As the overall market dropped 15.8% in 1Q09, converged mobile devices (commonly referred to as smartphones) continue to grow year on year at 4.0%. Growth within this segment was evident in Western Europe, North America, and Asia/Pacific (excluding Japan). Mobile operators have become progressively more open to raising subsidies within this segment as dependence on data revenue has increased as a result of reduced consumer demand for new handsets.

Regional Analysis

• Shipments of mobile phones into North America started the year slightly higher than the same quarter a year ago even as the economic recession bit deeper into the United States and started to impact Canada. Carriers' efforts to lure customers with unlimited plans and free device promotions helped offset a sharper decline, even in the face of slower subscriber growth. Converged mobile devices at lower price points helped stimulate consumer interest in the midst of the economic recession, providing a needed boost to shipment volumes.
• As expected, the Latin American mobile phone markets took a negative turn in 1Q09 as most of the economies in the region began to see slower economic growth. In addition, local currency devaluation drove prices higher on imported phones, reducing demand. This has not deterred future plans of enterprise customers, who have voiced interest in increasing spending on mobile devices in 2009.
• Much of the Western European handset market was characterized by weaker consumer confidence and lower demand, while channels, already holding low inventory, were reluctant to re-stock. This set up challenging conditions for vendors in both the traditional mobile phone and converged mobile device spaces. Meanwhile, the CEMA market posted some positive news, as much of the inventory was cleared at the end of 2008. Shipments into the Middle East and Africa contracted at a slower pace in 1Q09, while demand in Central and Eastern Europe and Russia decreased rapidly due to currency devaluation.
• Asia/Pacific. In a difficult economic climate, China and India offered signs of encouragement in 1Q09. India reported strong subscription additions during the quarter, while China's rural subsidies have helped to prop up handset demand. Still, with growth coming increasingly from lower-end segments in the region, phone makers will find their average selling prices and profit margins challenged.

Vendor Highlights
Nokia saw its shipment volumes dip below the 100 million unit mark for the first time in two years, while its ASP slid due to pricing pressure and greater emphasis on lower-priced devices. Despite these challenges, Nokia posted a healthy 33.8% gross margin on its devices and services, with the success coming from the 5800 XpressMusic device as well as the launch of several services including Comes With Music, Nokia Messaging, Ovi Store, and Point and Find.

Samsung returned to double-digit profitability to start the year, resulting from improved operating efficiencies and a favorable product mix for the quarter. Samsung's strong position in feature phones sustained interest during an otherwise quiet quarter, with touch devices like the F480 and messaging devices like the A767. Samsung also recently announced its first Android-powered device, the i7500, due to hit the European market in June.

LG Electronics began the year on a positive note, posting an increase in operating margins despite a year-over-year decrease in shipment volumes. Driving its improvement was a combination of cost, supply chain, and operational efficiencies as well as warm reception for its touch screen, messaging, and digital imaging devices. Even as the recession continues, the company is targeting double-digit sequential growth in 2Q09 with the release of high-end models to key regions as well as low-cost devices into emerging markets.

Motorola, although posting another quarter of operational loss, showed signs of improvement to start 2009. Co-CEO Sanjay Jha underscored the company's operational effectiveness and cost savings, noting the reduction in operational loss compared to the previous quarter. In addition, Jha highlighted plans to add more smartphones to its portfolio before the end of the year. During the quarter, Motorola launched its Evoke QA4 and MOTOSURF A3100, as well as the industry's first eco-friendly device, the MOTO W233 Renew.

Sony Ericsson saw its market share decline as several key markets moved away from mid- and high-tier devices towards low-cost devices, where the company does not compete. Meanwhile, the company continued to build its content and services platform, with roll out of PlayNow Plus, Movies, and Arena across Europe. Although Sony Ericsson has been implementing a cost reduction plan since the summer of 2008, President Komiyama cited further need to reduce costs and headcount.

Top Five Mobile Phone Vendors, Shipments, and Market Share, Q1 2009

(Units in Millions)