San Diego Business Journal

Ericsson's recent decision to use contract manufacturing to build their wireless handset is an indication as to how competitive the wireless handset business has become.

This heightened competition evolves around several trends in a maturing growth industry.

The market rate penetration of wireless phones in Europe and in other parts of the world has reached levels equal to other ubiquitous items such as TVs, VCRs and landline phones.

In Helsinki, recent surveys show a 90 percent penetration rate. That means that literally everyone has a wireless phone in that city. In Hong Kong, for the first time, the number of wireless lines surpassed the number of landline phones.

Since in most markets almost everyone who can afford a wireless phone owns one, this trend is pushing the carriers to look for new demographics to expand their customer base. Such demographics include teenagers and the elderly, as well as those in lower socioeconomic groups in general.

- Factories Pushed To Lower Prices

The carriers design special plans that these groups can afford, and throw in economical phone models as part of the package. What's more, most wireless phone activations now take place in shopping malls , an indication that buying a cell phone is no longer a calculated decision based on need, but rather an impulse buy, purchased just like a fashion item.

No wonder wireless service providers and carriers keep pushing the factories to lower prices on the handset equipment. They want to be able to offer their customers top-of-the-line digital phones at affordable prices, such as those no-monthly-fee plans that allow for the purchase of air time as needed.

Now more than ever the large carriers have the muscles to push the carriers around. The major wireless consolidations Vodaphone/Mannesmann, Bell Atlantic/Airtouch/PrimeCo, Voice Stream/OmniPoint, and SBC/BellSouth present new challenges.

Previously, the fragmented market allowed the manufacturers to offer different product models and different prices to a diverse customer base. Now, the manufacturers have to contend with behemoth customers that dictate prices, models and delivery for all their different properties.

In turn, manufacturers run the risk that, should they fail to comply with the carriers' demands, they could be shut out of that segment of the market.

Verizon, for instance, now controls about 80 percent of the Code Division Multiple Access (CDMA) technology market in the United States. If you want to be a player in the CDMA market, you better have your phone endorsed and approved for usage on the Verizon system.

On a tangential note, some smaller manufacturers are trying to hedge their bets by developing indirect channels of distribution through the carriers, dealers, regional and mass retailers. So, even if the carriers do not pick up their particular phone on a direct basis, they still have a chance to distribute the phones to independent wireless retailers.

Ericsson's decision to move production outside its own manufacturing facilities is an admission that the company needs to focus on new and emerging technologies rather than simply assembling parts in a physical factory.

- Using Contract Manufacturing

Other growth industries, including Internet routers, have used contract manufacturing from the get-go. Companies such as Cisco Systems and Juniper Networks use contract manufacturing exclusively with a very high degree of success.

The life cycle of cellular handsets is becoming shorter and shorter, both as a result of changing technologies and changing consumer needs.

This forces handset manufacturers to invest substantial resources into research and development, in order to adapt to new technologies, such as Bluetooth and wireless mobile Internet. Outsourcing manufacturing should free up a great deal of capital and engineering time, and allow manufacturers to focus on core technologies, or acquire new ones.

Companies that stand to win in this race include Qualcomm Inc., which recognized this trend early on and acted by selling its handset business to Kyocera wireless. Qualcomm is now free to focus on further developing its core CDMA technology, improving its chipset design and working on a third generation of mobile phones.

Motorola has great technology, software capabilities and chip design and manufacturing capacity. These assets will allow them to focus on the high-margin end of the business, should they decide to exit the phone-building business.

Ericsson, the developer of Bluetooth technology, which will enable all kinds of electronic devices such as laptop computers, wireless phones and personal digital assistants to communicate wire-free, is another great beneficiary of this trend.

The proliferation of the wireless handset business, once limited to a select few, will give original equipment manufacturers and consumer electronics firms the ability to participate in this growth industry by way of applying their expertise in building high-quality electronics products, just as they presently make CD players and TV sets.

The successful manufacturers will be those who can focus on technology and chipset design, similar to Intel, who does not build computers but provides the "guts" that power them.

And so goes the wireless phone. Soon, someone will produce its "brains" and someone else will wrap it in plastic. And you'll be asking: Do you have Motorola inside?

Ram is founder and CEO of San Diego-based InfoSonics Corp., Inc.