There is seldom a time in the investing community when youth works to your advantage. Most investors look to professionals with years of experience for advice and for good reason. Lately though, I keep finding myself bothered by the naivety of some analysts’ opinions regarding the smartphone market. In my mind, most analysts have too narrow a field of view. They are looking too closely at device sales and missing the bigger picture. Smartphones are only the beginning of a wave of wireless mobile devices. The future of the technology industry in the coming decade will be driven largely by the widespread adoption of mobile wireless devices. What is really at stake here is which mobile operating systems all of these wireless mobile devices will be running.
Currently, there are six “major” mobile operating systems – Research in Motion’s (RIMM) BlackBerry, Apple’s (AAPL)iOS, Google’s (GOOG) Android, Palm’s webOS, Nokia’s (NOK) Symbian, and Microsoft’s (MSFT) Windows Phone 7. When the financial news began covering the emergence of the smartphone trade, the mantra was “a rising tide floats all boats.” Essentially, the strong demand for smartphones would be enough to support all six of these mobile operating systems. The collapse of Palm’s stock price earlier in the year is proof that this is simply not the case (HP’s (HPQ) acquisition of Palm is a different story I will touch on in a bit). This logic always seemed crazy to me. How is it possible that six mobile operating systems could live in harmony, when only two or three major computer operating systems were able to coexist? There are simply too many mobile operating systems on the market right now for all companies involved to be successful.
I believe we are at the beginning of a radical transformation of the technology industry that will take place far faster than most analysts expect. Consider the notion that the average user gets about 3-5 years use out of a traditional computer before upgrading. This is a far longer product lifecycle than the mobile device market. The standard cellular contract is 2 years, after which most people are given incentive to upgrade to a newer device and renew their contract. People will be replacing their mobile phones or smartphones roughly every two years. This considerably faster refresh rate will mean the dynamics of the mobile device market will change very rapidly. Companies that are slow to innovate will be left in the dust as their competitors gain market share. Some companies understand the importance of this market and are throwing considerable weight behind their offerings, both in terms of software engineering and advertising. On the other hand, some companies are late to this understanding and are scrambling to catch up. The result is exemplified in the chart below that shows how large a difference one year can make to a company’s percentage of worldwide sales.
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As evidenced above, one year can make a drastic difference for these companies in terms of market share. I would expect when the sales figures are released for 2010 the evidence will be even more alarming. Part of the reason I think the next couple years are critical for these companies is because of how rapidly this segment of the market is growing. Take a look at the chart below…
While smartphone sales have been growing steadily in recent years, we are at a tipping point now where sales will begin accelerating even faster. Gartner is predicting that by 2013 smartphones will make up 43% of all mobile phone sales worldwide. Further, they are predicting this number will be 70% in Europe and North America. This number is important for many reasons but there are two that are key. First, the companies that are able to capture large portions of this growing market will see massive sales growth in the coming years. Second, within a few years it should be obvious which companies have succeeded and which have missed their golden opportunity. As such, I would expect the stock prices of the companies involved to closely follow their relative successes and failures in this space.
There are many aspects to consider when looking at this rapidly growing segment of the market. I have put together what has become a very long assessment of the competitive landscape and outlined what I feel will be the deciding factors for which mobile operating systems will succeed and which will fail. Please be aware, this is a very in-depth qualitative assessment of the competitive landscape. While the financials of the companies involved may determine valuations on a short-term basis, it is the strength of their offerings and their fundamental understanding of the future of the mobile landscape that will determine their success and the shape of the industry over the coming decades. It is important to remember that each company is unique and has its own background, strategy, and vision. I have tried to focus on aspects that are unique to each company, yet relevant to the macro shift taking place in the mobile landscape.
Before discussing individual companies, I feel it is important to establish criteria by which all companies can be compared. It is my belief that there are three factors that will play a large role in deciding which of these mobile operating systems will dominate the market going forward. I have briefly outlined these factors below before discussing companies on an individual basis.
Availability of Quality Software
The first and most obvious factor is the availability of software or “apps”. Users are far more likely to buy a device that has a large software library available as soon as they turn their new device on. Further, users are more likely to replace an older device with one running the same mobile operating system so they do not need to repurchase all of their software. The table below shows the number of apps currently available on each of the major mobile operating systems. Since not all companies provide this information, these numbers are close estimates based on the most recent information from a variety of sources.
