Slowdown may snag smartphone newbies: U.S. market now focus of global battle

Like cartoon coyotes that draw themselves to full height before an exaggerated pounce on prey, handset vendors have offered little this year – but portended much – before an expected lunge at the market.
Major vendors, particularly smartphone purveyors, have largely passed up the first two industry gatherings of the year to introduce new devices, while promising greatness to come.
Based on flagging consumer demand – forecasts for the overall handset market in the first quarter run as dismal as negative 25% year-on-year growth – this calm-before-the-storm, whether intentional or not, will soon give way to white-hot competition in the smartphone segment.
Seeds of smartphone shift
If that shift in emphasis to smartphones appears counter-intuitive in a severe economic downturn, consider this:
This year’s offerings were hatched in better times – late 2007 and early 2008 – when smartphone growth skyrocketed to 36% even as the overall handset market slowed to 5.4% in 2008, down from 16% the prior year, according to ABI Research. At least in the United States, that trajectory was ignited by Apple Inc.’s two iPhone launches and aided by massive carrier subsidies and marketing campaigns for hero handsets at or near the top of their portfolios as carriers sought to convince consumers of the efficacy of mobile data.
At AT&T Mobility and Verizon Wireless, smartphones have become as much as 35% to 40% of their portfolios, according to financial analyst company Morgan Keegan, though smartphone users comprise only 20% of those carriers’ subscriber bases.
This year, while forecasts for the overall handset market range from Nokia Corp.’s negative 10% to a new, more pessimistic assessment of negative 18% growth from RBC’s analyst Mark Sue, smartphone sales are widely expected to maintain high-single or low-double-digit growth. And consider the larger pattern as well: In the third quarter of last year, Motorola Inc.’s Razr (hold the nostalgia) finally lost its top-selling spot in the U.S. to the iPhone. Research In Motion Ltd. is now the top U.S. shareholder among smartphone vendors, according to NPD Group. “Thin” has long since given way to “smart and thin.” (If only fashion models would follow suit.)
Add a dash of ferment: smartphones’ rise has lured vendors from outside the wireless industry – from America’s Apple to Asia’s Acer – while operating systems, hardware platforms and application markets have sprouted like weeds after a spring thunderstorm. Some analysts believe, in fact, that in a time when carriers have conspicuously called for fewer platforms, those platforms instead have proliferated, bifurcating into proprietary and open-source camps.
U.S. carriers have also begun skirmishing via their data service plans, with analyst predictions that some experimentation will be necessary in a sluggish economy to introduce consumers to the ineffable joys of data usage.
There could be fender-benders at the crossroads, too, as smartphone veteran Nokia reportedly eyes the burgeoning netbook market, while laptop purveyors such as Acer have displayed their newly hatched smartphones.
Cautionary remarks
This market lunge toward smartphones by incumbents and newbies is not without risk, according to several analysts.
“As expected, there were a plethora of new smartphone launches and announcements from both incumbent vendors and new entrants (at Mobile World Congress in early February),” wrote UBS analyst Gareth Jenkins in a note to investors. “However, we came back largely unimpressed and we believe that the industry has not really moved forward. All the launches were largely in the high-end category and vendors (with the exception of Nokia) have failed to push down the smartness into lower price points.”
“After playing with a large number of devices,” Jenkins added, “we felt they had either poor design (ZTE, i-mate), software glitches (Toshiba), were too niche (Garmin-Asus) or without independent OSs (LG Arena). Even where the devices as such are okay, we believe new vendors will find it difficult to establish wide distribution and operator relationships (Acer)…. Overall, while the smartphone market is becoming crowded, we are not convinced about the long-term sustainability of most of the new players, as most plans were put in place before economic conditions deteriorated.”
But, according to Jenkins and others, the obvious challenge to incumbents is to play catch-up in the software-and-services department.
“We believe the greater risk to Nokia and other incumbent vendors stems from software-focused, third-party operating system providers such as Google and Microsoft,” Jenkins wrote. “The concern is that the handset industry cedes margins to third-party OS providers as the intelligence and differentiation in devices moves away from hardware to the operating system and applications. There is also the danger that large players like Google exercise greater bargaining power over operators, leading to device vendors being squeezed out of the emerging apps and Internet services business model.”
iPhone still the driver
For those of you fatigued by iPhone chatter, brace yourself.
“The iPhone remained the iconic leader the rest were trying to catch,” wrote Deutsche Bank analyst Brian Modoff from MWC. “We lost track of the number of vendors offering iPhone look-alike products with touchscreens, media functions and lots of icons. None of these match the iPhone’s applications ecosystem or ease-of-use, but that does not stop them from trying.”
Apple CEO Steve Jobs in his most recent public appearance declared his company satisfied with its hardware and software platform, but industry pundits insist that a line of devices is better than one. Speculation over a stripped down, lower-priced, iPhone have abounded for the past year.
“The company must make every effort possible to come out with differentiated handset devices for various market segments in order to retain its momentum within the handset industry,” wrote Frost & Sullivan analyst Luke Thomas, “considering that many of its competitors have come out with several models of touchscreen devices at much lower price points.”
