A recent newspaper article on what men should know about dating contained the advice:
"Switch off your mobile phone when you're on a first date."
That rather goes to show the extent to which mobile technology has changed our lives, and not always for the better! Mobile telephony has been a growth area for the past 20 years. However, that hasn't always made money for investors - Vodafone (VOD) for instance saw its share price get stuck for years in a 120-140p trading range, and has become a yield stock despite having exposure to some strong growth markets.
Nowadays, while voice traffic is seeing prices and profitability driven down, data usage is growing strongly and producing good profits for mobile networks. That's also been good news for handset manufacturers, who got a double whammy - global demand for mobile phones growing fast as new users joined networks in emerging markets, plus demand for higher specification phones as data usage became more important. (Those are not mutually exclusive trends either; India is seeing huge demand for web-capable phones, leapfrogging the stage of "broadband in the home" to go directly to mobile broadband.). However, a spanner has now been thrown into the works. Google's (GOOG) open source Android operating system has been winning market share on mobile devices - growing from nothing in 2007 to 32% of the market now according to IDC. Even if Apple's (APPL) new iPhone manages to grab back a few percent, it'll still be number two to Android. By 2015, Android is expected to have 40% of the market according to U.S. broker Piper Jaffray's analyst.
Android has won share from both Microsoft (MSFT) and Nokia (NOK), as well as Apple. Nokia is looking particularly hurt - recently, it hit the news as CEO Stephen Elop issued a memo with the following stern words:
"We poured gasoline on our own burning platform. I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven't been delivering innovation fast enough. We're not collaborating internally. Nokia, our platform is burning."
Nokia shares have really suffered. It's moving its phones to Windows 7, in a dramatic break with the past. And it seems to be stuck at the lower end of the market, without exposure to the growing tablet sector. It makes operating margins of only just over 10%, and some commentators think it would have been better off moving to Android - the growth platform - instead of joining Microsoft with an untried and low-market-share operating platform. Nokia looks to be rated around 12x earnings - but of course there is now considerable contention as to what those earnings will actually be.
While Apple has garnered fans for its iPod and iPhone, there are now rumours that many of its fans are getting fed up with its restrictive approach to content and functionality, and are looking for a more open platform. Certainly, the huge royalties Apple creams off have little appeal for content and application developers who can get a much bigger slice of the action on Android. Edison also warns Apple's 50% margins aren't sustainable in the "new" open source mobile world - so total profitability could fall across the industry.
Apple has been on a run the last few months - whether or not Stephen Fry is still a fan, Wall Street certainly is. However, it hasn't joined the tech stratosphere. Trading on what look 15x puts it in the same sort of range as Oracle (ORCL) and Cisco (CSCO) - sensible if not exciting tech stocks. However, the uncertainty is that Apple's products are fashion products - they're not basic components such as Cisco produces, and Apple doesn't have the sort of customer switch cost that Oracle does with its corporate base (changing your entire accounting system or customer database is not something you do lightly). The squeeze on margins, and particularly, any squeeze on its content revenues, might also be also a risk that Cisco and Oracle don't seem to run to the same extent.
Another big loser so far recently has been Research in Motion (RIMM), maker of the Blackberry. It was the only game in town for data-use a few years back - now, it looks to be finding the going hard. But on 11x earnings, some see it as a potential turnaround story (e.g. Citigroup is currently recommending the shares), arguing that RIMM could steal all that market share that Nokia's going to lose by moving to Microsoft. It's also likely to do well when it introduces a tablet, expected some time this quarter - tablets are expected to be the next big thing in mobile computing, following the iPad's success.
Undoubtedly, the mobile handset market will create big winners and big losers. However, the same rapid pace of technological change that makes the sector exciting also make it very difficult for investors to work out where exactly that money is going to be made, especially given the added element of unpredictability that comes with consumer fashion.