The Ongoing Smartphone Revolution

There is no way that Alexander Graham Bell could have predicted that his humble invention, the telephone, would grow to become the most important and significant device used by virtually every human on earth.

In recent years they have grown a portfolio of powers and capabilities which, if one were to actually stop and think about it for a second, are staggering. Not only do they give you the ability to communicate from any point to any other point and access to nearly the sum of all human knowledge, they also have some amazing party tricks. Like anywhere I am on the face of planet earth I can use my phone to record events as a movie (in full colour and with sound) and within just a few seconds I can make that movie available to the whole world’s population. Yet most people most of the time just use them to speak and text to friends and relatives.

And there seems to be no limit to man’s ingenuity with what these devices will do. Just now GPS is being added to more and more phones. So everything that they do can be location specific. Every photograph and video can be tagged with its exact location. And searches and requests can be tailored to only give information of specific relevance to that location. Like where is the nearest sushi bar and give me directions to get there. GPS can be incorporated into games in countless ways so expect to see some great innovation from our industry here.

At the moment telephones seem to be polarising into two sorts of devices with a third imminent. The first is the small, maximum portability and convenience, voice and text centric “standard” phone. The thing that most of us carry. The engineers still cram in features like cameras and MP3, but they cannot compromise the size of the package. The second kind of device comes when you throw away the size limitation (within reason) in order to incorporate a whole raft of features, mainly geared towards the internet. These are called smartphones and are currently a hotbed area of technology growth. In fact I have never in my life seen any area of technology develop at such a pace.

The imminent device is a little larger still, with even greater capabilities. Something like netbook meets iPhone. With a gesture interface and the potential to do everything. The manufacturers need the will to start making these and consumers need to adapt to them, but the potential utility of such tablet like devices is such that their introduction must now be inevitable.

For the moment, however, it is smartphones that interest us. Suddenly, out of nowhere, there is a plethora of devices that make good business models for game developers. And they are developing at a frightening pace where something six months old can easily be obsolete. The driver for this forced, hotbed evolution is the commercial and technology war between some of the world’s best and brightest companies. We have Google (GOOG) against Apple (AAPL) against Microsoft (MSFT) against Nokia (NOK) against RIM (RIMM).

If I were in the market right now, I would want a Google Android device. The combination of features and benefits puts it at the top of the heap. Unfortunately Google, for all their technical brilliance, are very bad at marketing. So Apple, who are absolutely brilliant at marketing, continue to outperform with their inferior iPhone. But such is the intensity of this war that Apple are playing catch up with a downloadable upgrade for existing iPhone users that brings in 100 (yes 100) new features. Interestingly for us this includes subscription based services. Which means that the World of Warcraft killer that everyone has been waiting for could very well be a mobile phone game.

For such a new device on the market the smartphone is exceeding the wildest prediction with its success (much as the netbook also is). Apple AppStore now has 25,000 different downloadable applications and has had 800 million downloads. And just to remind you, the AppStore didn’t even exist on July 9th 2008!! And another reminder, I saw it coming a long time in advance. And whilst Apple have the fastest growing smartphone standard they still only have about 10% of the market, which puts them behind Nokia, RIM and Microsoft.

Android has more potential in that it is already better and it is open source (unlike the proprietary Apple) so could very well be taken up by the big Chinese, Korean and Taiwanese handset manufacturers. The potential is out there to put far more handsets into users pockets than Apple can possible compete with. The only caveat, as I pointed out earlier, is Google’s historically inept marketing. Android is currently running fifth in the market but will ramp up quickly as handsets come out, especially the Vodafone Magic (VOD).

Then there is Microsoft. So far they have been rubbish in this area from a gaming perspective. Playing catch up and never even trying to establish any sort of technology or marketing lead. But they have the potential to steamroller over everyone. The Zune is a great bit of kit but, relatively, it is a commercial failure. What gives Microsoft the capacity to come out of their corner fighting is Xbox Live, a mobile version of this would give AppStore more than a run for the money. And if I know this then so does Microsoft. Meanwhile they are still third overall in the smartphone market with 12.5% of handsets, so they have something to build on.

