Sony Ericsson Struggles Against Competitors, Slowing Market

Sony Ericsson reported a tough quarter, as expected, on Wednesday, but analysts seemed optimistic about the handset maker’s prospects.

“Sony Ericsson’s strategy is good, broadening the device portfolio and the geographic spread of its business with a strong focus on the U.S. market during 2008,” said Martin Garner, principal associate analyst for mobile at research firm Ovum. “It must now execute on that flawlessly.”

Getting there will be a challenge. The Swedish company’s profits dropped 48 percent in the first quarter of 2008, to 133 million euros, or $212 million. That’s down from 254 million euros during the same period a year ago.

Analysts knew the hit was coming, though. Sony Ericsson issued an early warning in March, revising its forecast down to 150 million-200 million euros, or $239.5 million-$319.3 million. And indeed, the manufacturer shipped fewer devices, and had lower sales prices and sales than usual – sales slipped by 7.6 percent.

Demand for high-end phones fell somewhat because of slowing market conditions, analysts said. But the other problem is that while Sony Ericsson makes well-built devices, it faces stiff “coolness” competition from Nokia, LG and Apple’s iPhone.

“The typical Sony Ericsson handset is drifting further and further from what customers are looking for,” said independent analyst Jeff Kagan. “Sony Ericsson handsets are good quality, but are plain, ordinary phones, as the market moves more toward data.”

The company is trying to fix that problem, although the efforts hurt in the first quarter. Half of Sony Ericsson’s profit shortfall came from higher research and development costs to support new product launches. That worried Ovum’s Garner. Component costs are rising due to inflation and Sony Ericsson “will be looking to improve its operating efficiency to compensate.”

‘Operating efficiency’ generally translates into cutting jobs and condensing locations.

Sony Ericsson executives acknowledged the need to catch up with customers’ tastes.

“Sony Ericsson continues to invest in expanding its product portfolio to appeal to a wider variety of consumers in both new and existing markets,” said Dick Komiyama, president of Sony Ericsson in a prepared statement. “Our product announcements during the first quarter have been well received by the industry, and we expect to see a positive effect from these announcements during the second half of 2008.”

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