Over the last decade, the mobile phone has become not only our primary communication tool, but also a key wardrobe accessory used more and more for personal self-expression. We now say something about ourselves with our choice of handset.

In this process of mobile phones transforming from functional gadget to fashion item, companies from all reaches of the luxury sector are clamouring to offer their own unique handsets. Be it the product of collaborations with leading mobile phone manufacturers and developers or independently produced bespoke gadgets, mobile phones are an effective device for luxury companies to extend the brand into an entirely new product line and to demonstrate the design prowess of its high-end craftsmen. Moreover, the recent hype surrounding mobile phone and luxury brand collaborations has afforded its participants with incredible press attention and greater recognition amongst customers who may not have paid attention to the brand in the past.

This so-called ‘luxury phone’ market may still be in its infancy, but is quickly becoming a big business. ABI Research forecasts an $11 billion luxury handset market for 2009 and estimates $43 billion for 2013. Leading luxury phone manufacturer Vertu — a British subsidiary of Finnish Nokia — recently surpassed one billion euros in yearly sales.

Taking the mobile market as a whole, luxury and fashion only make up a slender fraction of total sales, but industry expert Matt Lewis of London-based wireless consultants ARCchart explains why the high-end handset market is important: “What makes it viable is that the business model is quite different. These devices ship in lower volumes, but the margins are significantly higher.”

And as the total market for mobile phones expands worldwide, we can expect the high-end handset segment to also grow in tandem. Sales Director Julien Verbois from CG Mobile — French creator of many high-profile mobile phone collaboration models — is also optimistic, stating how: “Studies have shown that the co-branded mobile phone market will expand from 1% market share in 2006 to a targeted 20% by 2010.”

Three Categories: Branded Mass-Market, Premium Fashion, and Luxury

Although many tend to lump all high-end phones together in the same product category, UK wireless market analysts ARCchart break down the product offerings into three categories: branded mass-market phones, premium fashion phones, and luxury phones.

Branded mass-market phones include Motorola’s RAZR, Nokia 8800, and perhaps even the iPhone These are models sold at the operators’ own retail spaces and are generally available with network operator subsidies. This category has been a significant area for luxury brand collaborations.

The Prada-LG phone debuted in 2007 at around $800 and offered a sleek black exterior shell and clean interface in line with the Italian brand’s usual aesthetic. Samsung countered with a successful Giorgio Armani handset and is poised to release a less expensive Emporio Armani collaboration model called NIGHT EFFECT. Dolce & Gabbana’s gold-coloured Motorola — priced at under $200 — racked up $315 million in sales.

Prada Phone by LG Advertising Campaign

For its part, CG Mobile realised a Samsung and Hugo Boss collaboration — a near perfect iPhone clone with a chic monochromatic exterior. Verbois believes this model to be a great example of the potential for partnering: “Our Samsung F480 Hugo Boss is a very good example of a balanced partnership between two leading brands. Its success all around Europe is probably the best testimony of the relevance of the choice.”

Other fashion phone collaborations have been more about subtle exterior motifs than manufacturing a unique shell from scratch. The agnès b mobile phone — created by CG Mobile — takes a standard Sagem shape and adds the French brand’s famous lizard logo on the outside and on the stand-by screen.

In Japan, Coach released a limited-edition model with carrier KDDI au in celebration of its mobile webpage launch. The handset was a basic au model, but came in a pattern using Coach’s colours and its “C” logo mark. In order to bring attention to the brand’s founding in 1941, Coach only offered 1,941 phones for sale and priced each at 19,410 yen.

A step up from the simple co-branding of the mass-market segment are the premium fashion phones, for the most part offering very unique shells from masters of industrial design. Here we see Bang & Olufsen’s Serene (built by Samsung) and Motorola’s AURA, built from 200 parts, which retails for $2000.

Luxury phones, on the other hand, are not merely cross-branding platforms or engineering marvels: they are high-end objets crafted from the finest materials. The highest priced Dior Phone — made by French company ModeLabs — is inlaid with Swarovski crystals and retails for $26,000. Tag Heuer’s $6,000 Meridiist phone is available in crocodile skin. Vertu’s Diamond series boasts phones made with diamond-encrusted platinum frames, and its collaboration with French jeweller Boucheron will set you back over $300,000. The Russian Gresso phone is made from 200-year-old African Blackwood and sports navigation keys in gold and white diamonds.

Luxury, however, does not merely entail the addition of precious stones. At the Baselworld conference held last week, Ulysse Nardin, the Le Locle-based house responsible for the creation of such timepieces as the 1846 Chronometer and the Astrolabium Galileo Galilei, unveiled The Chairman, a smart phone that incorporates environmentally-friendly kinetic technology inspired by the winding mechanism of an automatic mechanical watch.

Ulysse Nardin Chairman Mobile Phone

Vertu offers a button on each phone that instantly connects with an international concierge who will make dinner reservations or find a babysitter for customers, no matter their location. Vertu has also pioneered a retail store experience that brings the luxury world’s superior customer service model into the handset purchasing process.

