While 2005's $115.1 billion worldwide factory revenue from production of cell phones represented an historic high, iSuppli says 2006 will see a drop to $109.7 billion. Earnings won't fully recover until 2009, when they'll return last year's levels.

The culprits are market saturation, a slow down in production, and a precipitous decline in the Average Selling Price.

Slow Down
Production of mobile handsets grew by 30 percent in 2003, 25.1 percent in 2004, and 13.6 percent in 2005. Next year, iSuppli says that number will lower to less than half of 2005's level at 4.9 percent. So instead of last year's 810 million units shipped, there will be 850 million mobile phones rolled out in 2006.

Saturation
Most worldwide markets are saturated as well. There are far fewer first time subscribers out there, so today's mobile phone sales are driven more than ever by replacements.

Manufacturers, in partnership with carriers and content providers – of course – are attempting to give consumers incentives to toss their old phones out on the ears more often.

The onslaught of multimedia advancements (TV, radio, video, images, etc.) and other data services supported by operator’s new high-speed networks and the increasingly feature-packed handsets offered at all levels and price points—from your basic cell phone, to feature phones and smartphones—are all designed to draw customer upgrades.

Average Selling Price
As with the computer industry, mobile phone Average Selling Price prices have traditionally declined because of decreasing component costs. iSuppli sees this process accelerating in 2006.

From 2003 to 2004, ASP dropped by only 2.7 percent to $155. Last year, ASP lowered by a much greater 8.5 percent - to $142 per phone - over 2005. iSuppli predicts next year the decline will be an even sharper 9.2 percent, dropping the ASP for a mobile phone to $129.

iSuppli director & principal analyst for communications and consumer electronics says several factors are contributing to the fast decline in ASPs.

“Low-end, ultra-low-cost mobile phones are being pushed into emerging markets in large numbers. Meanwhile, at the high-end, wireless communications service providers are continuing to demand lower-cost 3G mobile phones in order to spur greater consumer adoption of 3G services. These two factors are driving down the overall ASP in 2005 and 2006,” Smyser says.

The ASP price decline will stop by next year. iSuppli says it'll lower by another 1 percent to $128, followed by mere half percent declines in 2008 and 2009. Smyser asserts the rising production of high-end 3G phones will offset continuing pricing erosion in low-end models.