Wireless

Worldwide cell phone sales fell in the first quarter of this year, but smartphones continued to grow, despite a deepening recession, according to a report published by Gartner Wednesday.

The news shouldn't come as a big shock. Cell phone manufacturers, such as Nokia, had reported disastrous earnings for the first quarter. But the growth in smartphone sales, which were up 12.7 percent compared to the first quarter of 2008, provides some hope for the industry.

Touchscreen devices seem to be leading the pack in terms of device growth, with Apple's iPhone 3G doubling its market share in the first quarter compared to the first quarter last year. Apple shipped 3.9 million iPhones for a market share of 10.8 percent.

In terms of the overall cell phone market, manufacturers sold about 269 million cell phones, which was about 14.5 percent fewer than were sold during the fourth quarter of 2008 and about 9.4 percent lower compared to the same quarter last year.

Nokia continued in the lead with about 36 percent of the market, a 3 percent dip from the same quarter last year. Samsung's sales grew and it is now the second largest cell phone maker with 19.1 percent of the market. This is up from 14.4 percent during the first quarter last year. LG, Motorola, and Sony Ericsson make up the rest of the top five cell phone makers.

While Apple saw the largest amount of growth on the smartphone side, Nokia managed to hold onto to its position as the world's largest manufacturer of smartphones. The company has 41.2 percent of the smartphone market. But its marketshare has been slipping. At the end of 2008, the company had 45.1 percent of the market. Aside from Apple, Research In Motion also had a big quarter. Its BlackBerry devices made up nearly 20 percent of all smartphone sales in the quarter.

The boost in smartphone sales is particularly good news for companies like Palm, which is banking on the success of upcoming Palm Pre. The phone, which goes on sale June 6, will initially be sold exclusively on Sprint's network. The device was announced in January at the Consumer Electronics Show in Las Vegas and has been hyped ever since. Sprint's CEO Dan Hesse said this week he expects shortages when the device goes on sale in a couple of weeks.

Even though smartphones sales continue to grow, they still only make up about 13.5 percent of total mobile devices sales. This figure is up from 11 percent a year ago, but it still represents a small portion of the overall cell phone market.

The fact that the smartphone market is growing at all during the current recession says a lot about the pent up demand for higher functioning devices. But hefty service fees could derail growth if the economy doesn't pick up or people lose their jobs.

However, there are signs the market is stabilizing. Mark McKechnie, an analyst with Broadpoint AmTech, published a research note earlier this week stating that early indications suggest that Nokia's sales could be up slightly up in terms of total units for the second quarter. Still, even though the market looks like it might be stabilizing, most analysts don't see a recovery until well into 2010. Until then companies will be crossing their fingers that consumers' love affair with smartphones continues.

Correction: Virgin Mobile began selling its $50 unlimited plan in April after the first quarter had ended.

Competition in the prepaid cell phone market is heating up, making it more difficult for companies, like Virgin Mobile USA, to hold onto subscribers in an increasingly crowded market.

Virgin Mobile USA, a longtime player in the prepaid cell phone market, reported Monday it had lost a total of 133,292 net customers during the quarter to end the period with 5.2 million subscribers. Even though subscribers were up 2.8 percent compared with last year, the company's losses during the quarter point to growing competition in the prepaid market.

The market appears to be especially competitive when it comes to flat-rate, contract-free wireless services. Regional players Leap Wireless International and MetroPCS, which have long offered cheap flat-rate services, reported strong subscriber growth during the first quarter, as they each expanded into new markets. And Sprint Nextel's Boost Mobile, which began offering its $50 unlimited plan in January, also added about 764,000 new subscribers in the first quarter.

Virgin Mobile, which had been successful in the past selling pay-as-you-go service in the U.S. market, lowered the price of its all-you-can-eat plan in April to $50 a month, as well. The company also launched the Pink Slip Protection program, which offers customers who have lost their jobs free service for three months.

Virgin Mobile has managed to improve its churn rate, or the rate at which subscribers leave its service. The company reported that its churn fell to 4.8 percent from 5.1 percent during the same period a year ago.

