High hopes

Ericsson moved to fix its hurting handset division by announcing a joint venture with consumer electronics powerhouse Sony, but analysts questioned whether this deal will bolster the crumbling business.

“We've been looking at possible ways to strengthen our mobile-phone business,” said Jan Wareby, president of Ericsson's consumer products division. “We're convinced we found the perfect partner for a perfect match. Many observers describe it as the ‘Dream Team.’”

Wareby said Sony's consumer-electronics expertise combines with Ericsson's knowledge of wireless third-generation technology to give the joint venture a winning combination as multimedia-capable phones evolve.

But historically, joint ventures in the handset business have failed. Lucent Technologies and European vendor Royal Philips Electronics terminated their year-old, mobile-phone joint venture in 1998, citing poor performance amid rumors of conflicting corporate cultures.

Sony formed a joint venture with Qualcomm in 1996 to propel CDMA technology into the market and create strong brand recognition with the help of Qualcomm's expertise. Much to the industry's surprise, Qualcomm's brand name proved more popular than Sony's, and Qualcomm continued to increase its market share. Sony bailed out of the U.S. market in late 1999.

Sony Ericsson will be different, Wareby said.

Why analysts say Sony Ericsson may not work…

Ericsson	▪ Market share has fallen to around 6% ▪ Severe losses in handset division
Sony	▪ Market share at 2% ▪ Handset business unsuccessful in Europe and U.S. to date
Sony Ericsson	▪ Clash of business cultures ▪ First products won't be available until 2002, making both companies vulnerable until then ▪ Each company holds four seats on the board of directors, creating a potential deadlock
Sources: Analyst comments, company information

“Most joint ventures try to keep different brands and try to keep different distribution channels,” he said. “We outline here a full sales and marketing responsibility and the creation of a new product brand, which is then based on the foundation of the Sony and Ericsson brand.”

Ericsson's conference call with analysts last week left more questions than answers for the financial community.

“It's unclear what they bring to each other,” said Mark Roberts, managing director of wireless equipment at First Union Securities' telecommunications infrastructure practice. “My first thought was a maxim used by marriage counselors: ‘People tend to marry at their own level of dysfunction.’”

Investors were hoping Ericsson would completely exit the handset business. Handset sales fell 52% in the first quarter, while operating losses in the division dipped to $555.7 million. Initiatives ranging from layoffs to outsourcing have failed to turn the division around.

Sony has not developed a successful handset business, with less than 2% of worldwide marketshare. Analysts wonder how Ericsson will stay afloat in the interim.

Until new Sony Ericsson products are available in 2002, “it may be that there is too much time between today and the actual profitability of the company to keep Ericsson from hemorrhaging financially,” said Bryan Prohm, senior analyst with Dataquest.

Analysts also see a potential corporate culture clash, which could lead to governance issues. Each firm will have four seats on the joint venture's board with no tie-breaking votes.

Wareby said the Sony Ericsson business will be profitable when it starts Oct. 1 in London, with Ericsson contributing roughly 2500 employees and Sony adding an additional 1000.