The world has changed since mobile phone maker Sony Ericsson was born in 2001, and analysts say Ericsson would like to abandon its ailing baby, leaving it in the hands of Japanese partner Sony Corp.
Investor talk that the parents were agonizing over the future of their offspring stepped up last week when the joint venture warned of a worse-than-expected Q1 loss. But there had been no such talk in front of the children; Sony Ericsson said it had no indication that either partner was considering pulling out.
Ericsson, itself loss-making eight years ago, believed then that keeping the phones business would help it sell networks, but that argument holds little water now. “We have seen many examples of players that manage perfectly well without both, such as Apple and RIM,” said Hakan Wranne, telecoms analyst at Swedbank.
Mats Nystrom, Ericsson analyst at SEB Enskilda, said Ericsson’s shares would benefit if the company was not involved in the venture, since it would cut its operational risk and reduce volatility.
Sony Ericsson grew fast in 2005-2007 on strong demand for its music and camera phones, Walkman and Cybershot, but handset demand fell in its key European market throughout 2008.
Other regions followed, and in the fourth quarter, overall market volume started to contract. Sony Ericsson last week blamed weak demand and destocking by retailers for the profit warning, but analysts say it probably also lost market share due to a weak product portfolio.
The firm now expects to ship around 40% fewer units in the first quarter than in the previous quarter. Its stronghold is mid-range feature phones, a segment hit hard by the downturn.
As the global economic crisis bites, demand has switched to cheaper phones, where bigger rival Nokia dominates, and where Sony Ericsson has lacked the scale to compete.
At the same time, competition at the high end from Apple’s iPhone and other “smartphones” has ratcheted up. As operators shift their subsidies toward smartphones, Sony Ericsson’s feature phones become pricier for the customer.
IT COULD BE CHEAP?
As the line between consumer electronics and mobile phones gets fuzzier, that gives Sony a better fit with the joint venture, analysts said, but the timing could be better.
The global financial crisis and a strong yen have not been kind to the Japanese firm, which has signaled it wants to get out of loss-making ventures rather than invest more.
But analysts say it would probably prove difficult for Ericsson to find another buyer for its stake, which might mean Sony could pick it up without having to dig deep.
“In our view, a SE acquisition, if it occurs, would be affordable and provide potentially a stronger long-term Sony,” said Macquarie Securities analyst David Gibson in a research note.
“However, the benefits of such a deal are likely to be some time away and go against the rationalization strategy in the rest of the Sony business.”
Indeed, that strategy might suggest that Sony, too, would prefer to leave the venture on someone else’s doorstep, but that wouldn’t be an easy sell in current circumstances.
“Sony Ericsson’s losses need to stabilize first, and that won’t happen while the handset market is in free fall,” said SEB Enskilda’s Nystrom. “It may be possible for the companies to think about a deal in a couple of quarters, if and when the industry’s inventory correction is over.”
Analysts said Sony Ericsson would probably need to raise cash later this year if it can’t reverse the current earnings trend. And though both parents could reluctantly afford it, Richard Windsor, global technology specialist at Nomura Securities, said Sony might be the more willing.
“The scenario we are looking at ... is that Ericsson gives it to Sony for nothing. That’s a possibility,” Windsor said. (Reuters)