Nokia were the first into this space with Symbian and they have a lot of experience of powering a market with rapid technology change. They have driven off and defeated old mobile technology competitors like Sony Ericsson (SNE) and Motorola (MOT). And they are big. Nokia has over 128,000 employees who turnover over 50 billion Euros a year making 5 billion a year in profit, all from telecoms.

Yet they failed spectacularly with nGage V1 and nGage V2 not setting the world on fire. But don’t, whatever you do, write them off yet. They will fight back big style, they have no option if they want to survive. So expect a lot of big announcements from Keilaniemi. Their market share of smartphones is sliding rapidly but they are still the number one with 47%, which is more than twice that of their nearest competitor.

Now for Sony. Some people think that I don’t like Sony. They are wrong... I have, and still do, consistently buy Sony devices. In fact, as recently as a couple of weeks ago I made my latest Sony acquisition. But as an observer and analyst I am duty bound to say it how it is when it comes to Sony. And Sir Howard Stringer has publicly said a lot of the same things that I have.

Which brings us to the total disaster that is Sony and smartphones. Sony should be the market leaders here. Uniquely they had all the elements in place. The PSP, the Sony Ericsson phone brand, everything that is Playstation and world class content and manufacturing. But they have failed abysmally and excruciatingly. They are nowhere and there are no signs of them doing anything serious about getting anywhere, despite constant rumours of a PSP phone. The disaster that is Sony smartphones is synonymous of the disaster that is Sony.

Also in Japan we have Nintendo (NTDOY.PK) who are riding a bubble of success with their Wii and DS, which use old and cheap technology in clever ways to appeal to massive audiences. But they are being left too far behind. The DS is a creaky old fashioned device when you hold it up against an Android or an iPhone and the consumers of the world can see this. Nintendo have a huge amount of catching up to do and at the speed the market is moving at they need to do it very soon. They could rapidly become has-beens if they don’t.

So it doesn’t take a genius to realise that all these companies and standards won’t succeed. There will be winners and losers. And these companies are run by some very smart people. Which means that I can see some preemptive consolidation. Why spend a fortune going to war with someone when you can very easily just buy them or merge with them? The stakes are so immense and the technology so fast moving that this makes a huge amount of sense. So here are a couple for you to think about.

Apple (highly profitable) should buy Sony (currently making massive losses). This is such a brilliant fit at so many levels that you wonder why it hasn’t already happened. Apple would bring their software and sexy design to Sony products. And in return Apple would become a world class consumer electronics company overnight. The only fly in the ointment is that Apple is such a one man company and Steve Jobs is currently ill. But still, this is the consolidation that I would like to see. It would shake the whole world of consumer electronics down to the foundations. And the Playstation brand would grow wings again.

The second buyout should be Nintendo buying RIM. Once again a perfect fit. RIM have great technology but are way behind when it comes to the consumer side. Nintendo have the consumer side bolted and could use RIM technology to leapfrog right into the middle of the smartphone fray. This would make so much sense for both companies. Just send me the normal percentage for the idea when you do it.

So we are at or near the beginning of two revolutions. Smartphones and netbooks. Each, on its own, is far bigger than the home console revolution was. If you are involved in the gaming industry these are the places to put your money and energy. But the entry costs are so low that you need to differentiate your software offerings even more. Which makes marketing yet more important and critical on the road to success.

Disclosure: No positions

Comments

[vpwinner:]

Wow! Great article. Very insightful and really enjoyed it.

Mar 23 11:20 AM

[.crazylegs..:]

hayweed, timbom - must get tiring defending apple so vociferously every day. do you take extra vitamins each day?

Mar 23 11:35 AM

[winindthedust:]

User 24038, I hope is being sarcastic.

The article is poorly researched, and should not be used for investment.

Mar 23 12:09 PM

[winindthedust:]

Google Android's competitor is M$ Mobile (CE). Microsoft has much more to fear from Android, then does Apple. Google, of course is unconcerned about Microsoft, and we expect Ballmer to get the sack any day now.

Android actually helps the Apple iPhone.

Mar 23 12:10 PM

[pk de cville:]

Apple buying Sony is a bad idea. The 35,000 employees at Apple would be outnumbered by the 100,000 ??? at Sony. This would threaten Apple's unique and incredible culture for focused excellence in all areas of business.

