Despite an improvement in margins, mobile phone maker Sony Ericsson reported a decline in third-quarter revenue and volumes, based in large part on its decision to sell cheaper handset models at lower than average prices.

The increase in low-priced phones in the product portfolio led to a 19% drop in average selling price, to 120 euros ($170) from 147 ($210) euros in the same quarter of last year. In the second quarter, the average selling price was 125 euros ($178).

Sony Ericsson, which is a joint venture, said it shipped 25.9 million cell phones worldwide, an increase of 31% from the 19.8 million phones shipped a year ago. The company said it was pleased with its worldwide gains, especially in Europe, North America and Latin America

Current Sony Ericsson president Miles Flint, who is leaving his office on Nov. 1 for personal reasons, said that the quarter had seen the company continue to generate significant year-on-year volume growth with a portfolio of products spread across the widest variety of price points in the company’s history.

Sticking with his original projections, Flint said he hopes to have more than 1.1 billion shipments by the end of the year. “We are confident that the remainder of the year will see us further capitalize on this new broader portfolio with flag-ship Walkman phone models such as the W910 and W960 plus the much anticipated 5 mega-pixel Cyber-shot K850 camera phone launching in time for the holiday season,” he said.

Flint will be succeeded by Hideki Komiyama, the current director and chairman of Sony Electronics and EVP Electronics marketing and sales strategies for Sony.

After today’s earnings report, London-based Ovum adjusted its original prediction that Sony Ericsson would overtake Motorola, which will announce its Q3 results along with LM Ericsson on Oct. 25, by the end of the year. The firm still anticipates improvement in Q4 volumes, revenues and profits, but is disappointed in Sony Ericsson’s Q3 earnings.

“The shipment growth has slowed because of two main factors,” said Martin Garner, mobile practice leader at Ovum. “First, there has been growing channel inventory in China as local vendors have priced aggressively during the last couple of quarters. This is likely to affect several vendors. Second, Sony Ericsson’s portfolio is ageing, especially at the high end. The effects of this have been felt mostly in Japan and Western Europe. The launches it did during May and June of this year should fix that but those products are only just coming onto the market now.”

Garner concluded that these results should be a blip. “Sony Ericsson is still doing well and as the new phones come through should have a stronger portfolio. We continue to expect improvement in Q4 on volumes, revenues and hopefully profits.”