(Source: LuxuryBrandNetwork.com)

Mobile phones aren't just broadcasting call signals--they're also broadcasting a user's social status and personality.  That's one reason the segment is booming, prompting big names like Ferrari, Prada and Dior to co-brand handsets, as well as encourage dedicated mono-brands like Vertu to establish themselves. 

But are these decisions by major companies to enter the market based on over-inflated estimates of market potential by over-eager telecom analysts?

Analysis by LuxuryBrandNetwork.com suggests market size projections for luxury mobile phones are being grossly overstated, potentially causing over-investment by major luxury brands.  ABI Research's new 48-page report, "Luxury Mobile Phones," estimates $11 billion in revenue generated by luxury handsets next year.  The report, released 5 Aug 2008, says that revenue will compound at more than 40% per year to exceed $43 billion in 2013.

Neil Mawston of Britain's telecom consultancy Strategy Analytics estimated in BusinessWeek that handset-maker Vertu generates $1.6 billion in sales (200,000 of the hand-made units a year at an average $8,000 each).   That would comprise nearly 3% of Nokia's $58 billion revenues, says BusinessWeek. 

But that analysis seems flawed in our view for several reasons.  First off, 2007 revenue for Nokia was actually just $51 billion.  Second, examination of the company's financials reveal that just under half that figure (or $25 billion) was in handset sales.  Mawston's estimate would put Vertu's share of company handset revenue at a highly-unlikely 6.4%.  Finally, the average selling price for the company's handsets keeps dropping (€74 in the most recent quarter, down from €90 in the same period last year).  The company says this was "primarily due to a higher proportion of lower priced products."  These figures simply don't reflect much of an impact from Vertu sales.

Most damning to ABI's $11 billion market size estimate is the prognosis of Vertu's president, Alberto Torres.  He has every reason to tout the luxe phone space as head of the Nokia division that pioneered ultra-luxury handsets.  "From what we've seen, the creation of a multibillion-dollar market in luxury phones over the next few years is very possible," Torres told BusinessWeek at the end of December, clearly communicating that the market is not yet there.

We don't see any problem with ABI's 40% growth estimate, nor does our critique mean luxury phones are not an attractive market:  it's just that $1 billion and $11 billion starting market sizes yield very different risk and investment decision.

According to Vertu's Torres, sales in Russia already outstrip those of any country in Western Europe, while the Mideast market should clock triple-digit growth until 2010. China is also booming. 

Demand is strong in more developed countries, too, with triple-digit gains in the U.S.  Vertu plans to enter the tech-savvy Japanese market in the second half of 2008.

Why the disconnect on market estimates?  One reason is that market research firms have a natural bias towards large market estimates:  they sell reports only when clients believe there is big potential in an area of interest.  No client will purchase a market research report that concludes there's not much of a market in a space.

Regardless of the specific market size, luxury-branded mobile phones are certainly here to stay.  "For luxury goods producers, mobile phones are a logical addition to their basic product portfolios of jewelry, watches, and other fashion accessories," said ABI Research Director Kevin Burden.  "From the perspective of handset manufacturers, a luxury mobile phone does not simply mean a new handset model, it represents a meaningful strategic approach to increased brand equity."

That's a projection with which we can heartily agree.

(Posted 8 Aug 208)