Mobile phone maker Sony Ericsson will focus entirely on the booming smartphone market, going head to head with rivals like Apple and underlining the importance of a tie-up with Sony amid reports the electronics giant is preparing a buyout.

The company said it would shift all its production to smartphones during 2012 as it reported a swing back to profit of 31 million euros, just higher than forecasts.

Last week, a source with direct knowledge of the matter told Reuters Sony was in talks to buy Ericsson''s 50 percent stake in the joint venture. In an interview with Reuters, Sony Ericsson chief executive Bert Nordberg declined to comment.

Analysts believe the world's ninth largest handset maker can only succeed in attracting avid gadget users away from its rivals by being fully integrated into Sony's wide portfolio of devices and getting access to the Japanese electronic giant's entertainment assets, like PlayStation and music catalogues.

Smartphones currently account for around 80 percent of all Sony Ericsson's sales and the company said its share of the global Android-based smartphone market during the quarter was approximately 12 percent in volume and 11 percent in value.

"Speculation persists that Sony will buy out the JV," said Geoff Blaber from CCS Insight.

"This is arguably the most desirable end game for a company that needs full access to Sony content and services."

Controlling Sony Ericsson would help Sony recoup ground in the battle against Apple Inc and Samsung Electronics , where it has been hampered by a disjointed strategy regarding mobile gadgets and online content.

For Ericsson, a sale would insulate its profit and loss account from the volatility Sony Ericsson has brought and allow it to focus resources on loss-making chip venture ST-Ericsson.

A Reuters poll put the price of Ericsson's 50 percent stake in Sony Ericsson at around $1.5 billion.

Smartphones
The road ahead will be tough for Sony Ericsson as it shifts fully to smartphones.

All handset makers are targeting a bigger share of the smartphone market and players like Samsung Electronics and HTC Corp will be difficult to dislodge.

Sony Ericsson has been losing money for a while, although its recent focus on smartphones based on Google's Android platform pulled the company back into the black.

Third quarter pretax profit at the company was 31 million euros ($42 million), just higher than the mean forecast of 27 million euros in a Reuters poll and a swing back from a loss of 42 million in the previous quarter.

"On the sales side it's actually a pretty strong quarter for Sony Ericsson," said Sydbank analyst Morten Imsgaard, who said that customers like Sony Ericsson's new product line based around its Xperia smartphones.

"On the earnings side it's not that strong, and the company will have to work on that side going forward to lift the operating margin," he said.

The operating margin was 2 percent, down from 4 percent a year earlier, indicating that after years of restructuring and cost cuts, more remains to be done.