when economic news overpowered the market, everyone thought it would be up 10% or more.
Consensus has it that what happened was a fall of 11% to 12% for the last quarter of 2008 so if this new predicted fall of 8.3% was evenly spaced across the whole year, then that would mean that the fourth quarter of 2009 would need to be down around 20% on the end of 2007 to make the prediction right. We’re not sure we can buy that, and anyway IDC never said that the market would be flat in demand over all of 2009, quite clearly the worst quarter should be the one we are in, and the last quarter of 2009 the best. But even so this ignores a lot of themes we have commented on recently.
Texas Instruments last week talked about being pleasantly surprised by chip orders for handsets, Motorola has even said a few good things about the market and Chinese handset makers have revised their forecasts up, instead of down, due to up demand in China, for instance HTC said last week that it believes its sales bottomed out in February. Remember that China is building brand new 3G networks and it will have no phones for them. It has also introduced stimulus discounts for consumer electronic purchases. But IDC’s own forecasts reckons that the BRIC countries will be roughly flat ‘ Brazil and Russia down and India and China up. We have to remember that Brazil has just 190 million people with 100 million handset users. Russia has just 141 million people and around 140 million handset owners, so 240 million between them, with penetration rates of around 63% and close on 100%. In India and China the numbers are so much higher, around 300 million mobile users in India, only 27% penetrated there, while China stands closer to 700 million, closing in on 50% saturation. In other words the two bigger markets are the ones with the higher replacement numbers for existing devices and yet also the highest possibilities for new subscribers. Sure there is a recession on but these people which Chinese and Indian operators are reaching out to now have ALWAYS been poor. Despite all this IDC is going for a growth rate across BRIC of just 0.3%.
While we find that pessimistic, we also find another idea fairly outrageous, that in markets like the mature regions of Japan, the US and Western Europe shipments will decline from down 12.4% to down 24.6% throughout 2009. If this was true, handset makers stronger in Japan and Europe than elsewhere, like Sony Ericsson would be in much worse trouble, and yet once again they have been issuing encouraging statements. Sony Ericsson said it is looking for some signs of recovery by mid-year, and expects to return to profit during the second half of 2009 and that the market will shrink by 5% in unit terms this year.
IDC says that in these markets, operators are struggling to find the right mix of marketing and device subsidy to entice consumers to spend while finances are tight. Given that most European markets are 50% post paid as well as 100% saturated, contracts will come up for grabs evenly throughout the next few years, and while operators may come up with incentive plans to get consumers to stick with their existing phone, such moves risk starving customers of new facilities and making them churn,
In a market like the US where mobile internet usage is going up at 100% a year (see separate piece) it does operators no good to artificially deny customers new handsets which they need to use more data services. Yes it will happen a little bit, but can you see AT&T trying to put off people from upgrading to an iPhone, because they don’t want to shell out more money to Apple. It would be suicidal, and the same for Vodafone on the Blackberry Storm or its new Android phone and the same for other majors on the new breed of touch phones. And if contract customers continue to get a new handset every 18 months or so, then pre paid must account for most of the falls, and handset sales must be falling by something close to double those IDC rates, as high as 49% among pre-paid buyers, at least in some countries.
We understand and agree that major operators have a chance to slow down the uptake rate of new phones on contract customers. They don’t have to call them up and remind them that their contract is up and offer them a nice new phone in order to get them to sign a new one, they can wait until the customer remembers. But that customer may just quietly respond to another offer in the market place and churn away. Operators can force everyone to sign longer contracts, which gives the appearance of making the handsets cost less, by spreading them over 24 months. Yes, but this will not have an effect during 2009 or 2010. There are other tricks that the operator can try ‘ half your voice rate if you keep your old phone ‘ just buy a SIM and go on eBay to get a cheap phone ‘ but that once again really creates churn risk.
Operators, who are all doing well in the countries which IDC thinks are moribund, AT&T, Verizon, Vodafone, Orange, Telefonica ‘ all up in either revenues or margins or both, cannot blithely divorce their fates too much from handset makers, or they will reap what they sow.
We do not have the privileged access that IDC analysts might have to leading operators and handset vendors, but we cannot see this prediction coming true in Western Europe or the US. In Japan where there are no subsidies and this is all consumer led, maybe.
There is some discussion by IDC about how in the fourth quarter operators and retailers never ordered any phones because they were emptying inventory in the sales channel. But now it’s empty they can choose to not fill it or run it at a lower level, but they cannot empty it once again, because it’s already empty. So orders have to go up or stay still.
IDC sort of admits this and says ‘that as consumer spending has dropped, handset manufacturers and mobile operators have reduced supply on hand, which has left chip vendors with increased inventory. Inventory management has had a dramatic impact on shipments, but consumer demand is not falling as fast. Large chip vendors have been working to restructure inventory levels over the past couple of months to deal with the expected downward year and should see some stabilization once inventories are reduced.’
“Expectations for 2009 were negative going into the fourth quarter of 2008. However, worse-than-expected results and a steady flow of negative economic news are indicating that 2009 will be gloomier than predicted,” said Ryan Reith, senior research analyst with IDC’s Worldwide Mobile Phone Tracker. “Concern is understandable during this time, but note that the mobile phone market still has plenty of room to grow on a global scale and we expect recovery will begin in the first half of 2010.” That’s a full year further out than handset makers are saying, so it’s pretty negative stuff.
IDC then goes on to distinguish between converged devices ‘ those which offer the internet in some form ‘ and normal handsets, saying converged devices (Smartphones) will still be up for the year by 3.4%, a change from its previous prediction of 8.7% up, despite the fact that Smartphones cost more.
The notion that this segment will remain in positive growth while the industry experiences an 8.3% downturn speaks volumes about the potential upside for these devices when the market turns.