Apple's culture is the goose that laid the golden eggsssssss and you don't want to mess with what they have.

Mar 23 04:39 PM

[Hayweed:]

Crazylegs - I saw my first zune yesterday being used by a person. No social there. You can say what you want but Apple is crushing the competition. If they weren't would Verizon really need to give you a free blackberry when you buy one. Talk about Margin Compression for Rimm. Dell needs a phone yet the carriers reject their proposed phone (LOL), MSFT is all about vaporware. Please stick with us we promise to come out with something cool some day - really. Sony may be reduced to a niche player in consumer electronics since we only have BBY and WMT left. At least Apple has their own stores.

Mar 23 04:58 PM

[JamesApple:]

This article is on drugs. iPhone is not inferior at all. RIM is becoming toxic asset. People are gonna run tons of fantastic local apps on the iPhone which collaborate like never before and all the other iPhone wannabees will make their manufacturers, investors bankrupt.

Mar 23 06:59 PM

[KenC:]

WOW! There is so much wrong with this, one hardly knows where to begin!

Mar 23 07:17 PM

[KenC:]

Bruce said, "Like anywhere I am on the face of planet earth I can use my phone to record events as a movie (in full colour and with sound) and within just a few seconds I can make that movie available to the whole world’s population"

Wow, are you in marketing, cause you know hyperbole, like it's going out of style. One, you can't do this "anywhere..on the face of planet earth". Two, a video clip is NOT a "movie". Three, what do you define as "full colour", because no one would describe the color gamut of a cellphone clip anywhere near the color gamut of a "movie". Four, "within just a few seconds", are you kidding? Uploading video over a cell network takes more than "just a few seconds". Five, sadly, the "whole world's population" does not have net access.

That was just the beginning of this long bit of gibberish.

Mar 23 07:23 PM

[KenC:]

Bruce said, " And they are developing at a frightening pace where something six months old can easily be obsolete."

The beauty of the new model in smartphones, as epitomized by the iPhone is that it's a blank canvas. It can constantly be updated. An EDGE iPhone that is 20 months old can still have all the application goodness that the latest 3G iPhone has. It is not obsolete in any way.

Mar 23 07:26 PM

[KenC:]

Bruce wrote, "If I were in the market right now, I would want a Google Android device. The combination of features and benefits puts it at the top of the heap. Unfortunately Google, for all their technical brilliance, are very bad at marketing. So Apple, who are absolutely brilliant at marketing, continue to outperform with their inferior iPhone. But such is the intensity of this war that Apple are playing catch up with a downloadable upgrade for existing iPhone users that brings in 100 (yes 100) new feature"

So, we have a HTC G1, and other Android devices rumored to be coming. What is it about the buggy G1 that "puts it at the top of the heap?"

Oh, btw, are you a marketing consultant, because the above implies that perhaps, you are fishing for a marketing job with Google. Google has shown some brilliance in the area of search software. They have not shown any hardware brilliance.

Please recite all those things that are "inferior" about the iPhone, and please do not mention the camera. Noone buys a cell for its camera.

You write as if you believe Apple's latest OS is somehow a response to Google's Android? How do you know this? Do you mean that Apple held an unusual presentation that it has not held exactly at this time last year? Do you mean that Apple has offered to release a new OS in the Summer, something it has never done before? Where is there evidence that Apple's latest release is anything but what they planned years ago in their approach to the smartphone market?

Mar 23 07:33 PM

[KenC:]

Bruce said, "Android has more potential in that it is already better and it is open source (unlike the proprietary Apple) so could very well be taken up by the big Chinese, Korean and Taiwanese handset manufacturers"

Can you backtrack and provide the evidence that Android is "already better", and what exactly is so great about open source, and how is that benefitting users? I mean how is Linux doing on the desktop? Why isn't LiMo doing better then? Symbian has gone open source, and they have a head start with its existing relationships with 3 of the largest mfrs already.