The company sees the $50 flat-rate plans and other "hybrid" plans, which offer a set number of minutes at a standard price without a contract, as its growth engine for the future. Chief Executive Dan Schulman said that 55 percent of the gross customer additions during the quarter came from "hybrid" plans, according to the Wall Street Journal.

This makes sense given that consumers say they are considering prepaid cell phone services as a way to reduce costs and avoid lengthy carrier contracts.

Virgin Mobile USA is offering laidoff consumers a little relief in this tough economy.

The cell phone operator is offering a "Pink Slip Protection" program that essentially picks up the tab for three months of service for customers who have lost their jobs. To qualify for the three free months of service, users must subscribe to one of the company's monthly service plans, which cost $29.99, $39.99, and $49.99. New subscribers will be automatically enrolled in the program and existing customers can also enroll for the program.

Virgin said it will pay bills up to $90 a month, including taxes and surcharges. Subscribers must have the Virgin monthly service for two months before they are eligible for the benefit. To qualify and verify that subscribers are indeed laid off, Virgin is requiring that users show proof of state unemployment benefits.

Virgin is a low-cost cell phone provider that actually uses Sprint Nextel's network to resell wireless minutes.

The recent economic downturn is proving to be a boon for low-cost service providers, like Virgin Mobile. Many consumers looking to cut their monthly cell phone bills have been turning to prepaid wireless providers. And companies like Cricket, MetroPCS, Virgin Mobile, and Sprint's Boost Mobile have seen an increase in the number of new subscribers.

These low-cost providers have been offering cheaper plans to try to attract cost-conscious customers. Boost Mobile recently introduced a $50 all-you-can-eat monthly plan that offers unlimited voice, data, text messaging, and wireless Web access.

Red ink flowed throughout the broader markets Thursday following unsettling news that General Motors auditors are casting doubt on the company's ability to survive..

The Dow Jones Industrial Average closed down 281.40 points, or 4 percent, to 6,594.44, a low it hasn't seen since 1997.

The Dow's decline has been rapid. Just four trading days ago it was in the 7,000 range. And just 13 trading days before that it was in the 8,000s, where it languished for months.

The Nasdaq closed down 54.15 points, or down 4 percent, to 1,200, and the CNET Tech Index dropped 27.34 points, or 2.76 percent, to close at 962.74.

A few tech companies managed to swim against the tide.

Leap Wireless stock rose 4.47 percent to $28.27 a share. The company announced its wholly owned subsidiary, Cricket Communications, struck a deal with Samsung Telecommunications America, in which Samsung's SCH-r211 bar-style phone would be available to customers using Cricket's unlimited wireless services.

And Chinese Internet search company Baidu jumped 2.66 percent to $161.51 a share, after a Citi Investment Research analyst upgraded the company to a "buy" from a "sell," according to an Associated Press report. The analyst upgraded the stock based on weekly improvements to traffic on its site since January, according to the report.

Networking gear maker Ciena saw its stock jump 11 percent to $5.93 a share during the regular trading session Thursday, after announcing it would cut 200 positions, or 9 percent of its workforce, and close its research and development facility in Massachusetts.

That news apparently pleased investors, despite the company also reporting a 26-percent revenue drop in the first quarter over year ago figures and a net loss of $24.8 million, compared with a net profit of $28.8 million, during the same period.

Adobe Systems was another company that posted share price gains, despite issuing a first-quarter warning after the markets closed Wednesday. The software maker said it would miss its earlier revenue forecasts, but expected to remain on target with its profit projections.

Shares of Adobe advanced 3.68 percent to $16.92 a share on Thursday.

Nearly a quarter of all handsets sold in the U.S. during the fourth quarter were smartphones, according to the NPD Group, a market research firm.

A new study released on Tuesday indicates that about 23 percent of all handset sales in the U.S. during the fourth quarter of 2008 were smartphones. This was up from 12 percent of all handset sales in the fourth quarter of 2007.

But as sales soared, prices for these advanced phones dropped. In fact, the average price of a smartphone during the quarter dropped by 23 percent from $216 in the fourth quarter of 2007 to $167 during the fourth quarter of 2008, NPD said. Apple's new iPhone 3G, priced at $199 with a two-year service contract with AT&T, helped lead the growth in smartphone volumes, but also led the industry in terms of declining prices.

