Entry-level phones not for all makers

update Strong growth has been predicted for entry-level mobile phones, but not all manufacturers will see profits if they enter this market, warns analyst.

update Despite strong growth projections for the entry-level mobile phone segment in emerging regions, not all phone manufacturers should enter this market, an analyst has advised.

According to a recent ABI Research report, the entry-level phone markets will see a 24 percent year-on-year growth over the next five years.

However, Tim Renowden, devices analyst at Ovum, the entry-level mobile phone segment presents lower margins and requires large shipment volumes for manufacturers to it is profitable.

"[As such], there are relatively few players with the manufacturing and distribution resources to meet this scale," Renowden told ZDNet Asia. "Nokia has a firm grip on [this] market, particularly in emerging markets, and doesn't really look like relinquishing it any time soon."

Michael Morgan, mobile devices industry analyst, who authored the ABI report also noted that the emerging markets present "margins so thin that profitability demands major economies of scale". This requires large investments on the vendors' parts to ensure costs are kept low, by manufacturing locally to control import and labor costs. Vendors also need to establish the ownership of a "wide IP (intellectual property) portfolio" to keep royalty costs down, Morgan said.

"The research shows that on all these counts, Nokia is the out-and-out market leader," he stated.

Morgan, however, noted in a follow-up e-mail to ZDNet Asia, that makers must balance quality with low cost. "Companies that focus purely on creating the lowest cost device without regard to quality and the consumers' desire for status will find that their market share will drop," he said, pointing to Motorola as an example of such a maker who has suffered in emerging markets.

He said the low income-earning masses may pose a "great challenge" to operators hoping to sell services in emerging markets, but prepaid plans present a way for this demographic to own a mobile phone.

Handset vendors addressing this market should focus on its needs. "These people do not need, nor can they afford, a 3G feature phone with a 5 megapixel camera. They do, however, need features such as voice, FM radios and flashlights," he said.

Renowden said another barrier turning smartphone makers away from the entry-level segment is, simply, that the market does not suit their brand image. Referring to Apple and BlackBerry maker Research in Motion (RIM), as examples, he explained: "These brands thrive on a perception of being high-tech and somewhat exclusive."

Entry-level phone makers targeting more mature markets face the challenge of managing consumers that demand more features, and that also look for these features in basic models. Such features include 3G-capable applications such as e-mail and IM (instant messaging) capabilities, he said.

ForgetMeNot Software recently echoed a similar observation, saying there is "huge demand" across Asia for such connectivity. The company sells a product to carriers aimed at allowing them to deliver e-mail and IM over SMS to basic phones that do not have 3G capabilities. Synchronica too, offers a similar tool to enterprises.

According to Renowden, it is now an opportune time for manufacturers that have traditionally concentrated on basic handsets, to consider entering the smartphone market.

He cited the growing awareness of smartphones among consumers, and the lower licensing costs of open source smartphone platforms such as Android and Symbian, as factors helping to lower barriers of entry to the market.