SALES OF LOW-END HANDSETS STIFLING MOBILE DATA SERVICES

Despite monumental leaps in wireless handset technology made over the last year, recently announced year-end results by the world's two largest mobile phone manufacturers indicate that cheaper, less functional handsets made up a larger percentage of total sales than high-end models.

The fact that sales of lower-end handset are strong is troublesome for domestic wireless carriers that are relying heavily on subscriber usage of data services for revenue growth.

Motorola, the No. 2 handset maker in the world, announced last week that it shipped 27% more phones in the fourth quarter than it did one year ago. Revenues from its handset unit, however, increased just 11%. The company attributed the discrepancy to a demand shift to its new low-end units.

Similarly, last year world leader Nokia saw a 9% increase in total units shipped. But net sales for its handset division decreased slightly.

Much of the shift to lower-end units is due to increased sales in less mature growth markets such as Russia, China and other countries around the world. But the trend is also one that affects North America, where customers have been reluctant to adopt phones with color screens.

“It's different depending on the market,” said Perry LaForge, chairman and executive director of the CDMA Development Group. “In Korea, you'll see the introduction and adoption of higher-end handsets much faster.”

Of course, the flagging state of the overall economy also plays a role in slow adoption, as consumers and enterprises pinch pennies on both high-end handsets and the additional usage costs associated with mobile data applications.

But consumers' general lack of knowledge about the benefits of wireless data is a problem as well, said Neil Strother, senior analyst with Instat/MDR.

“I just think it's going to take time, even if people have a lot of cash on hand,” he said. “You're only going to buy what's useful or interesting.”

That education runs both ways, Strother said. To drive demand for high-end handsets, wireless carriers that are closer to consumers than handset manufacturers must learn how to market services and make them profitable. That will require a shift in thinking for service providers, particularly those that have grown out of wireline companies where the business model was selling voice by the minute, Strother said.

To help encourage mobile data adoption, many carriers have started dangling the proverbial carrot in front of consumers, said John Jackson, an analyst with The Yankee Group.

“Operators have been pretty aggressive with subsidies,” he said. “That's started to drive some volume, which is good and bad. The plus is you drive advanced data-capable handsets into the hands of users. The downside is your customer acquisition cost goes up.”

A spokeswoman for Verizon Wireless said subsidies for phones offering the carrier's highly publicized “Get it Now” wireless data offering had not increased, but that phone manufacturers themselves have been offering rebates.

Still, such cost reductions help drive penetration of data-equipped handsets, she said. Doing so should educate the public on high-end handset functions, which in turn should help create a wider demand.

“These phones are more expensive, but customers reap a wealth of benefits from them,” she said.