The $200 price range appears to be the sweet spot for consumers in this market. And other manufacturers including Research In Motion with its Blackberry Storm on Verizon Wireless, the T-Mobile G1, and the-soon-to-be-launched Palm Pre from Sprint Nextel all fall within this price range.

NPD also noted that high-speed data services are becoming more central to smartphones. And about two-thirds, or 66 percent, of smartphones sold last year now use 3G wireless networks. This is compared with about 46 percent of smartphones that used 3G a year ago.

This is good news for mobile operators, which are locking consumers into expensive data plans in exchange for subsidizing their handsets.

But as competition heats up, experts like Ryan Reith of IDC expect carriers to further subsidize these devices to compete with other carriers. The iPhone has been holding its value very well. But carriers are already starting to cut prices and offer special deals on other smartphones.

Only a month after it hit the market, the G1 started selling for $148 from Wal-Mart. And three months after it launched the Storm, Verizon Wireless is now offering a special "buy one get one free" promotion that allows customers who buy any BlackBerry device, including the Storm, to get another one free.

While these subsidies could attract new customers, they will also cut into mobile operators' profits.

NPD Group suggests that carriers and retailers look toward selling more accessories to help boost profits. The market research group found that more than half or 52 percent of smartphone buyers purchased an accessory when they purchased their phone, while only 41 percent of all cell phone buyers bought an accessory at the time of purchase.

Nokia, the largest handset maker in the world, is cutting jobs at one plant and closing down at least one R&D site, as demand for cell phones plummets amid the worldwide recession.

The Finnish company said Wednesday that it will cut production at a key plant in Salo, Finland. It also plans to temporarily lay off about 20 percent to 30 percent of the plant's 2,500 employees on a rotational basis. All workers at the plant will be affected as groups rotate through the temporary layoffs.

Nokia also plans to shut down one R&D center in Jyvaskyla, Finland, where it currently employs 320 people. And it will cut another 90 jobs elsewhere, the company said.

The cuts come as Nokia is being hit by slowing demand in the cell phone market. In January, executives told investors that they expect the overall cell phone market to drop around 10 percent in 2009.

For the fourth quarter of 2008, Nokia's sales dropped 19 percent to $16.5 billion compared with the same period a year earlier. Its profit fell about 69 percent.

While the overall cell phone market has declined, smartphones sales have actually been growing. In the fourth quarter, smartphone sales were up about 22.5 percent year over year, buoyed by new products from Apple and Research In Motion. But Nokia has actually been losing share in this high-end niche to these competitors.

To cope with the deteriorating economic situation, Nokia CEO Olli-Pekka Kallasvuo told investors last month on its quarterly conference call that the company plans to slash annual costs by about $905 million by the end of 2010. Kallasvuo also acknowledged that the cost cutting would likely result in job cuts.

The global recession is hitting the handset market hard, as the biggest supplier in the market, Nokia, is seeing its sales plunge.

The Finnish handset maker said Thursday that fourth-quarter sales dropped 19 percent to $16.5 billion compared with the same period a year earlier. And its profit fell about 69 percent.

Nokia had warned investors in November and December that sales volumes were going to be lower than expected, but the magnitude of the decline still came as a big surprise to most investors.

Sales were hit not just at the high end, but also at the low end, where Nokia has driven much of its profits the last several quarters.

At the high end, the company lost market share to Apple with its iPhone and Research In Motion with its BlackBerry devices. But the company also felt the slowdown in developing markets, where it has provided low-cost phones. Even in China, Nokia's largest handset market, the company sold 36 percent fewer devices during the fourth quarter than the same period a year ago. And sales were down 23 percent in the Middle East and Africa.

CEO Olli-Pekka Kallasvuo explained that the weak economy forced many distributors and retail outlets to sell excess inventory instead of ordering new devices from the manufacturer. But he said as inventory is sold, he expects sales to pick up later in 2009.

Nokia's dismal earnings are likely a harbinger of problems that face handset markers in 2009. Nokia has for many quarters been the strongest cell phone maker in the market. It has dominated both at the high end and at the low end of the market. But Kallasvuo said the overall market is weak now because of the poor economic conditions around the world. And he expects the overall handset market to be down 10 percent in 2009.

