Megapixel Camera Phones, a New Catalyst for Category Growth

March 26, 2004 -- Since the first camera phone hit Japan in November 2000, the worldwide market for the product has grown at a rapid rate. Most recently, news of the first megapixel camera phones in Europe is setting the market up for enormous uptake.

The first camera phone (the J-SH04), manufactured by Sharp and launched by J-Phone of Japan, featured only 110,000-pixel resolution. Today, the majority of camera phones feature 0.3-megapixel quality, or 300,000 pixels, an improvement over the J-SH04, but much too low to lead to widespread acceptance.

By contrast, most popular digital cameras feature 3.0 megapixels, enough to adequately produce 8x10 prints. However, at 1.0 megapixels, the new camera phones will enable consumers to safely print standard-size, good quality 4x6 photos. For this reason, the 1-megapixel camera phone is positioned to represent a key sweet spot for vendors looking to push their brands in the new mobile imaging market and for carriers looking to generate additional revenues from multimedia messaging services (MMS), or taking, sharing, and printing of digital photos wirelessly. Despite some limitations, several emerging and future applications will be integral to the further penetration of these devices.

Market Forecast
It's no secret that camera phones have already seen significant success in Europe and Asia. However, the U.S. has had to play catch up – and will continue to do so - as carriers continue to upgrade their networks to handle higher-bandwidth services. Consumer education on the benefits of 1-megapixel plus camera phones will also lead to increased demand for this technology. Worldwide, Japan was the leading region for camera phone sales in 2003, with a market share of more than 50 percent, according to InfoTrends Research Group. However, the group also predicts a major shift in shipments this year as camera phone adoption increases in other areas of the world.

Key Applications
The applications expected to be a catalyst for this type of growth include MMS, image printing, and video applications. MMS, developed by 3GPP (Third Generation Partnership Project) allows users to exchange multimedia communications between mobile phones and other devices. The technology is an extension of the text-based Short Message Service (SMS) protocol, but MMS enables users to send and receive wireless messages that include images, audio, and video clips in addition to text. Picture messaging, taking photos from a camera phone and sharing them immediately with another mobile recipient, is just one current common application of MMS. In the U.S., all major wireless carriers are offering some form of MMS, though specific offerings and pricing varies greatly.

Given the picture quality of camera phones today, primary use has been found in more casual taking and sharing of photos. Such activity is almost entirely for entertainment purposes or to enhance communication, though other interesting and somewhat unexpected, uses have arisen as well. For example, "moblogs", or mobile Web logs, have emerged as a way for regular consumers to participate in a new wave of online journalism by documenting everyday events via cell phone or other mobile devices. In fact, these logs are particularly suited to lesser quality camera phones; as the desire is often to post small images to the Web that do not require a dense amount of pixels.

Image printing will be the next key application once camera phones featuring 1-megapixel resolution become more widely available. Today, much activity has begun to occur in this area from printer manufacturers such as HP, Epson, and Canon as well as camera manufactures such as Kodak, HP, and Fuji. In anticipation of this next tech wave, Hewlett-Packard, Epson and Canon recently announced the formation of a new group: the Mobile Imaging and Printing Consortium; its goal is to specifically promote new standards for printing images captured with camera phones.

Kodak has already emerged as a frontrunner in facilitating mobile printing. The company enables camera phone users to upload pictures and videos to a central server, send them by e-mail, or print them via wireless infrared or Bluetooth at Kodak kiosks. Kodak has plans to enter the European market: Germany, Britain, France, Italy, Spain and the Netherlands and also has deals with three of the top U.S. carriers – namely AT&T Wireless, Cingular and Verizon Wireless. Additionally, Kodak and Nokia recently announced a deal whereby Nokia will design phones specifically for use at its kiosks. In fact, the first product of this deal is about to be harvested, as the newly released Bluetooth capable Nokia 7610 megapixel camera phone will meet users in the second quarter of 2004.

In addition to Kodak, Fuji and Sprint PCS are teaming up to enable Sprint PCS customers to print photos taken with camera phones. Sprint PCS' Picture Mail subscribers will be able to leverage Fujifilm's Get the Picture Online service to view, edit, and share their pictures. In the future, the companies plan to expand their relationship to enable users to locate and forward pictures to retail photofinishers directly from their camera phones.

