America Zooms in on Camera Phones

For months, John D Downey steered clear of phones with cameras, fearful that
handling the click-on gadgetry would be complicated. But early this fall, the
Sprint PCS Group customer was seduced by a simple Sanyo SCP-8100 with a built-in
camera. Suddenly, Downey became a picture-snapping fanatic, shooting photos of
his six kids to send to grandma. And as owner of Broski Fence Co. in Kansas
City, Mo., he uses the phone to click and e-mail pictures of fence parts to
suppliers. "Since it’s always with me, I can use it on a daily basis and
not get bogged down figuring out how the damn thing works," Downey says.

With wireless carriers pushing lucrative new photography and multimedia
services, camera phones are suddenly hot in the US. From virtually nothing in
2002, sales of photo-friendly handsets should hit 5 million units this year and
soar to 48.5 million in North America by 2006. Good news for the two biggest
suppliers of mobile phones in the US, Nokia and Motorola, right?

Feature-packed Cells for Sales

LG VX6000 Average price: $100. Simple design makes snapping photos and sending audio clips easy. SAMSUNG SPHA600 Average price: $200. Pricey, but sleek rotating camera lens a hit. NOKIA 3650 Average price: $150. Features video, but clunky size and complex keypad turns off buyers.

It should be, but the shift also creates big risks. After all, during
transitions to new technologies, upstarts have a rare opportunity to gain ground
on established players. Nokia should know: It went from nobody to No. 1 during
the move from analog to digital phones in the 1990s, displacing Motorola. Now,
Asian companies are seizing this photo opportunity to challenge Nokia and
Motorola like never before.

Although share figures are a well-kept secret in the emerging US market, the
trend is clear: Having unleashed a variety of models in America when demand
finally took off in the spring, Asian phone makers have claimed the early lead.
Samsung, for example, ships seven camera phones–more than anyone else–that
make up 40% of its US volume. That puts it at the top of the biz along with
Sanyo, LG, and Sony Ericsson, according to Christopher S Ambrosio, wireless
director at Newton Center (Massuchussets) researcher Strategy Analytics Inc.
Nokia lags just behind; Motorola is hardly in the game.

How did the Asians manage to do it? Thanks to speedy data networks that are
more conducive to e-mailing pictures than are US systems, demand for
photo-snapping handsets took off in Asia three years ago. That has given Korean
and Japanese phone makers a big headstart incorporating new capabilities into
the complex handsets.

Moreover, many suppliers of camera components are Japanese, enabling Asian
phone makers to work closely with them. The Asian players are also part of
larger conglomerates that have decades of experience making consumer electronics–expertise
they leverage when producing multimedia phones. "We recognized that cameras
would be a hot trend," says Peter
A Skarzynski, senior vice-president of Samsung’s North American wireless
division.

Bare-bones Phones

At the same time, market-leader Nokia’s traditional strength–a strong
brand, honed through years of marketing–may actually be hurting the company.
As wireless carriers such as Sprint introduce promising new multimedia
offerings, they want to highlight their own names and services as much as the
manufacturers’ brands. This damages entrenched icons such as Nokia and
Motorola far more than upstarts like Sanyo and LG.

But Nokia can’t blame its challenges solely on the carriers. The company
was early to the US market with its 3650 camera model last fall, a phone that
also takes video clips. But its clunky design and poor screen quality pale next
to high-resolution, user-friendly Asian models. Moreover, Nokia has yet to
deliver a picture phone to Verizon Wireless, the nation’s biggest carrier, and
to Sprint, the camera-phone leader. The reason: Nokia is a relative newcomer to
the CDMA technical standard used by those and a few other US carriers. To boost
its presence in the US, Nokia has focused instead on bare-bones voice phones for
CDMA carriers.