Given Nokia’s manufacturing prowess and scale, much attention was given to the news at MWC that Nokia and former antagonist Qualcomm Inc. would collaborate on UMTS versions of Nokia’s N60 series platforms for the U.S., where Nokia’s meager market share has continued to slide (to 8.5% in 2008, down from 10% the prior year, according to IDC.) But the results of such a collaboration aren’t due until the second half of next year, a virtual eternity in the handset business. Meanwhile, last week, Nokia launched its much-heralded, mid-tier touchscreen smartphone – the 5800 XpressMusic – in the U.S. at $400 without carrier support or subsidies, a clear market miss at a critical juncture.
It’s the applications, stupid
Apple’s influence, of course, stems from its leading AppStore effort in the software-and-services arena as much as from its sleek hardware and fun user interface.
“Everyone is launching an AppStore,” wrote Jonathan Goldberg, analyst at Deutsche Bank. “We are concerned that everyone seems to be designing their store with Apple in mind rather than the consumer. The fact that no CEO we have heard speak on the topic can get the name of their own store straight is telling. We like good applicati
on delivery platforms, but we think most of the new offerings will fall shor
t of Apple’s combination of a solid user experience, thoughtless synchronization, clear carrier relationships and a heavy marketing budget.”
Microsoft Corp. and Nokia announced app stores at the MWC and the “me too” list extends to Google Inc., RIM, LG Electronics Co. and carriers galore. Well-funded application development contests have become de rigueur.
And analysts are far from discounting the potential for the lumbering Finnish giant to reverse its global slide in smartphone growth. Where Nokia once held better than half the global market for smartphones in its hand, it has seen that eroded to well below half while Apple, RIM and HTC Corp. have ravenously gobbled up the slack, and more.
“Nokia’s EVP of services acknowledged Symbian’s challenge for developers (at MWC), but beginning this summer he expects material improvement in the level of integration between Ovi, Symbian and hardware design,” wrote analyst Ittai Kidron at Oppenheimer. “Overall, Nokia remains confident and we believe the portfolio will start improving later this year.”
Platforms proliferate
Another battlefront is shaping up between proprietary systems such as those offered by Apple, RIM, Palm and Microsoft and open-source, license-free Linux, embodied by the Android and LiMo Foundation efforts.
The biggest news out of the MWC earlier had LG electing to use Microsoft’s Windows Mobile OS on most of its new smartphones, with a goal of releasing 50 in three years. But placeholder iteration Windows Mobile 6.5 isn’t due until the back half of this year and WinMo 7.0 isn’t due until next year.
“Microsoft is playing catch-up,” wrote analyst Avi Greengart in a recent report.
But, in a sense, so is Android, as only one model – HTC’s G1 at T-Mobile USA Inc. – has reached the market, vs. more than 30 handsets powered by LiMo’s platform. And though HTC wielded its wand at MWC, displaying its Android-powered Magic handset, at least one analyst said there’s catch-up to be had in the open-source camp as well.
“The (HTC) Magic exhibits no real innovation in terms of hardware or software,” Greengart wrote in a report on MWC offerings. “HTC’s Android phones are still about the promise of Android, which still feels like a half-finished OS.”
“The true power of Android will only be realized once developers have created unique applications and user interfaces and multiple vendors have created Android phones across many carriers,” Greengart concluded.
Meanwhile, Palm’s highly awaited Hail Mary – its Pre handset running its brand new WebOS platform – is in the air and scheduled to reach the end-zone by mid-year, where Sprint Nextel Corp. representatives will be waiting to score a touchdown, badly needed by both vendor and carrier.
In the platform area, however, as operators plea for consolidation and simplicity, “it’s gotten worse not better,” Greengart said in an interview. “There are more vendor-specific platforms, more that can be licensed and all are asking consumers to buy them, developers to write for them and operators to support them. We’ve got app stores that are platform-specific, carrier-specific. There’s definitely some shakeout coming.”
In the consumer’s mind, however, all this is just so much inside baseball, according to one analyst.
“From the consumer’s standpoint, which handset will do the things I want it to do?” asked analyst Chris Schreck at IMS Research, rhetorically. “They don’t care if the OS is open or proprietary.”
Service plan skirmishing
Analyst Shaw Wu at Kaufman Bros. has said that AT&T Mobility’s relatively high price for data plans is hampering uptake of the iPhone, a reflection of the two-pronged consumer consideration when shopping for a smartphone. With smartphones’ rising popularity and intense interest among carriers in growing ARPU, Wu implied that a data-plan price war might help boost smartphone uptake. Wu sees 3 million iPhones sold worldwide in Apple’s fiscal second quarter, ending in March, which would compare to 6.9 million units in the company’s fiscal fourth quarter and 4.4 million in fiscal first quarter – strong but slowing sales that tend to fuel speculation over Apple’s pending choice of hardware or software upgrades.
“Consumers are aware that they’ll have to pay for a data plan,” Greengart said. “I think you’ll see some experimentation with data plan pricing, some around prepaid, perhaps some flexibility that allows lower prices at the beginning of a contract until the consumer sees the beauty of ‘always on’ data. Until the economy recovers, however, there are increasing numbers of people looking to cut monthly costs.”
“Particularly in a down economy, consumers need to look at the cost of a data plan,” agreed analyst Ross Rubin at NPD Group. “Operators and OEMs will have to push the lure of the experience. Once the lure was e-mail, now it’s access to a rich Web experience. It’s no coincidence that the top four devices all have vastly improved or new-to-market browsers. And when the Pre arrives, all top-tier carriers will have a capacitive touchscreen hero handset not made by the top five vendors, each with a different OS.”
In a word: ferment.