The phone industry is turning into a painful demolition derby

LG Earnings Analysis

LG just reported a surprisingly large 43 billion won loss in its mobile communications division, despite 54% unit volume growth during the Christmas quarter of 2013. This is particularly depressing, because LG had launched an aggressive marketing campaign to support the well-reviewed, highly sophisticated LG G2 phablet. During the Christmas quarter in 2012, LG was enjoying massive volume growth, strong reviews of a fresh flagship phone and robust carrier/retail support across Europe, North America and Brazil. It wasn’t enough.

The whole strategy of second-tier phone vendors spending massive sums to support ambitious high-end phone launches is falling apart. Motorola, HTC, Nokia and LG have failed with their recent high-impact launches and are now facing a brutal Q1 2014. As their flagship models from 2014 are already fading, the dramatic weakening of Latin American currencies is undermining emerging market performance while demand slumps in both the U.S. and European markets.

Apple and Samsung are dominating the high-end market more than ever, with their Chinese and Indian combined market share now rising steadily thanks to aggressive new marketing moves in these two engines of the global phone industry. The second-tier brands could try to pivot to the low-end market, but the awful deterioration of Nokia’s handset performance in the fourth quarter shows how tough that move is to execute. As the demand for high-end Lumias faded in the Christmas quarter, Nokia’s handset division was exposed to just how unprofitable the Lumia 500 budget smartphones are.

We are likely to enter a painful demolition derby era, during which the handset businesses belonging to Google, Microsoft, LG and Sony remain painful sources of permanent losses for their mother companies. Until pulling the plug on brain-dead smartphone divisions becomes a new trend.

It’s hard to say how long this will take, but it’s quite possible that by the end of the year, several of these firms will face $500 million to $1 billion or more in quarterly losses generated by ailing phone units.

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