Taking Stock: Mobile Phone Companies Bounce Back After A Dismal YearTaking Stock: Mobile Phone Companies Bounce Back After A Dismal Year

My cell phone looks just like it did a year ago. What's wrong with that? Well, according to the hype last year, I should have had a brand-spanking-new one capable of surfing the Internet, conducting banking transactions, and transmitting streaming video. Yet I still have my trusty phone that looks so '90s. What happened?

This was supposed to have been another banner year for the mobile phone industry. The number of handsets sold worldwide was expected to surpass 650 million. In addition, new data services were in the offing. Instead, it looks like only 390 million to 400 million handsets will be sold this year, and wireless data has yet to achieve any mass-market appeal.

A couple of factors combined to make this a dismal year. The economic slowdown is partly to blame. Technical glitches in the next-generation technology, which have delayed deployment, are also at fault. Finally, most telecom carriers around the world are reeling from varying levels of overinvestment during the past two years and were forced to be a bit more prudent in their use of capital.

One indicator of recovery will be how fast high-speed networks are rolled out by vendors and adopted by consumers. The upgrade path from voice to mobile high-speed data is expected to go from second-generation, the current mobile network, to 2.5G and finally arrive at wireless nirvana, 3G. The predominant technology today is the Global System for Mobile Communications. The middle-generation technology for GSM is called General Packet Radio Service/Enhanced Data Rates for Global Evolution, while the third-generation wireless technology is Wideband Code Division Multiple Access, or WCDMA. In the United States, this is the route AT&T Wireless and Cingular Wireless will go. The other important technology, CDMA, is used by Sprint PCS and Verizon Wireless.

Data-transmission rates are still pretty anemic--less than half the speed of an already-slow 28.8-Kbps dial-up modem. The good news is that 2.5G should improve this to an average of 64 Kbps. The fun starts if the promised rates for third-generation are true. Data would then be received and transmitted at speeds equal to those provided by digital subscriber line or cable modem. AT&T Wireless and Sprint PCS have begun to roll out their 2.5G offerings; Verizon and Cingular will launch theirs this quarter.

One vision that seems to have died is the notion of accessing the Internet via your cell phone. It now seems more likely that you'll have different services that you can access using menus or icons on your cell phone. These services might be offered by mobile phone companies or perhaps by a provider such as Nokia. The most popular services will probably be messaging and entertainment. In Europe, Short Messaging System is hugely popular, while in Japan, downloading cartoon characters is big. In addition, various forms of entertainment ranging from games to music are expected to be hits. Using your mobile phone as a payment device also is catching on in some parts of the world. This lets you buy merchandise from vending machines without having to hassle with coins and crumpled bills.

There are signs that the industry is once again growing. The inventory correction that has plagued it appears complete, with wireless chip companies such as RF Micro Devices, Texas Instruments, and TriQuint Semiconductor reporting increases in business. Intel, which provides flash memory for mobile phones, has indicated that this line of business also is doing OK. Motorola is seeing growth in its handset division after being one of the first to launch GPRS handsets. Nokia recently said it expects to see 25% growth in handsets in the fourth quarter, compared with the third quarter, though this is still below numbers that a normal fourth quarter would produce.

There are still some clouds on the horizon. Consumer spending could become significantly weaker and the wireless carriers could decide to postpone the migration to next-generation networks. However, odds are that the industry will return to growth--perhaps not stellar, but growth nonetheless.

William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the information 100 Stock Index. Reach him at [email protected].