Hurdles and Roadblocks

Upon viewing the first wave of successes, luxury handset collaborations appear to be win-win for the brands and the manufacturer/carriers. There are, however, serious issues that may hamper broader market growth in the future. For one, luxury brands hoping to wing it without an established mobile industry partner may face fierce technological barriers. Matt Lewis from ARCchart reminds us of the initial difficulties developers faced trying to work around the problem of casing radio antennas on handsets in precious metals. This is where Vertu’s Nokia connection proved useful, enabling the luxury maker to avail itself of Nokia’s technology back catalogue.

While engineering issues seem to be mostly resolved for the moment, the trade-off between technology and ‘bling’ is still the most unresolved issue for the collaboration field. Vertu and nearly all other high-end phones can offer only the most basic communication functions and cannot compare in interface or specs with tech-driven mass-market models like Apple’s iPhone. ARCchart’s Lewis puts this problem in perspective:

“When it comes to luxury products, particularly in the automotive industry, not only are they at the cutting-edge of design but typically they are at the cutting-edge of technology as well. This is true for cars like Mercedes, BMW, and Porsche. That’s definitely not the case with the luxury handset market. When you look at the feature set of technology on a lot of luxury phones, they are way, way down on the end of the scale. There is a very basic reason for that: the technology has been evolving so quickly over the last five years that it’s very difficult for these companies to come in and differentiate themselves on technical specifications. There is a safe ground in making the devices technology-dumb in that they are extremely reliable.”

There is also the issue that in the past most elite consumers updated their cell phones constantly, exchanging outdated models with the latest and greatest technological innovations on a semi-annual basis. Luxury phones are sold as investments, and users will be wary of throwing a ruby-covered handset into their sock drawer for temporary burial.

Lewis believes that most luxury phone consumers have found a way around this problem. “I feel like the luxury companies may be reluctant to admit this, but many of their customers do not use their devices as their permanent phone,” he tells us. “In other words, it’s an accessory. These are phones that someone will use in the evening when they go out to show off the bling factor.”

Consumers may also use a luxury phone as a “secondary device”, in that it’s used alongside, for example, a BlackBerry (for its superior email capabilities) or an iPhone (which has advanced media and internet capability).

“The user ends up carry two devices,” he explains. “The point is that the luxury phone is typically not used exclusively.”

The Case of Japan

The case of Japan also sends a mixed message about the future of luxury phones. The Japanese market, of course, is the global leader for mobile technology, in addition to being the world’s largest consumer of luxury goods. And yet, luxury handsets have yet to make a real impact.

Andrew Shuttleworth, co-founder of mobileinjapan.com notes, “From an outside observer’s perspective, I’d say fashion phones have been an interesting approach to targeting consumers, but they created only a little buzz in the early days and can hardly be considered a mega hit.”

Things may change, however, with the new Vertu store in Tokyo’s upscale Ginza neighbourhood. Vertu does not just plan on selling handsets, but furthermore has set up a MVNO (mobile virtual network operator) with carrier NTT DOCOMO. If this business model is successful, Vertu may export the strategy to other markets.

ARCchart’s Lewis says he thinks Vertu is going about things the right way, but “it’s going to be difficult to excite a Japanese consumer with a product that is so technologically basic.”

Current Challenges and Future Potential

With analysts expecting the luxury and fashion phone market to expand greatly, most major brands will find it in their interest to consider seriously product development within the mobile market. The global recession, however, is making high-end handsets less of a guaranteed winner for the time being.

Some models — like the Tag Heuer Meridiist — have been launched quietly while phone-dabblers like Bang & Olufsen seem to be retreating slowly. CG Mobile’s Verbois, however, sounds confident about the market’s prospects, despite the recession: “The global sales of mobile phones slightly decreased in 2008 and will continue to do so in 2009. However, niche markets are emerging from the industry transformation described earlier. Luxury and fashion brands are still at the early stage of building up alliances with mobile devices manufacturers and distributors. There is still space for extravagance, opulence and luxury at its paroxysm.”

In the current environment, wealthy consumers may be less eager to pick up conspicuously bejewelled handsets, and mass-market consumers may understandably grow more dependent on carrier subsidies to make phones as close to free as possible.

However, the desire for a unique and well-designed fashion handset burns ever more fiercely as consumers learn to think of the gadget as a key accessory.

That said, creating high-end mobile handsets from scratch will continue to be a challenging proposition for companies without technological capabilities. But there is an increasing number of technology firms building or otherwise ‘producing’ collaboration phones on behalf of major clients. Now that fashion phones have staked out every market price point from mildly premium to ultra decadent, luxury companies have space to find the perfect target pricing to match best the brand’s image.

Prada, Armani, Hugo Boss, and Dolce & Gabbana have shown that carrier-subsidised mass-market entry can also be an extremely lucrative and effective strategy. And, Vertu’s success makes the extreme high-end also look tempting.

By the time a new Vertu phone is released, we may just be out of this recession, with wealthy consumers looking to get back to their previous levels of exclusive lifestyle.

W. David Marx, Tokyo Correspondent