Beyond just taking photos, even more advanced handsets are beginning to enable video as well. Sprint PCS already offers two new phones that can shoot short video clips (about 15 seconds), the Sanyo VM4500 and the Audiovox/Toshiba VM4050. But the next leap includes devices optimised for longer video applications and video conferencing, like Sony Ericsson's dual mode UMTS/GSM-GPRS video phone, the Z1010, introduced last year, and Samsung's first handset allowing two-way video calls, the SPH-V4300 CDMA2000 1x-EVDO camcorder phone available in South Korea. While these more advanced early models are focused on European and Asian markets, the U.S. will begin to see better video phones coming soon once carriers complete migration to true 3G networks.

Important Limitations
Despite the potential for success, there are several important limitations to 1-megapixel and beyond camera phones. In terms of picture quality, resolution is the number one issue today. Even at 1-megapixel, camera phones only offer the clarity matched to the lowest-quality digital cameras on the market today. Additionally, when viewing images taken or received on the handset itself, the display resolution is also important.

Other major concerns for vendors and carriers offering the devices include power consumption and battery life. Color and high-resolution screens as well as camera and video capabilities consume significant quantities of power that severely cut into the devices' battery life. There is also the issue of memory for storage of photos or lengthy video clips.

Another limitation with the phones lies in the method in which a consumer delivers the images to photo printers. Professional photo finishing solutions like those being set up by Kodak and Fuji are certainly one option, but the true test is enabling consumers to print images from home or the office. This means providing adequate printers and consumables at reasonable prices and perhaps even removing the PC from the equation.

Slow streaming of video is another issue, particularly in the U.S. Operators in South Korea are providing video services that stream between 1 and 3 frames per second, and this is now moving to between 5 and 10 frames as the networks continue to improve. Audio and video streaming have only recently become available in the U.S. and the device options are very limited. In fact, Sprint PCS is the only U.S. carrier to specifically promote streaming services, such as its new TV phone service for $10 per month. Other devices, like the Motorola Microsoft-powered MPx200 with AT&T Wireless service, support audio and video streaming, enabling users to download and play MP3 files or short video clips, but the carriers have not done a lot to promote these features or make content available.

Additionally, network interoperability creates an important limitation, particularly in the U.S. where 6 nationwide carriers and dozens of small, regional carriers still exist. If camera phones are to continue to gain quick acceptance, consumers must be able to take and share photos with users of all types of camera phones on all types of networks.

Finally, security and cost issues are already hindering the penetration of camera phones. Many businesses and public places are banning use due to fears that trade secrets or personal rights will be violated. The thought is that camera phones are essentially cameras disguised as everyday cell phones, and this lends to endless possibilities for individuals wishing to do damage to persons or intellectual property.

In the U.S., cost is somewhat less of an issue since carriers still heavily subsidize phones. U.S. customers can even get some low-end camera phones today at no cost after promotions with a two-year service agreement. However, new 1-megapixel and camcorder phones will continue to be much more expensive. Until consumers are convinced of their value, it will be difficult to justify the cost of many of these high-end devices.    

Future Outlook
The emergence of the 1-megapixel camera phone has begun to significantly enhance the attention on the camera phone category of mobile devices. In the European and Asian markets, where true 3G services are already deployed and increasing in popularity, camera phones will continue to gain widespread acceptance. The U.S. has moved at a slower pace, but new network technologies will prove to be the catalyst for explosive camera phone growth.

Currently, the U.S. market consists of 25 camera phones featuring built-in cameras and 19 camera-capable phones via optional camera attachments. These are offered from the top five carriers and range in price from $0 to $649. The maximum picture quality is up to 0.3-megapixel resolution and between 256 and 262,144 colors. Because cost is an important issue, carriers will continue to heavily subsidize phones and offer additional incentives to entice new camera phone users to buy and existing customers to upgrade phones. Features such as 1-megapixel plus resolution, 262,144 colors and beyond, printing options, and video streaming and conferencing capabilities will also continue to be important, particularly in the U.S. where existing features are already much less robust. New devices are set to flood the already highly competitive mobile market. Couple this with the significant unit sales predicted and we can expect to see increased focus on pricing and promotional activity by carriers, new photo sharing and printing services promoted by carriers and photo finishers, and increased branding efforts by device manufacturers, carriers, and digital imaging partners.




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