What's Ailing Sony Ericsson?

When handset maker Sony Ericsson signed tennis star Maria Sharapova last January as its first-ever global brand ambassador, it was hoping her cachet would boost sales of its high-end multimedia gadgets, which are facing a lot more competition these days from the likes of Nokia (NOK), Samsung, and Apple (AAPL).

But the glamorous Russian lost badly this year at both the French Open and Wimbledon, leaving some sportswriters to question whether Sharapova's best tennis days are behind her. That makes her a somewhat ironic choice for spokesperson, as some mobile industry analysts are starting to ask similar questions about Sony Ericsson.

The Japanese-Swedish phonemaker scored big a few years back with a series of devices built around Sony's iconic Walkman marque. But analysts say the sub-brand has become a bit stale and Sony Ericsson hasn't yet been able to serve up another ace. Indeed, some are even starting to compare Sony Ericsson to Motorola (MOT), which stumbled by relying too long on its once hot-selling Razr series.

All of this helps explain why the company issued a profit warning June 28. The joint venture of Sony (SNE) and Ericsson (ERIC) said it will likely only break even in the second quarter, blaming lower market demand for mid- to high-end mobile phones and delays to new products planned for the quarter.

Sales Falling Across the Industry

It was Sony Ericsson's second profit warning of the year. In the first quarter, the company reported a 47% year-over-year decline in pretax profits, to $304 million, on sales down 8%, to $4.2 billion. The full set of second-quarter financial results will be announced July 18, and Sony Ericsson declined to make executives available to discuss its financials or market conditions in the interim.

To some extent, Sony Ericsson's woes are shared by the industry as a whole. Mobile-phone sales fell 16% in Western Europe in the first quarter—the first such decline recorded since 2001—and there are indications weakness is spreading elsewhere. Tech consultancy Gartner (IT) has lowered its estimate for global unit sales growth in 2008 to around 10% from a previous range of 10% to 15%. (In 2007, by comparison, sales grew 16%.) "Given how the second quarter has gone, we are more conservative in our annual expectations for worldwide sales than we were at the end of the first quarter," says Caroline Milanesi, Gartner's research director for mobile devices.

The numbers are heading down due to the economy. In Western Europe, Milanesi says, spending-conscious buyers are passing up high-end models in favor of midrange alternatives that often come for free with prepaid service contracts. And in emerging economies, which have been the big growth driver for the industry in recent years, first-time handset owners are holding off on trade-ups to snazzier models as they contend with rising expenses for food and fuel. This delay in upgrades especially hurts Sony Ericsson and Samsung, which rely more on replacement sales in emerging markets than on first-time buyers.

Too Concentrated in Western Europe

The trends are tough for everybody, but Sony Ericsson is being hit harder than most of its rivals. In the first quarter of 2007, the London-based company posted global sales growth of 64%. A year later, that had fallen to just 2%, and sales are now declining, says Neil Mawston, director of the global wireless practice at researcher Strategy Analytics in Milton Keynes, England.

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