Sony Ericsson's "it" for phones

CHICAGO — Sony Ericsson is a bit player in the U.S. cellphone business, but globally, the phone maker has seized the gee-whiz momentum that until recently was focused on rival Motorola.

It has increased both profits and market share by capitalizing on Sony's famous brands, particularly via the Walkman music phone and Cyber-shot camera phone.

Now Sony Ericsson is seeking to bolster its already-strong position in music and camera phones with eight new models, many of which are earmarked for overseas markets.

But a new, middle-tier version of the Walkman phone should be available through a U.S. network by summer. And the new ultra-thin, technologically advanced Walkman phone, the 880, is set to be sold later this year through Sony's 37 U.S. Sony Style stores.

"Sony Ericsson is the 'it' brand right now," said Matthew Hoffman, a stock analyst at Cowen & Co.

Based in London, Sony Ericsson is a six-year-old partnership between the Japan-based consumer-electronics giant Sony, and Sweden-based LM Ericsson, the world's largest mobile-phone-equipment maker.

After muddling along for a couple of years, the joint venture turned a profit in 2004 and had a breakout year in 2006.

"These guys have been really gaining momentum worldwide," said John Jackson, a wireless industry analyst at M:Metrics.

But it's a different kind of momentum than that bred by the Razr, Motorola's blockbuster phone. The Razr won on fashion, Sony on function, he said.

Sony Ericsson's global market share is still well below that of Schaumburg, Ill.-based Motorola, the globe's second biggest cellphone maker. But Sony Ericsson has made impressive gains.

It moved from fifth to fourth place globally last year and is closing in on the world's third-biggest phone maker, Samsung. Sony Ericsson's global share was 8.8 percent in the fourth quarter; Samsung's was 10.9 percent, according to market researcher IDC.

Small in North America

But in North America, it's a different story: Sony Ericsson ranked eighth during the third quarter, with only a 2.5 percent share, according to IDC.

What gives? Sony Ericsson effectively shut itself out of about half of the U.S. market in 2003.

That's when it opted to make phones based only on GSM wireless technology, closing a struggling operation that relied on CDMA technology.

GSM is dominant in Europe and accounts for about 70 percent of the global wireless market. But CDMA is particularly popular in the United States; both Verizon Wireless and Sprint use it exclusively.

AT&T's Cingular Wireless is the largest GSM network in this country, followed by T-Mobile USA, both of which have limited Sony Ericsson offerings in some parts of the country.

Najmi Jarwala, president of Sony Ericsson North America, acknowledged that many of Sony Ericsson's top products have not been aligned so far with the goals of U.S. carriers.

He cited the K790 model, a 3.2-megapixel camera phone that was the first phone in Sony's new Cyber-shot line, as an example.

The K790 was one of the best-selling phones in the world last year, according to a Krusell International, a Swedish firm that tracks phone sales. But no U.S. wireless carrier is selling it.

"The value proposition with the [U.S.] carriers didn't align," Jarwala said, declining to elaborate further.

Carriers in the U.S. have more clout in the retail sale of phones than they do in other countries. They heavily subsidize phone prices, recouping that cost and then some through service plans for phone calls, e-mails, music downloads and so on.

Price a plus

Sony phones tend to be relatively expensive at a wholesale level, yet they don't necessarily give wireless carriers a chance for greater service revenues, analysts say.

Demand certainly exists for Sony Ericsson phones here.

At Personal Electronic Solutions, an independent wireless carrier in Chicago, one of the most requested phones is Sony Ericsson's K790.

The K790 sells for $399 at PES, and interested customers must buy it "unlocked," meaning the phone isn't tied directly to a wireless carrier's service. (Customers still need to separately buy a wireless service plan)

Of the unlocked phones sold at PES, roughly 15 percent are from Sony Ericsson, trailing only Nokia, the world's top mobile phone maker, said Gary Britton, a sales associate at PES.

Britton said his customers are mostly interested in high-end phones and that Sony Ericsson's products "are ahead of the curve with the technology they offer."

Profit help

Such high-end phones have helped keep Sony Ericsson's profit margins high when other phone makers, particularly Motorola, have struggled.

Sony Ericsson's operating profit margin — operating profits divided by revenues — was 11.9 percent last year, up from 7.1 percent in 2005, according to Hoffman's research.

Of the world's other five top phone makers, only Nokia improved its operating margin last year, but not as much as Sony Ericsson.

Motorola, meanwhile, saw its annual operating margins drop from 10.6 percent in 2005 to 9.5 percent in 2006, courtesy of a dismal fourth quarter.

Motorola's phone shipments still boomed, but the firm failed to meet sales goals for premium phones — the very models that have buoyed Sony Ericsson.