The fact that Nokia is now struggling to get people to buy new phones, means it will likely be even harder for its weaker competitors, such as Motorola and Sony Ericsson. Last week, Sony Ericsson Mobile Communications, a joint venture formed between Sweden's Ericsson and Japan's Sony, reported a loss of $243 million for the fourth quarter. Motorola was already struggling before the economy took a sharp nosedive. And the overall outlook for the industry will certainly hurt it most severely as the company is not expected to come out with any exciting phones until 2010.

Nokia is in far better shape than these other companies. And it will surely weather the current economic storm. But the question is how badly will it get beaten up in the process? The smartphone category of handsets is where most of the growth will likely come from in the coming year. But it is precisely this market, where Nokia faces the stiffest competition from Apple and RIM.

Nokia says it has products in the pipeline that will compete in this category. It has the 5800 Xpress Music phone, which has a touch screen and offers multimedia functionality. It also plans to launch the N97, which will also have a touch screen and a slide-out keypad.

Even with new devices, Kallasvuo acknowledged the company will have to make significant cutbacks. Specifically, it plans to reduce annual costs in its devices and services operations by more than $900 million by the end of 2010. The cost cutting will no doubt result in job cuts, Kallasvuo said. But he didn't say how many jobs would be lost.

Editor's note: This is part of a series of stories about the recession's effect on the tech industry.

A year before the U.S. economic crisis came to a head, Debra James of Oakland said she saw the writing on the wall and decided to trim the household budget. Topping the list were things like satellite television.

"I could tell the economy was getting sluggish in the summer of 2007," she said. "So I decided we needed to make some cuts, so that if things got worse, it wouldn't be so painful."

Indeed, things did get worse. The U.S. economy has technically been in a recession since December 2007, according to a recent report from the National Bureau of Economic Research, a nonpartisan group that officially tracks recessions.

Workers in the U.S. have steadily been losing their jobs all year as companies slash headcount to cut costs. The worst month so far has been November, when U.S. companies shed a whopping 533,000 jobs, according to the Bureau of Labor Statistics. This was the worst single month of job losses in the U.S. since 1974, when the economy was coming out of another severe recession, a recent New York Times article reported.

The big difference this time around is that the current recession seems to be picking up steam, with even more companies announcing layoffs in early December.

While Debra James, 45, and her husband Mervin James, 40, have kept their jobs so far, Mervin, a heating and air conditioning technician for new construction in the Bay Area, has had his salary cut by 20 percent in the past year. And his company has stopped paying for vacation time.

James said the pay decrease has taken a toll on the family finances. She and her husband are putting less money into their savings every month. But because they've been able to eliminate a significant chunk of their monthly expenses, they've had more wiggle room than they would have had if they hadn't started cutting back.

"If we were living the lifestyle we had been living before we made some changes, the salary cut would have definitely had a negative impact on us," she said. "But we were ready for it."

Top on the list of services to cut was the satellite TV package. James said she and her husband were spending $115 a month for their Dish satellite service, which gave them about 250 channels of programming. But when she sat down and listed what she and her husband actually watched, she discovered that they only viewed about 25 of those channels.

"I just couldn't justify watching only 10 percent of the channels I was paying for," she said. "I would have felt a lot better about keeping the satellite service if I could have thrown out the extra channels and only paid for the channels we watched. It's just like buying a whole loaf of bread and only eating two slices--such a waste."

This idea of a la carte pricing for TV channels or allowing people to pick and choose which channels they want to get has had strong support for several years from Federal Communications Commission Chairman Kevin Martin, as well as from many parent and consumer advocacy groups. But the cable TV industry has long argued that pricing individual channels would result in higher prices and fewer choices for all consumers.

After a few Google searches, James said she found a wealth of legitimate sources for TV programming online. Sites such as Hulu, Fancast, Joost, YouTube, and most major TV networks' Web sites offer TV shows and other video content for free. Using an existing rooftop antenna, James plugged her TV into the hook-up to get more than 50 high-definition TV channels over-the-air. The cost for these HD channels: zero.

