Cell Phone Makers Add Features and Up the Ante in a High-Risk/High Return Market for Investors

By Mike Caggeso
Associate Editor

On April 3, 1973, Motorola, Inc. (MOT) engineer Martin Cooper - considered the father of the mobile phone - made the first cellular phone call. It wasn't to his wife, mother or children, but to rival Joel Engel, head of research at AT&T Bell Labs.

"He tried to pretend it was nothing significant. But if you think I was trying to needle him, you're right," Cooper told ZD Net, a tech-focused business news site.

To say the cell-phone market - and the rivalry between manufacturers - is red-hot would be a major understatement.

First, consider that what used to be a standard cell phone has morphed into a veritable toolbox of technologies that boost efficiency and provide entertainment: clock, planner, calendar, calculator, map, phone book, PC, Internet-navigator, voice-mail system, e-mailbox, digital camera, gaming console, news portal, voice recorder and stereo - to list just some of its capabilities.

And as the wireless phone's keyboard becomes increasingly user-friendly, an entire new language subset - replete with abbreviations and symbols-from-text has evolved with the technology as such new "killer apps" burst from this portable desk-in-your-pocket.

Talking - with your vocal cords, that is - has almost turned into an ancillary feature.

And the initial hero of our story - Cooper, the Motorola engineer - isn't all that happy about how his baby is growing up.

"The last thing the public is asking for is a phone that is also an MP3 player, a flash camera and a voice recorder," Cooper said. "Those [handsets] are so complex that it's even hard for a techie to use them."

Not only is Cooper wrong about that [because teenagers are more handy with their handsets than are most adults over the age of 40], it's also reasonable to suggest that Cooper is responsible for the phone's transformation into a multi-purpose tool. 

After all, wasn't the cell phone developed to speed communication by making it more portable [even though his first model weighed two pounds]? And wasn't Cooper's famous first call made to a rival - someone whose job was to provide customers with something Motorola couldn't?

And so began the wireless-era's Gold Rush, a race to put these phones on steroids, pumping them up with as many applications as possible. It may have started slow, but it's turned into a downhill slalom.

But that's hardly saying all the companies that sell mobile phones are gold-mine stocks. Over the past year, several companies have emerged as industry leaders in the rush to provide customers around the world with more features and lower prices. Others - such as Cooper's Motorola, ironically - found themselves far behind in the race.

Indeed, just last week, Motorola effectively announced it was putting its handset unit up for sale - although analysts say it will be a tough sell to get someone to buy it outright.

The Winners

Industry leader Nokia Corp. (NOK) has been on a roll that has seen its share price skyrocket 58.4% in the past year, which is all the more dramatic when you consider the stock is down almost 10% year to date in the New Year. The Finland-based manufacturer upped its global market share to 40% in the fourth quarter, driven by a 44% spike in profits [full-year profits rose 67%].

Also, in the past six months, Nokia made aggressive buyout moves - offering $8.1 billion for leading digital mapmaker Navteq (NVT) and an undisclosed sum for privately held mobile advertiser Enpocket. The Navteq bid hasn't gone through because the companies are waiting for the European Union to rule on another merger deal [TomTom NV's proposed buyout of Navteq rival Tele Atlas NV] before filing for required antitrust clearances, but Nokia and Navteq are committed to the deal, Medill reports.

The Navteq purchase is a clear shot across the bow of Apple Inc. (AAPL), whose iPhone debuted last summer with mapping and navigation capabilities powered by Google Inc. (GOOG) technologies. The iPhone muscled its way into the marketplace so quickly that Time magazine anointed it as the Invention of the Year.

In a very short time, the iPhone has changed the direction of how mobile devices are designed, causing other companies to mimic its sleek look and touch-screen ["haptics"] technology.

The result: In the fourth quarter alone, Apple sold 2.3 million iPhones worldwide.  And rivals took notice.

Last month, LG Electronics Inc., the world's fifth-largest cell-phone maker, set a bold goal by saying it would boost its global phone sales by about 25% this year, Reuters reported.

And the Sony Ericsson Mobile Communications unit of Sony Corp. (SNE) has cleverly launched two "entry-level" handsets specifically focused on the India market, which is the world's hottest mobile phone market - not just because of its growing population and incomes, but also because there are hundreds of millions of people without mobile phones

Sony Ericsson wants to sell 10 million handsets in India by 2009.

