Smartphones Look to Dominate Handset Sales –Which OS will Thrive, Which will Fail?

Todd Day, Industry Analyst

Mobile & Wireless Communications

October 27, 2009

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Focus Points

North American Mobile Operating System Profiles

Global Smartphone Forecasts

North American Smartphone OS Forecasts

Smartphone Challenges and Drivers

Smartphone Key Trends and Suggestions

Hot Topics

Industry Participants

Conclusion

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Android – Google Inc.

Developed by Google, the Android Operating System is completely open, allowing developers to use any of the phones core functionality from an application, including placing calls, sending SMS or MMS messages, capturing pictures or video, and utilizing GPS coordinates for Location Based Services (LBS). While the license is free for the OS, Google plans to drive advertising through the platform via mobile search.

Pros:Cost – Android is distributed under an open source license, meaning that the cost to use it is free.Application performance – Android was built to allow equal access and performance to any and all applications for a device.

Cons:Security – Because Android is an open source operating system, unlocking, hacking, and viruses could pose more of a threat than it would to a closed operating system.

Notes:Although HTC is the only manufacturer with Android powered devices currently on the market, Samsung, LG, and Motorola have all announced plans to have Android powered phones out by the end of 2009.

In the U.S., T-Mobile is the only carrier that has an Android powered phone available. However Sprint, Verizon, and AT&T have all been pursuing Android devices as well. Sprint is expected to be the next carrier with an Android device available to customers some time in late 2009 or early 2010.

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iPhone OS – Apple Inc.

Developed by Apple, the iPhone Operating System is a proprietary operating system only used onApple’s own iPhone and iPod Touch devices. Although early on, the iPhone OS was closed to developers, it is now open to registered iPhone developers.

Pros:Applications – The iPhone store has approximately 85,000 applications available for download on its application store – which has accumulated over one billion downloads to date.Performance – Equipped with a full web browser, rich media, fast processor, and plenty of memory, the iPhone is one of the top phones in the industry.Ease of Use – One of the biggest contributing factors in the success of the iPhone is that consumers have been able to use the device easily.

Cons:Availability – Currently, the iPhone is available in the U.S. only on AT&T’s network. This is limiting the adoption rate of the product.Closed Architecture – Apple acts as a censor on applications that are allowed.

Notes:The iPhone OS runs on four abstract layers: Core OS layer, Core Services layer, Media layer, and Cocoa Touch layer. These layers allow the iPhoneto handle multiple tasks simultaneously, providing a better user experience.

The iPhone OS is only manufactured on Apple devices which reduces the speed at which the iPhone OS can be adopted, however, it also helps to keep the quality of the applications and the user experience high.

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Blackberry OS – Research In Motion (RIM)

Developed by Research In Motion (RIM), the Blackberry Operating System is a proprietary operating system only used on RIM’s own Blackberry devices. RIM became the kings of email when their first Blackberry products came out. Their OS provides security and enterprise integration that has helped make Blackberry the most widely used Enterprise mobility product on the planet.

Pros:Security – The Blackberry OS was designed for security in an enterprise environment. Although today, that same security is nice to have for consumers as well.Enterprise Connectivity – Email, Mobile Web, Mobile Resource Management (MRM), and Location Based Services (LBS) all work very well with the Blackberry OS.

Cons:Variety – Although RIM has recently been more focused on providing more variety in the product lines, most of the Blackberry products have a similar look and feel.Poor Ease-of-Use – Although it shines in other areas, RIM needs to do a better job of creating a more simplistic interface for consumers.

Notes:In recent years – after the success of the Blackberry Pearl, RIM has been focusing on the consumer side since that segment has been showing the most growth.

The Blackberry OS is only manufactured on RIM devices which reduces the variety of the available products, however, it also helps to keep the quality of the applications and performance high.

