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Buy CellHow many mobile phones does the world need?

By Daniel Gross
Posted Wednesday, June 2, 2004, at 5:37 PM ET

Is it possible to live on Planet Earth without a cell phone? The answer would seem to be no, at least according to the cell-phone industry and its analysts. Tim Long, an analyst at Bank of America, in May projected that 650 million wireless handsets would be sold this year and 730 million next year. Trikon Technologies Inc., which makes equipment used in the construction of cell-phone components, said in a recent release that the worldwide handset market is "forecasted to reach 1 billion units by 2006."

Of course, everyone knows a guy with four cell phones—usually he has the same number of ex-wives—but these numbers are jaw-dropping. Considering that the census clock shows a current population of about 6.372 billion, Long is suggesting that one in every 10 human beings will buy—not possess, but buy—a new cell phone this year. Trikon believes that in 2006, one in every 6.5 humans will do the same. Not adults, not workers, but one of every 6.5 people.

Are these stunning numbers real, and are they sustainable? So far, investors haven't pushed the stocks of Nokia and Motorola to anywhere near their bubble-era heights. But the cell-phone growth projections are based on premises that are more redolent of 1990s-era techno-enthusiasm than the current decade's putative realism. Some savvy observers of the telecom world detect the beginnings of a bubble. "At some point, we're going to run into the law of large numbers and it's going to be a nasty setup," said Cody Willard, general partner at CL Willard Capital and a columnist for TheStreet.com. "I just don't think we're quite there yet."

Last year, according to Alex Slawsby, a senior analyst at IDC, 551 million cell phones were shipped from vendors, up 20.8 percent from 456 million in 2002 and nearly double the figure from 1999. (Since cell phones are sold through so many retail channels around the world, it is difficult to get hard numbers on retail sales.)

Few analysts believe growth will continue at this pace. Long, for example, sees sales rising at a compound rate of about 11 percent for the next five years, so that in 2009 about 1.1 billion handsets will be sold. That sounds reasonable enough. But when you start from a very large base, and when the pool of potential buyers and users is growing at only about 1 percent, the longer-term picture becomes blurry.

Slawsky says there are 1.35 billion cell phones in use in the world today. By 2008 there should be 2 billion wireless subscribers in the world—30 percent of the projected global population. That won't leave many potential customers left. The World Bank says that in 2001 more than 1.1 billion people lived on less than $1 a day. Not many of them will be buying Motorola's new flip phone. Throw in the large chunk of the population made up of kids and very old people, and "there's probably 2 to 3 billion people that will never have a cell phone," says Slawsky. By his reckoning, some time between 2010 and 2020, everyone who wants and can afford a cell phone will have one. In 30 years, cell phones will have gone from an oddity to a luxury to a necessity.

The projections also assume smooth, uninterrupted growth in the global market, particularly in developing markets. China and India, with a combined population of more than 2 billion, represent the greatest growth markets for cell phones. In 2003, sales of handsets in China and India were 74 million and 17 million, respectively. Long assumes steady year-over-year compounded growth in both markets, so that by 2009 the two Asian giants will account for 259 million sales. Sales are also projected to quadruple in the Middle East and Africa, from 33 million in 2003 to 123 million in 2009. But the economies of these regions are prone to busts as well as the booms they're currently enjoying. And when you're expecting compounded double-digit growth, one flat or down year can quickly make long-term projections seem unreasonable.

The projections also assume that sales will continue to grow or at least remain constant in developed markets where cell-phone penetration is remarkably high like Japan (62.7 percent) and Western Europe (77.2 percent). In these markets, most of the activity comes from selling newfangled phones to existing users. And manufacturers are busily stuffing new features into cell phones—cameras, text messaging, Internet access. For a large chunk of the market, then, growth depends on how fast existing customers decide they need new phones. Long's analysis shows that the replacement rate should fall from 2.9 years in 2003 to 2.6 years in 2004. Over the long term, Long's model sees people replacing their phones once every two years. That means half the people who own cell phones will get new ones each year—up from about one-third today.

That may happen. Or it may not. As with PC users, cell-phone owners need a reason to trade in machines that continue to function perfectly well. If they don't, or if the networks needed to support enhanced handsets aren't rolled out quickly enough, the demand won't materialize as projected. That's precisely what happened in 2001, when global sales of cell phones actually dropped by a few percentage points—despite the introduction of smaller, snazzier phones.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
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