And instead of spending an extra $20 a month for HBO or any other premium movie channels, James subscribed to a $17-a-month Netflix service, which allows her to rent three movies at a time and download some movies right to her computer.

In order to view the online programming on her TV, James spent about $600 on a new computer, an HP Pavilion Slimline. The Windows Vista computer came with an integrated TV tuner, a High Definition Multimedia Interface cable for carrying high-definition video, and an embedded Blu-Ray/DVD player. The PC, which is only about the size of an old VCR, hooks directly to her TV and can be programmed to act as a DVR recording over-the-air programming that is received from the rooftop antenna. And because most of the Web content is on-demand anyway, James said she can watch whatever she wants, whenever she wants it.

She invested another $50 for a wireless mouse and keyboard, which she uses to search for programming on her hard drive and on the Net. To make finding the shows she likes easier, James said she simply bookmarks her favorite Web sites like the Discovery Channel, which offers full-length documentaries online.

Because she and her husband are watching more video online, James upgraded their DSL service from the $25 deal, which gave them 1.5 Mbps downloads and 384 Kbps uploads, to the $30-per-month service, which offers up to 3 Mbps downloads and 512 Kbps uploads. All told, she is saving about $93 a month after the $17-a-month Netflix subscription and the $5-a-month extra for higher-speed broadband. The cost of the new computer was paid off in about six months.

Instead of feeling deprived, James said getting rid of the satellite TV service has been a huge improvement.

"We definitely watch more TV now than we did with Dish," she said. "And because most of the shows online through services like Hulu.com don't have commercials, I can watch them much quicker too."

And because some TV channels actually offer additional video content online than they do on regular TV, James said she and her husband are able to get more variety and choice than they were getting with their Dish package. For example, AT&T, her broadband provider, offers a special broadband channel called ESPN360.com.The site offers a wide variety of sports programming from college football to international soccer matches to Nascar, which aren't always shown on the cable or satellite ESPN channels. The events are often aired live and replayed at a later time. And it's all free.

James said she has even been able to find plenty of kids programming on some Web sites, such as Nickelodeon.com and Disney.com, for when her young niece visits.

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Setting up the new entertainment system wasn't difficult either, she explained.

"I would say I am a proficient computer and Internet user," she said. "I can follow directions when it comes to plugging cables into something. But I don't know anything about programming or uploading or streaming movies or music."

But James did say that searching for TV shows using a mouse instead of a remote control means she and her husband have to make a few more clicks to find what they're looking for. And she admitted older TV viewers might not like the new interface. But she added it didn't take long for her and her husband to adjust to the change. Besides, she said the amount of money they save every month is worth it.

"I enjoy my extra $93 a month," she said. "In fact, we just came back from a vacation where we spent a good deal of money, but it was nice to know we were spending money that we had saved from cutting back."

As the recession takes its toll, Motorola announced Wednesday that it is cutting compensation and benefits packages for its employees, including top executives.

Co-CEO Greg Brown will forgo a 2008 cash bonus earned under his incentive plan, while co-CEO Sanjay Jha will forfeit his cash bonus at a similar level as Brown's and take the remainder of his cash bonus in restricted stock.

Beginning in the new year, Motorola plans to suspend its matching 401(k) contributions, leaving employees to be the sole contributors to their 401(k) plans.

And a number of Motorola employees will face a salary freeze in the new year, with co-CEOs Brown and Jha taking a 25 percent cut to their base salary.

Beginning March 1, Motorola will permanently freeze its U.S. pension plan, preserving the vested benefits accrued by employees and retirees, but canceling future benefit accruals. The company, however, will continue to fund its pension obligations to current and future retirees.

"The sustained downturn in the global economy requires that we take these difficult but necessary steps," Brown and Jha said in a statement. "While serving our customers remains a top priority, we are equally focused on our cost structure, and we will continue to implement appropriate measures to conserve cash and reduce expenses."

The compensation hit is just the latest blow to Motorola, whose troubles reach back before the onset of the current economic crisis. Earlier this month, for instance, Standard & Poor's dropped the phone maker's credit rating to junk status.

Motorola fell 4.31 percent to $4.22 a share in early morning trading Wednesday.