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The Honolulu Advertiser
Posted on: Tuesday, October 14, 2003

Cell prices may aid sales, cut profits

By Andrew Backover
USA Today

Optimism for cell phone makers could be dampened by price cuts and increasing competition.

Motorola, the No. 2 cell phone maker, yesterday reported better-than-expected cell phone sales.

No. 3 Samsung told Reuters that phone demand was rising.

Motorola shipped 20.2 million phones in the third quarter, about 2 million better than some telecom analysts expected. Its cell phone revenue rose 8 percent from a year ago to a better-than-expected $2.9 billion. Revenue of $6.8 billion and earnings of 6 cents a share, excluding unusual items, also topped expectations.

Yet Wall Street frets that cell phone makers might be cutting prices too much to boost sales. While that means consumers could pay less for better phones, it could hurt earnings and investors. Motorola's positive report sent its shares up just 8 cents to $13.87.

Motorola's specifics could signal problems for its sector, including:

Price. Deutsche Bank Securities says the average selling price of Motorola phones fell 2 percent from the previous quarter, to about $145. That's down 10 percent from a year ago. "The implication ... is that pricing pressure and competition is exceptionally strong," Deutsche Bank reported yesterday to investors.

Profit. Motorola's cell phone operating income of $165 million "was only modestly above" Deutsche's expectations. "If this is any indication of the industry competition, it means (No. 1 Nokia's average selling price) could be even lower, too," Loop Capital Markets said in a report.

J.P. Morgan says North American cell phone sales will hit 100 million in 2004, up from 87.5 million this year. That's 14 percent growth in 2004, up from 12 percent this year. But that's still far below the growth of the boom years. From 1999 to 2000, North American cell phone sales skyrocketed 58 percent.

A rule that kicks in next month letting U.S. consumers keep their cell phone numbers when switching carriers is expected to spur more phone sales. Also, consumers have grown more likely to replace phones with camera and walkie-talkie models.

Yet Motorola is struggling to keep market share, and it has not been timely in introducing new phones. As it plans to spin off its semiconductor unit, it must replace outgoing CEO Christopher Galvin.

On Friday, Moody's Investors Service downgraded its debt rating to near-junk status, prompting Motorola to release its results a day early.

Galvin said Motorola has shown "momentum ... in the face of the most difficult period in history for the telecom and semiconductor industries."