Ericsson suffers as delays to broadband shrink demand

News that L.M. Ericsson Telephone Co. is expecting to bleed hundreds of millions of euros in the first three months of this year is further evidence of the pain mobile operators are suffering as they wait for broadband to arrive.

The Swedish giant warned of a pre-tax loss of €445 million-€556 million(US$391.6 million - $489.28 million) instead of a result close to breakeven as initially expected. Sales were predicted to rise 15 percent, but have been flat. This has been blamed on low demand for replacement handsets - which would have been stimulated by services made possible by broadband - and reduced operator subsidies.

Recent profit warnings from the major handset and infrastructure manufacturers have been sparked by a drop in consumer demand as Europe's markets reach saturation point.

This was not supposed to happen. The plan was that by the time that all Europe's valuable customers had bought a mobile and signed up with a particular network, the operators would have started offering a new range of data services designed to increase mobile usage and thus revenues. Of course, using these new services would necessitate buying a new phone.

But the widespread roll-out of the next stage of network architectures such as GPRS, which are designed to give wireless devices the ability to access information at roughly the speed of a PC, has been delayed until the end of the year at the earliest.

In fact, the wireless industry has reached the point at which major operators are scraping the barrel. So many people already own a mobile that the only customers left are very low margin. As a result, the operators are reducing their use of one of the main weapons in the fight for new customers - the subsidy of handsets. And as special offers dry up, so does consumer demand.

Ericsson's problems have hit its Infineon microchip supplier Siemens AG. The German giant's own mobile business has also been hurt.

Even Nokia Corp. is not immune. By some puzzling financial magic, the group will hit its first-quarter earnings targets despite lower sales - 20 per cent growth compared with earlier estimates of 25-30 percent.

French electronics group Alcatel SA has also warned that its mobile handset division is likely to make a loss in the first quarter, again blaming a cut in handset subsidies. Motorola Inc. and Texas Instruments Inc., which makes chips for handheld devices, have added their voice to the gloom over the last month.

The industry has also decided it is not financially prudent to start a price war for existing customers just before it starts investing heavily in the next generation of wireless. The networks are more interested in increasing revenue per current user than grabbing new customers.

"It is really to do with a change in focus from being hyped up about market share and top-line growth to the value of the customer," explains Tressan MacCarthy at SG Securities (Europe).

Increasing revenue per user means increasing call volumes, ideally by increasing higher-margin data calls rather than voice traffic. But delays to GPRS have slowed growth. The effects have been compounded by the downturn in corporate spending in the US, which is affecting business sales.

Analysts believe Europe faces at least six months of this telecom downturn, which could be extended if the hiccup in the US economy turns out to be serious.

In fact, Per Lindberg of Dresdner Kleinwort Wasserstein expects usage to drop over the next few months. He believes mobile communications has turned out to be a "hyper cyclical" phenomenon - it is a luxury service and consumers cut back on spending when they lose confidence in the local economy.

Lindberg said: "We are now in a reassessment stage, which is why we have seen a meltdown of some of these overvalued firms."

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