Mar 23 07:37 PM

[KenC:]

Bruce says, "But they have the potential to steamroller over everyone. The Zune is a great bit of kit but, relatively, it is a commercial failure. What gives Microsoft the capacity to come out of their corner fighting is Xbox Live, a mobile version of this would give AppStore more than a run for the money. And if I know this then so does Microsoft. Meanwhile they are still third overall in the smartphone market with 12.5% of handsets, so they have something to build on."

Oi, there's that word "potential" again. Wow, someone thinks the Zune is a "great bit of kit". Wow. Boggles the mind. Oh, sure, specs look good, but execution was lousy. Oh, just what we all need, more points. And, are you so sure a mobile version of X Live will give the AppStore "more than a run for the money", I mean, just about every MS backed music service killed the iTunes Music Store, right?

As for MS's market share. You do realize that their share is falling rapidly, and will fall even faster when Palm goes WebOS, and HTC continues to gravitate to Android, and Motorola goes toward Android. I mean, if Android is so great, how can that be good for MS? I mean, didn't they pay a huge amount of money to get LG on board? I thought they were supposed to get paid for their mobile OS, not pay!

Mar 23 07:44 PM

[KenC:]

Bruce said, "Apple (highly profitable) should buy Sony (currently making massive losses). This is such a brilliant fit at so many levels that you wonder why it hasn’t already happened. Apple would bring their software and sexy design to Sony products. And in return Apple would become a world class consumer electronics company overnight. "

Wow, are you just trying to save Howard Stringer's bacon, or what? Sony already has "sexy design", and Apple is already a "world class consumer electronics company". Can you explain any of the technological or product mix "fit" that makes you think this is "brilliant"?

Mar 23 07:47 PM

[KenC:]

"The second buyout should be Nintendo buying RIM. Once again a perfect fit. "

Please explain the "perfect fit" in detail.

You know, the less you write, the less likely people are to think you a fool.

Mar 23 07:48 PM

[ArtfulDodger:]

Mr. Bruce Everiss:

You are right about not writing the Finns off. They are great innovators and even better managers.

But what I really like about them is they tend to their own business. They bore their heads and put their noses to the grindstone---and work.

It's hard to beat people like that in the long run.

Thank you for the excellent coverage and insights into these companies and their products.

I really appreciated the article.

Mar 23 11:43 PM

[Martin Hill:]

Great analysis from those above commenting on what is a very poorly written article by Bruce Everiss.

Bruce, you really need to learn how to ground your arguments with examples and reasons for anyone to take you seriously.

And please Apple haters like crazylegs, could you give some justification to your own arguments rather than launching a "fanboi" attack? It would be much more constructive and might even get you some respect rather than a collective rolling of the eyes.

thankee.

-Mart

Mar 23 11:51 PM

[Martin Hill:]

This couple of sentences in particular raises plenty of eyebrows:

"If I were in the market right now, I would want a Google Android device. The combination of features and benefits puts it at the top of the heap. Unfortunately Google, for all their technical brilliance, are very bad at marketing. So Apple, who are absolutely brilliant at marketing, continue to outperform with their inferior iPhone."

The HTC G1, the first and so far only Android phone has been widely panned as buggy, clunky, fat, lacking the ability to synch with Exchange, with inconsistent interfaces in each of the bundled apps, no integrated Music store, movie store, TV shows, podcasts, few apps available from the Android Market, no peripheral ecosystem like the 3,000+ peripherals available for the iPhone/iPod etc.

How this translates into putting Android at the top of the heap at this point in time boggles the mind.

Perish the thought that the iPhone might have a feature or two that justifies the hype around it.

-Mart

Mar 24 12:17 AM

[xtopherm:]

What planet is this guy living on? As I read it I began to wonder if it was a parody. I couldn't be sure, so I tried to read it like one and it really worked - it was sort of fun to read it for comic effect. But in the end, this kind of misinformed nonsense is not particularly funny. This guy really doesn't have a clue and probably should yield the podium to someone who does.

Mar 25 01:02 AM

[JamesApple:]

Apple's brilliance lies mainly with their knowledge that a machine is really useless without meaningful applications, so Apple gave us the iPhone which is optimized for writing meaningful applications. Why is it so hard to understand?

Mar 29 07:59 PM