Anyone who has seen ads for smartphones knows that this is the feature Apple and Google are quickest to promote, because they have the largest app catalogs. This also makes it more challenging for less popular mobile operating systems to gain traction. Often, developers will roll out new features to the larger mobile operating systems first and then later to smaller competitors. A typical example is the ubiquitous Facebook app. Since its initial release, the iOS and Android versions of the app have been the first priority for Facebook’s developers, receiving new features first and offering the most comprehensive experience. Meanwhile, the Facebook app for Palm’s webOS has received trivial updates and still lacks some key features.
In my opinion, the availability of software will likely play a crucial role in deciding which mobile operating systems succeed. A quick glance at the table above would tell you that Apple and Google are vastly outperforming their competitors. However, the data above is only based on apps already available. To truly confirm Apple and Google’s dominance in this area going forward, one needs to look no further than the results of the mobile developer survey below. When Appcelerator surveyed more than 33,000 mobile software developers, Apple and Google’s mobile operating systems garnered the most interest by a wide margin.
Scalability of Mobile Operating System to Other Form Factors
The second factor is the scalability of the mobile operating system to other form factors. As I have said already, smartphones are only the beginning of a wave of new wireless mobile devices. It is entirely likely that in a decade, the prominent mobile operating systems will actually begin to take the place of traditional desktop operating systems. Much in the same way that the advent of “Web 2.0” fundamentally changed what is possible with websites, so too will wireless mobile devices change what is possible with a “computer”. These new mobile operating systems are ushering in a new age of computing that allows for almost limitless possibilities. As such, there will soon be an expectation that all computing devices allow for the same possibilities currently found on smartphones – GPS location, augmented reality, dynamic orientation, and multi-touch input to name a few.
In the coming years, tablets and other mobile wireless devices will make up a larger and larger portion of the market. It seems only logical that manufacturers will need to provide at least the same level of functionality currently found in smartphones. The simplest way for manufacturers to do so will be to scale existing mobile operating systems to larger devices. This will ensure a familiar user experience and compatibility with existing software. Further, it will provide users access to the same apps, data, and content across an array of mobile devices. However, for this to be possible, these mobile operating systems will need to be flexible enough to run on a variety of form factors.
While it is technically possible for any of the six major mobile operating systems to be scaled to larger devices, that does not guarantee a desirable user experience. Some mobile operating systems are more flexible and can make this jump easily. However, there are a couple mobile operating systems that were designed primarily for smartphones and would require modification to be considered viable options for larger devices. As I said earlier, a fundamental understanding of the future of the mobile landscape will determine which of these companies will be successful in the coming decade. In my mind, the companies that are able to effectively scale their offerings to larger form factors, while maintaining a consistent user experience, will be the companies that profit most from this rapidly growing market.
Fragmentation of Devices
The third factor is possibly the most obscure and relates to the difficulties that arise when many different forms of hardware become involved. Essentially, having many different devices running the same mobile operating system means they might perform differently under the same situation. While the fragmentation of devices will not hinder a mobile operating system from mainstream success, it may complicate or impair the user experience. Fragmentation is a common problem for many open operating systems. Often, the software is given away for free and hardware decisions are made by the manufacturer, except for certain minimum requirements. The result is a wide array of devices running the same mobile operating system, but with different features. For example, the multitude of devices will have different screen resolutions, input methods, and hardware combinations. The problem for users arises when their apps require hardware like an accelerometer, GPS, or other features that might be omitted on certain models. This means that an app could run just fine on one mobile device but might not run as smoothly on others.
The most obvious example of this problem relates to the various form factors of mobile wireless devices. For example, newer mobile operating systems like iOS, Android, and webOS are based solely around touch input from the user. While some devices running these mobile operating systems may have keyboards, the navigation is still done primarily through touch input. As a result, the entire user experience is designed to be touch friendly, whether it be navigating the menus or using apps. However, this is where problems begin to arise for older mobile operating systems like BlackBerry and Symbian. Both companies are now trying to expand their mobile operating systems to include touch screen devices but this is not a simple process. Both Research in Motion and Nokia are attempting to support newer devices using touch-friendly versions of their existing mobile operating systems. Simply put, the user experience will not be as intuitive as a mobile operating system designed solely around touch input. However, these are company-specific issues I will discuss more in depth when talking about each mobile operating system.
Disclosure: Long AAPL, Long GOOG