The Biggest Loser

Motorola got trounced last year. The Illinois-based manufacturer posted an 84% decline in profit growth for the fourth-quarter profit on sales declines of its handsets.

Also in 2007's final three months, sales for the Schaumburg, Ill.-based company dropped 18.2% to $9.65 billion, down from $11.79 billion the year before. Net income was a paltry $100 million [4 cents per share] down from $623 million [25 cents per share] in the same period last year.

In the past year, the company slipped to third place in global market share, from 20.7% to 13.1% - putting it behind Nokia and Korea-based Samsung Electronics Co., Ltd. [14.5% market share].

Greg Brown took over as chief executive officer on Jan. 1, after former CEO Ed Zander retired amid falling profits and declining sales.

MarketWatch reported that it could take all of 2008 - or longer - for the company to overcome these setbacks in terms of lost sales and declining market share. Motorola's challenge: It will take several years to bring new phone models to market, and even then the company's costs remain too high, meaning the phones may not be price-competitive, anyway.

The Wild Cards

The tech world is abuzz over Samsung's G810 Smartphone, that company's answer to the iPhone and Nokia's popular N95.

In addition to having a small platform of products, Research in Motion Ltd. (RIMM) - makers of the near-ubiquitous BlackBerry - could face what Citigroup Inc. (C) analyst Jim Suva called a "double-barrelled risk," causing RIMM's share price to drop as much as 25%.

Ironically, the mobile device that's talked about the most may well be the one that hasn't even been invented, yet - the "G-Phone," or whatever it ends up being called, if or when search-engine leader Google decides to roll it out.

Google has remained mum about its wireless-communications aspirations, but the company has been racking up a portfolio of patents that show it is preparing to enter the mobile phone market [as well as video game and TV markets], InformationWeek reported, citing research from Evalueserve, a global research-and-consulting.

There's even been heavy speculation that Google would become a bidder for wireless spectrum licenses, either now or in the future. However, UBS AG (UBS) just this week reported that Google has likely dropped out of the current "C-Block" wireless license auctions that the Federal Communications Commission is holding to sell licenses for broadcasting spectrum once used by analog TV broadcasters.

Key Considerations for Investors Hoping to Profit in this Sector

With the current global credit crunch, consumers may be a little more cautious about spending for "luxuries," such as highly featured new phones. Better to make their existing handset last a little longer. Indeed, since consumers know how competitive high-tech industries have become, they often have no problem waiting six months before buying the newest gadget, understanding that with the wait, the price will come down substantially.

[On the other hand, investors have seen how one white-hot product - be it the Apple iPod or Apple iPhone - can supercharge a stock, creating stratospheric returns].

Investors might want to employ the same strategy but for a different reason. The bottom line here is that this sector is highly susceptible to risk, especially with the players that are the most tied to the U.S. market.

As of now, the least risky investments - relatively speaking, at least - may be the titans of the group - Nokia, Apple and Google, even though the latter isn't officially in the race.

Google may be the only company big enough to give Apple, who like Motorola's Cooper struck first between the two innovative companies, a run for its money.

Google can strike back in two ways. It can wait until global markets recover to unveil its phone. Or it can make its move during the rough patches of the first half 2008.

The latter is a gamble, but it has possible parallels to the iPhone's June debut and continued success - even as the markets started their initial descent.

All three stocks are down from their highs, and have declined in the New Year. And they are decidedly risky plays in a market as unforgiving as this one. On the flip side, all three are innovators.

For prospective investors, the key question for each company is this: How long before the next catalyst appears, and what's the downside risk to my purchase until that happens? Here are some of the key considerations for each, both pro and con:

  • Nokia, with its purchase of digital mapmaker Navteq, could push the cell phone into new markets, and it could conceivably develop new revenue streams with new products and services. Plus, as an industry leader, it has the market power to survive and thrive so long as its management team stays focused on the prize.
  • Apple has engineered more comebacks than Sylvester Stallone. It not only innovates - it does so with style, something high-tech products are too often bereft of. All it will take is another iPod, iPhone or Mac Mini to give the shares a Saturn V-like lift.
  • Google started out with a simple concept, and has just kept adding capabilities and services that the enhanced market position is to the company what a moat is to a castle. Analysts often decree that Google's growth phase is "over," listing logical reasons why this is so - only to be embarrassed when the company proves them wrong.

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