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webOS – Palm

The webOS developed by Palm is a new product just released in 2009 along side Palm’s new Palm Pre smartphone. The webOS is a closed source operating system with some components of it open source. The webOS was designed to make use of web technologies like CSS, HTML 5, JavaScript, etc.

Pros:Usability – The webOS was designed to function efficiently and yet effectively. The OS interacts with the web directly, allowing the web servers to handle the transactions and thus requiring less processing power. This in turn always saves on battery life (the holy grail of the wireless industry).Synergy – This feature integrates data from multiple web sources into one screen or application area in order to create a very sophisticated user experience.

Cons:Still New – Since the webOS from Palm is still fairly new to the market, there aren’t as many applications, and bugs are still having to be worked out.

Notes:Palm has stood firm to the idea of continuing to develop its webOS and future products internally. Ultimately, the best part about the Palm Pre is the operating system. Palm will likely change their mind if they don’t start gaining market share fast though.

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Symbian OS – Symbian Ltd.

Symbian OS has the largest market share worldwide. Much of this is attributed to the connection between Symbian Ltd. and Nokia. Although, Symbian is also used by companies such as LG, Motorola, Samsung, and Sony Ericsson.

Pros:Economies of Scale – Because of the large number of devices running Symbian OS, it reduces the costs significantly to use it. Although licensing costs don’t come into play much, the research & development costs associated with manufacturing a new device on a new OS can increase.

Cons:Enterprise Support – Applications that run on a mobile phone powered by the Symbian OS have to be signed. Furthermore, Nokia has been unsuccessful in the Enterprise area in the past. As a result, Symbian has been unable to become a widely spread OS due to the limitations in functionality for Enterprise Applications.

Notes:Nokia, once Symbian’s largest customer bought Symbian in 2008. However, Nokia turned over the intellectual property to the Symbian Foundation in order to ensure the further development of the OS.

The Symbian Foundation has a stated goal of opening up the Symbian OS within two years. Once that happens, it could change the landscape of the mobile OS market.

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Windows Mobile – Microsoft

Windows Mobile is currently up to Windows Mobile 6.5. The mobile operating system developed by Microsoft was long thought to be the future of the smartphone OS. However, licensing fees and performance problems have caused Windows Mobile to have a decreased market share in recent years.

Pros:Microsoft Connectivity – With many enterprises using Microsoft products like Windows, Outlook, Exchange Server, Windows Server, etc., there is a Microsoft connectivity advantage built into OS that many enterprise customers find advantageous.

Cons:Licensing Fees – Sticking with the classic Microsoft licensing fee model has proven troublesome for the adoption rate of Windows Mobile. Unless this model is changed, Windows Mobile is expected to continue to see a loss in market share.User Interface – Microsoft has had a problem with the user interface that will likely continue unless they rework their approach.

Notes:Windows Mobile still has the 3rd largest market share of the global smartphone market. If the licensing model changes soon, Microsoft could see a resurgence in manufacturers using their Windows Mobile OS. If it doesn’t, they will likely find themselves dropping to 5th behind Google and Apple.

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Global Mobile Device Forecast

Source: Frost & Sullivan

Device growth remains steady.Global device growth continues to remain

steady with a compound annual growth rate of 4.29 percent through 2014.

Growth should exceed 1.5 billion devices.

Devices are continuing to be created to utilize the full potential of mobility for governments, global enterprises, and individual consumers alike. As the world continues to evolve into the mobile age, its no surprise that mobile devices are at the forefront of all electronics sales. Having already exceeded the one billion device mark, by 2014, the world should see 1.5 billion devices.

Smartphones are expected to provide the most opportunity in the device market.There is no doubt that smartphones are leading the way for growth in the mobile device market. Unlike the 4% CAGR for the overall device market, smartphones should grow at a compound annual growth rate of nearly 26% through 2014.

