Reality Check: Smartphones turning into a PC-like business are heading toward commodity

Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Smartphone sales have been a high profit area for handset makers and wireless network operators, but like the PC business model circa 1990s has shown us, those profit margins won’t last forever. Indeed, I predict that the smartphone sector is heading toward commodity in 2010 and a new business model needs to replace the proprietary, phone-by-phone approach the industry practices today. This new business model will solve barriers to entry for device makers, content and service providers, and allow wireless carriers to bring truly unique devices to market quickly and affordably in response to customer demand.
We need only to look at the PC industry over the past two decades to see how the smartphone evolution will play out. The PC business model moved from proprietary, high-margin devices to inexpensive ‘clones’ as the software OS and hardware component parts became standardized. Dell then upset the entire industry with a direct-to-consumer business model that essentially just assembled component parts to order, with a Web-based front end to service the customer. PCs are no-longer delivered via master resellers from warehouses stocked with three-month-old inventory; PCs are now built to order with the most current parts and customer demand is reflected in real time by the orders coming in. New models are turned out every few months instead of years.
Unfortunately, today’s mobile handset manufacturing industry looks much like it did when it began in the middle of 1990, with engineering teams grouped by product line and charged with developing new handsets from beginning to end. The development cycle typically takes 12 to 18 months and therefore lags customer trends in both function and fashion.
The PC industry forever changed to a commodity business – and so will the mobile handset industry. Within the next two years I believe we will see mostly standardized PC-like smartphones, with a handful of proprietary designs fulfilling demand in niche market segments. Let me explain how.
Smartphone “motherboards”
The guts of a PC computer today reside on the motherboard, which is typically a commodity component purchased from an outside supplier. New in 2010, the mobile industry now can purchase a “smartphone motherboard” – with all functionality baked onto the circuit board, including tested and certified 3G radio solution, WiMAX/Wi-Fi, Bluetooth, sensors and necessary IO connectors for peripherals like LCD, keys, cameras, speakers and microphones.
And today’s smartphone motherboards can run “real” computer chips. No more PC-“like” capabilities; there is no reason not to have full PC capabilities—in a form factor that fits in your pocket. Because the software and hardware is integrated into systemware and miniaturized and optimized, current battery technology can power an x86 smartphone motherboard and 4-inch screen for multiple days.
Because these smartphone motherboards are already pre-certified and pre-validated with the carrier networks, the device makers will choose to use these as standard platforms around which they can add customized hardware casings and software user interfaces to bring unique handsets to market quickly.
The significance of open source
As the hardware standardizes, the software features and user interfaces proliferate – thanks to open source communities like Android and soon MeeGo. OEM/ODM device makers can harness the immense creativity of these software communities, and can commission them to start building interfaces and applications even before the hardware comes off the assembly line. Moreover, open software allows developers to build features and app’s that utilize ever-increasing mobile processor speeds because the updates can be done iteratively and at low cost. Smartphones should be capable of so much more than they are today. With current battery technology and current motherboards, smartphones should be able to offer features such as:
–HDMI – power your 60” flatscreen TV from your phone;
–full HD video;
–facial recognition;
–gesture recognition;
–full-front multi-touch surface;
–Real PC applications.
The only technology holding things back was the processor speeds. But with x86 computer chips running smartphones and multi-day battery life now a reality because of tightly integrated systemware, the business landscape opens up for smartphones to replace many other devices.
A flourishing ecosystem
It is important to note that “commodity” does not have to imply cheap and undifferentiated products. It just means that products are standardized. And a standardized smartphone market actually will stimulate more consumer choices. In addition to providing consumers with more affordable handsets and driving carriers’ data plans down into an ever-broadening consumer pool, standardization allows adjacent cottage industries to form and flourish.
The standard input/output ports on a PC are USB, SD card slot and 2.5mm audio jacks, which have fostered an abundant ecosystem of external speakers, monitors, headphones, external storage devices, printers, monitors, etc. Likewise, as smartphones standardize their I/O (most likely micro-USB and Wi-Fi), we can expect to see an ecosystem of peripheral devices to emerge as well. Not just mobile versions of PC peripherals, but also mobile-optimized peripherals like automobile integration docks, portable devices for the blind and disabled, medical monitoring peripherals, and a range of devices we haven’t yet imagined.
Conclusion
There will always be high-end, proprietary devices and niche applications, but the bulk of the smartphone market will move toward commodity. The x86 smartphone will follow the business model of x86 PCs. Like author Chris Anderson argues in his book Free, the effects of a marketplace are like gravity – and one can prop up a broken business model for only so long before gravity wins. Companies that recognize the ultimate destination for smartphone devices is commodity – and race to get their business models there fastest – will be the winners.
Markus Appel has spent his entire career in the mobile industry, starting with Siemens Mobile and then heading to Flextronics to become general manager of their ODM Flex Mobile group. Appel is currently CEO of Aava Mobile, a maker of reference designs for mobile handsets. He can be reached at markus.appel@aavamobile.com