July 3, 2008

New Laws Drive Wireless Headset Sales

In a move that could give a welcome, if short-lived, boost to consumer electronics makers and retailers, consumers up and down the West Coast are snapping up headsets that let them talk on cell phones while driving -- and stay in compliance with a law that took effect in California and Washington state on July 1.

Demand for hands-free headsets has been so robust that the Verizon Wireless store in San Mateo, Calif., added a whole new section for the devices, says store manager Aari Jethmal. "The shelves have been cleared and restocked and cleared and restocked." Verizon Wireless, owned by Verizon Communications (VZ) and Vodafone (VOD), is the second-largest U.S. mobile-phone provider, after AT&T (T).

Sales Boost Expected The law, which stipulates penalties for driving while talking on a handheld cell phone, is a boon for Plantronics (PLT) and other makers of headsets that use so-called Bluetooth wireless connectivity. "Historically Bluetooth headsets have been a low-margin product, so they would need to drive significant product to move the bottom-line needle," says Avondale Partners analyst John Bright, who has an "outperform" rating on Plantronics shares. "Luckily California is the largest state and a heavy cell-phone usage state, so it certainly bodes well for heavy volume."

On June 26, Bright raised his estimate for Plantronics' June quarter earnings by a penny, to 35% a share, in anticipation of the law taking effect. That's a cent higher than the average of Wall Street estimates. The shares have gotten little apparent lift since the law kicked in, slipping to 21.05 on July 2, from 22.32 on June 30.

Plantronics expects a sales boost in California for the second and third quarters, says spokesman Dan Race, though he didn't provide specifics. "We're seeing good interest in our premium products," Race says.

Other Bluetooth manufacturers poised to benefit include Motorola (MOT); GN Netcom, maker of the Jabra line of headsets; and AliphCom, maker of the Jawbone, which retails for about $130.

California and Washington follow New York, New Jersey, Connecticut, and Washington, D.C., in banning handheld cell phones while driving. Demand tends to spike in the two weeks before and after a law takes effect, says Carl Derry, a spokesman for GN Netcom. "Some people are really proactive about going out and buying," Derry says. "But others won't until they get a ticket."

Small Fines Demand will only keep rising in the coming years, says ABI Research, which in June estimated that by 2013 some 2.4 billion units of Bluetooth-enabled equipment will be shipped. Of those units, one in four will be headsets, ABI says.

Retailers including RadioShack (RSH), Costco (COST), and Fry's Electronics readied for the California law with prominent headset displays and explanations of the law. At a Fry's in Sunnyvale, Calif., an employee wearing a police officer's uniform touted the store's wares and alerted customers to the new law.

California's law stipulates a $20 fine for the first offense and $50 for each offense thereafter. No points are added to the driver's record. Washington's law makes a handheld cell phone a secondary offense, meaning drivers can only be cited if they're pulled over for another violation.

The California Highway Patrol has started pulling people over for talking on a phone without a headset but did not disclose statistics on how many drivers were cited on the first day.

To ensure they're not among those pulled over in the future, consumers will keep the headset purchases going. "There doesn't seem to be any discretion," Jethmal says. "People just come in and ask for a recommendation and then buy that one."

See BusinessWeek.com's slide show for a look at the latest in hands-free cell-phone gear.