Smartphones market grows to 4 times its current size.Already having reached the 100 million smartphone mark – 139.3 million smartphones in 2008, smartphonesshould grow to over 550 million by 2014. This will be growth of 4 times its current size over the next 5 years. Furthermore, this is an increase from 11% to 36% of the overall device market.

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North American Smartphone Operating System Forecast

Android is expected to become the second largest smartphoneOS in North America by 2014.Trailing RIM, Android should grow to over 30 million devices by 2014 –sustaining a 77% CAGR.

Palm WebOS is still too early to tell.The Palm WebOS should grow at a fairly quick pace, however, with Palm deciding not to license their OS to other device manufacturers, it will likely make up a small (around 2%) portion of the market.

RIM should hit sales milestones in North America by 2014.With an already strong foothold on the North American smartphone market, RIM should continue steady growth, hitting the 30 million device mark by 2012, and exceed 40 million by 2014.

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North American Mobile Operating System Market Share

North American Mobile Operating System Market Share (2008)

North American Mobile Operating System Market Share Forecast (2014)

Chart 3.2: North America Smartphone OS Market Share Forecasts

Despite a likely decline in market share, RIM and the rest of the smartphonecompanies should have record growth over the next 5 years.With 57% of the North American smartphone market share, RIM has faired very well in the North American smartphone market. Although Apple has been successful with it’s iPhone product, it hasn’t been able to gain on the breadth of RIM’s blackberry product line. Windows Mobile has been limited by licensing fees and underperformance. However, with the introduction of Android and Palm WebOS, competition and products will be coming from all angles. This competition should provide the variety in the North American smartphone market that is likely to fuel the growth of the market as a whole – making everyone a winner.

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Market Challenges

Lack of Variation in Pricing Models.With the U.S. and Canada carriers maintaining smaller amounts of carrier competition than Europe,

pricing flexibility by the carriers is very slight. This creates less choice to customers.

Ease-of-use Concerns.Consumers are often intimidated by a smartphone. Ease-of-use helps to create an environment that

should allow users to try new products and services. The iPhone is an example of how this has helped.

Getting Applications to the End Users Without Compromising the User Experience.As applications have become one of the key areas of interest for consumers, they have also become a key headache for carriers and manufacturers alike. Ensuring that applications installed through application stores and side loading do not affect the performance of the device will be crucial for both the carriers and the manufacturers alike.

Security Awareness. Many consumers will have personal data used on their smartphone, similar to the way personal

information is stored on a computer. Security features and awareness for devices will be important to maintaining a customer base.

Continual Performance.With multiple connections, applications, networks, and devices available, a key challenge for the industry

will be creating an environment which provides consistent performance levels during the entire user process.

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Market Drivers

Rank Market Drivers 1 – 2 Years 3 – 4 Years 5 – 6 Years

1 Rapid Adoption of Smartphones by Consumers. High High High

2Lower Price Points for Smartphones Creates a Closer Comparison to Feature Phones High High High

3Convergence of Mobile Devices in the Mobile Industry Will Continue to Shift All Devices Toward Running Mobile Operating Systems

High High Medium

4Lower Costs for Data Service Plans Due to Increased Competition Amongst U.S. and Canadian Wireless Carriers

Medium High High

5Increasing Number of Applications, and Application Stores for Smartphone Devices Provides Greater Benefits to End Users

Medium High High

6Carriers Creating an Environment That is More Open for Consumer and Enterprise Applications Will Increase Adoption

Medium Low Low

Figure 1.1: North American Smartphones Market:

Market Drivers Ranked in Order of Impact (U.S.), 2008-2014

Source: Frost & Sullivan

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Smartphone Key Trends

Camera/Video PhonesA key feature for mobile end users is the ability to capture still images and video alike. Originally, the camera

feature was seen in primarily feature phones. However, with changing demand and a very strong crossover between enterprise and consumer devices, over 70% of smartphones being manufactured today have cameras built into their design.

