Posted By: Tom Hustler

Reinhardt KrauseFri Nov 10, 7:00 PM ET

New 3G wireless technology has yet to find a home in emerging markets, where cell phone use has surged.
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That could spell trouble for cell phone makers looking to such markets for much of their growth.

Nokia and Motorola have prospered selling low-cost phones to first-time users in developing countries. Profit margins for such wares are slim -- and getting slimmer.

Cell phone makers want to sell pricier models, but the dearth of 3G, or third-generation, wireless networks limits their opportunities.

About 75% of the world's wireless networks have yet to be upgraded to 3G, the speedy technology that lets cell phones surf the Internet and download music or video. Areas without 3G include the four fastest-growing wireless nations: Brazil, Russia, India and China, known by the initials BRIC.

Only one in 10 mobile phones sold worldwide this year will be a 3G model, says market research firm Informa. By year-end 2010, Informa forecasts that only 9% of cell phone users in BRIC countries will be using 3G phones, whereas Japan is at more than 60%.

"I don't think 3G will be a big help for handset (phone) makers" in BRIC nations, said Gavin Patterson, an analyst at U.K.-based Informa.

Brazil, Russia, India and China have yet to issue national spectrum licenses for 3G services, he says.

Olympic Goal

"We really don't know when there'll be 3G in China, which has been aiming for the (2008) Olympics," he said.

Why does 3G in emerging markets matter to cell phone makers?

Handset sales growth in these markets has overtaken growth in Japan, Western Europe and the U.S.

Merrill Lynch says developing countries -- including Southeast Asia, Africa, eastern Europe, and the Middle East -- will account for 63% of global unit sales in 2007, up from 42% in 2003.

This shift to emerging markets has shaved the average selling price of phone models. ASP is a key metric for cell phone makers.

In Japan, 3G has spurred demand for mobile phones that send photos, download music or video clips, and access e-mail. It also has boosted sales in Europe and the U.S., though 3G hasn't gained a lot of steam in those markets yet.

In developing countries, though, most people use mobile phones just to make calls. Prices for low-end phones have dropped to $30-$40 in emerging markets, analysts say. In these generally poor markets, most cell phone users aren't big spenders. On average, consumers in many developing countries spend $10 to $15 a month on wireless services vs. roughly $50 in the U.S.

Wireless firms are wary of upgrading to 3G in many markets for fear they won't recoup that investment, says Randy Giusto, an analyst at market research firm IDC.

"It's going to be a real struggle to get 3G services into emerging markets," Giusto said.

Still, cell phone makers are upbeat about 3G's potential. Nokia and Motorola sell some high-end models to the affluent in BRIC nations. They aim to build on that success.

Nokia says demand for its N-series multimedia phones has been surprisingly strong in China.

"Emerging markets are not just about low-end devices. Take India. It's a polarized market. There is demand for sophisticated (devices) in cities," but also for cheap phones, said Tero Ojanpera, Nokia's chief technology officer.

Surging economies are boosting the size of the middle class in India and China.

Cell phone makers argue that wireless service providers would turn a profit from 3G investments in BRIC and other developing countries.

"It's still early days," Ojanpera said. "There is momentum. There is a need for higher (network) speed. Once the networks are out there, 3G services will start to flourish."

Replacement-Cycle Growth

Motorola has had success in China with its Ming smart phone. Allen Burnes, Motorola's vice president of high-growth markets, says wireless firms in developing countries do a good job of selling simple data services via slower 2G networks.

Motorola expects to sell more high-end models in developing countries, even if 3G services aren't rolled out soon.

"As our brand grows, our ability to sell mid- and high-tier handsets grows," he said. "It's clear there's a revolution going on in these places. People have a lot more disposable income, and they trade up to (better) handsets very quickly."

Some analysts agree. They say affluent consumers in emerging markets will replace their first phones with models equipped with color screens, built-in cameras or music players. So will fashion- or status-conscious consumers.

Merrill Lynch says this "replacement cycle" in emerging markets will be the cell phone industry's main growth driver in 2007.

"People tend to get something better than they had before, whether it's a car, clothes or a cell phone. There's potential in the upgrade market," said Tuong Nguyen, an analyst with research firm Gartner.

In Brazil, Vivo offers 3G services using old spectrum in some areas. Brazil is expected to auction national 3G licenses in 2007, says Yankee Group analyst Luis Minoru.

Russia and India are also in the early stages of planning 3G spectrum auctions. China hopes to have 3G services launched in time for the 2008 Beijing Olympics.

But 3G has been a tough sell even in more affluent countries. Informa doesn't expect more than half of cell phone users worldwide to have 3G models until 2011. Service provider Hutchison's 3G rollout in Europe, for example, has "been far from heartening," said Citigroup analyst Anand Ramachandran.

In the U.S., Cingular, Verizon Wireless and other carriers are years away from breaking even on their 3G build-outs, analysts say.

In October, TNS Global Insight released a study that found just 16% of U.S. consumers with cell phones have 3G models.

Copyright 2006 Investor's Business Daily, Inc.

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