Now that Apple's (AAPL) growth trend has been broken, the world is no longer in denial about how competitive the smartphone market is. There are many companies that will increase competition based on price and new features.
Non-psychic investors should realize that it is impossible to predict which smartphone players will gain market share and which will not. It is impossible to know which features will become the most popular. They should require that the firms they invest in be cheaply priced to compensate for risk in this market.
Smartphones to Segregate Work and Home
Leading technology companies like Research In Motion (RIMM) and VMware (VMW) are working to create dual identity phone software that will see businesses save millions spent in hardware devices for employees. The software will enable employees to isolate work and personal information on their smartphones and tablets without affecting their privacy. Research In Motion will be launching an upgraded version of the BlackBerry Balance software for this purpose, while VMware will launch its software on Google's (GOOG) Android platform. Red Bend has also included its own version of software in several phones that are already in stores. Several businesses have in the past allowed employees to use personal devices, but an effective means to segregate work from personal applications and contacts was lacking. VMware's senior director, Srinivas Krishnamurti, speaks of the growing need to adopt dual identity software for employees' devices. According to Krishnamurti, "The old school of management of the devices doesn't quite work."
About 28% of employees use their personal devices for work and the number is set to increase once the duality software and related products are launched. Research In Motion may greatly benefit from increased demand of these products if the $67 billion duality software market in 2011 is anything to go by. RIM's BlackBerry smartphones have faced stiff competition from Google and Apple, and the company will need to diversify or improve its products to survive. Forrester Research analyst, Chenxi Wang, is optimistic that the segregating software will promote business. According to Wang, "It will empower more workers to bring their own phones."
The segregation software will let one device act as two to the extent that a corporation's data can be deleted once an employee resigns without affecting personal data. The corporation's applications are independent of the employee's, so access to personal photos, texts or social networks is restricted. Red Bend and VMware make this possible by including a virtual operating system for business data and applications that is separate from the main operating system of the smartphone or tablet. An employee may have to use two separate email accounts and calendars though Research In Motion is working on a tool to merge contacts, calendars, and messages. There will be a need for employers and employees to address liability concerns regarding repair or replacement of the devices, since the same device enables personal and business use.
VMware and Red Bend's duality software (also known as Horizon Mobile) only works on Android, but VMware is working to develop a software version for Apple's devices in a bid to fully exploit the market. Samsung (SSNLF.PK), Verizon Wireless, and LG Electronics are among the companies that VMware is working with to introduce the duality software to the U.S. market. Software developers and handset makers may continue working together to help promote the duality software market and to reduce costs. LG's Corporate Vice President, Ki S. Kim, indicates that LG may preinstall Horizon Mobile on some of its devices. Red Bend stands to gain from royalties charged to device makers who preinstall its software, though it is not clear how much VMware expects to gain from this collaboration. According to Kim, "We firmly believe dual-persona is what the market needs."
RIM's software and Horizon Mobile will face competition from AirWatch, Citrix Systems (CTXS), Good Technology, Enterpoid, and Mobileron, who also provide software to manage personal and corporate data on personal devices. These companies enable users to download applications that allow corporate engineers to establish secure connections as well as link the device to company applications. All these companies take different approaches, and with the different smartphone types available, there will be a need to develop equally as many software types. AT&T (T) Advanced Mobility Solutions Executive Director, Mobeed Khan, says that his company is looking to partner with the company whose solutions work best. According to Khan, "We are looking to take the best-of-breed solutions and integrate them."
Dual identity software companies and smartphone players have wildly different valuations:
Growth Next 5 Years
Research In Motion
Since Apple has fallen, its shares are trading at an attractive price-to-earnings multiple. Apple is also thought to have excellent earnings growth by analysts over the next five years. Expect these growth estimates to drop in response to recently released quarterly results. However, Apple is still an attractive buy opportunity and would still be the best purchase on this list, even if analysts cut their growth estimates in half.
Research In Motion and Nokia (NOK) might seem like excellent speculative bets, but why chase risk when Apple is reasonably cheap? Neither Nokia nor Research in Motion is profitable. If you have to bet on bargains, make sure you don't allocate much capital, since neither firm has established that its operations can turn a profit in this competitive market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.