Of course, Nokia doesn’t plan to let the Asians corner the US camera-phone
market. A new version of its video phone, with better color and a simpler
keypad, is due this month. And Nokia aims to deliver at least four more camera
phones by the spring. "You can be assured that the goal for Nokia is to be
No. 1" in US camera phones, says Randy C Roberts, director of imaging for
Nokia Americas. It had better hurry. Nokia "has higher share now than it
will have next year unless it comes out with several more phones," says
Strategy Analytics’ Ambrosio.

That leaves Motorola, with its plodding engineer’s culture, as the odd man
out. The company delivered its first camera phone to T-Mobile in November–11
months after Samsung, and only in limited supply. Its failure to jump on the
camera-phone trend early has cost Motorola dearly. The outfit has complained
that it is unable to get key components. But its rivals, who locked in limited
supplies early, have not been similarly hurt. As Motorola dithers and Nokia
plays catch-up, Japanese and Korean phone makers are quickly making their brands
synonymous with the coolest technology.

By Roger O. Crockett in Chicago, with Andy Reinhardt in Paris, and bureau
reports  in BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc

WIRELESS: Richard Branson: Winning Virgin Territory

If anyone can make a prepaid phone plan seem cool, it’s Richard Branson. As
part of his assault on the fastest-growing segment of the wireless business, the
brash chief executive of Virgin Group Ltd. is employing the same full-frontal
sales tactics he brought to music, air travel, and vacation resorts.

He’s targeting young phone users with features such as pipedin music news
from MTV Networks or, for $2.95, an outgoing voice greeting from William Shatner.
Afraid your date won’t pan out? Virgin offers a bailout option with ‘rescue
ring’–an ‘emergency’ call you can arrange to receive so you have a
reason to bolt.

Branson himself showed up nearly naked in New York’s Times Square a year
and a half ago to kick off the 50:50 joint phone venture with Sprint PCS Group.
Since then, Virgin Mobile USA LLC has racked up more than 1 million users. The
fast start shows Virgin’s distinctive lifestyle pitch has connected with many
younger consumers. As the new kid on the block, Virgin is far from the biggest
player. AT&T Wireless and Cingular each has a fifth of the market for
customers aged 17 to 23, compared with Virgin’s 5%, estimates consultant
Adventis. But Virgin was the first to expressly target this group. And there
should be plenty of growth ahead, since American youth lags much of the world in
cell-phone usage–in the US, only 47% of consumers aged 12 to 24 have a cell
phone, says researcher Mintel International Group Ltd., compared with 80% or
more in many European and Asian countries. "They’ve proved a point: that
it’s possible to come in with a new brand," says Adam Guy, senior analyst
at Yankee Group.

To pry away those younger callers, Virgin offers the simplest of prepaid
deals–25¢ per minute for the first 10 minutes each day, then 10¢ after that–with
no contracts and no small print, under the romantic-sounding slogan "Live
without a plan."

Virgin Mobile USA is guarded with its data, but Yankee Group’s Guy figures
it gets a respectable $40 per month from each user and has kept customer
acquisition costs low. Funded with $160 million from Branson, Virgin Mobile says
it is self-sustaining now and should be in the black by early 2004. Until
recently, Virgin had to contend only with sporadic efforts from first-tier
carriers such as AT&TWireless and T-Mobile. But that’s changing. Nextel
Communications Inc., after grabbing 250,000 users with a tie-in to skateboard
and surfing events, is rolling out a youth brand, Boost Mobile. Like Virgin,
says Tom Hebert, business team leader for wireless at retailer Best Buy Co.,
"Boost has reached an untapped market that had very few options." And
there’s nothing to stop other carriers.

Thanks to Virgin’s early success, several are said to be hearing pitches
from brand powerhouses such as Walt Disney and Nike. Those companies have far
bigger budgets and could use wireless as a loss leader to flog other products.
That would cut the floor out from under prepaid pricing. Just because Virgin has
carved out a new niche doesn’t mean it will be alone for long.

By Gerry Khermouch in New York, with Catherine Yang in Washington  in BusinessWeek. Copyright
2004 by The McGraw-Hill Companies, Inc