Dual SIM Card PhonesDual SIM card phones are a newer feature that is still in the testing stages. Some devices have already been

manufactured that have this feature, however, it is yet to be determined if the feature will gain much traction amongst customers. Some advantages to a dual SIM card design would be multiple profiles for end users who use their device for both work and personal use (one card is used during work hours, the other is used outside of work hours). Another possible use would be for international travelers. A traveler could have a US carrier card for use while in the US, but then a T-Mobile card for use when traveling to Europe. The disadvantage to this would be the engineering costs associated with the new design and spacing requirements of the phone.

Wi-Fi Enabled PhonesWi-Fi has quickly been adopted as a quick and secure wireless standard for connecting to the internet. There are

hundreds of thousands of hot spot locations from airports to coffee shops all over the world. As data traffic continues to increase, end users are looking to Wi-Fi enabled devices as a faster and less expensive way to connect to the internet using their phone. Furthermore, the wide spread adoption of Wi-Fi has led to very favorable pricing on the chips, making it a fairly inexpensive feature for manufacturers to include in their phone designs. Looking forward, internet sharing will likely become an included feature for many smartphones, allowing the end user to use their cellular data connection (3G or 4G) on their phone as a broadband gateway for other phones and/or Wi-Fi enabled devices like notebooks.

Integrated GPS and Assisted GPS (A-GPS)Integrated GPS (Global Positioning System) is rapidly becoming a must have feature on nearly all smartphones.

Assisted GPS enhances startup performance of a GPS system allowing for quicker location tracking. The most compelling part of an integrated GPS smartphone is the ability to use Location Based Services (LBS) and Mobile Resource Management (MRM) products and services. These services include personalized weather, location-based games, tracking enterprise resources such as work vans and equipment, maps, directions, etc.

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Smartphone Suggestions

Mobile Industry Remains StrongAlthough the economy has been putting a damper on many industries, the mobile industry has remained

relatively strong. Although forecasts were adjusted down slightly by many companies, most are still making profits and continuing to grow their business’.

Cosmetics is the KeyIf there is one thing that the industry should have learned throughout the last year, it’s that the look and feel

of a device are just as important as the functionality of the device. With the advancements of touchscreen technology, Wi-Fi, LBS, etc., most smartphones are being equipped with the works. The key for manufacturers is to take all of the current features that are wanted, then create a design that looks and feels like an elegant accessory. Consumers are ruling the smartphone market now, and they care about the look of their phone the same way that they do about their purse or watch.

Applications, Applications, ApplicationsApplications has been one of the largest contributing factor in the success of the iPhone over the last two

years. In order for any smartphone OS or device manufacturer to be successful, consumers have to have access to applications that both empower them as a customer.

Open Source Operating Systems Will Reign SupremeWith products like Android and webOS finally on the scene, ultimately, the mobile operating systems that

provide open access for development of applications, and features that truly utilize the full capabilities of the device will likely end up being successful. The operating systems that do not will likely fail.

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Hot Topics

Nokia’s Interest in Buying Palm

iPhone vs. Android

RIM to launch Storm 2 with Verizon

Clearwire and 4G WiMAX

AT&T and Verizon 4G LTE

Satellite Technologies: TerreStar

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Major Industry Participants

• Apple

• AT&T

• Clearwire

• Google

• HTC

• LG

• Microsoft

• Motorola

• Nokia

• Palm

• Research In Motion (RIM)

• Samsung

• Sprint

• T-Mobile

• Verizon Wireless

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Conclusion

Smartphones will make up a large portion of the growth in the overall mobile device market.

Feature-rich smartphones will be the driving force behind successful smartphone products. Camera/video, WiFi, and Location Based Services (LBS) will likely become mandatory.

Symbian and Nokia are expected to continue losing market share to Android and iPhone OS, and companies like HTC, Samsung, and LG who will likely be putting marketing muscle behind the Android OS and a new line of smartphone products.

Research in Motion (RIM) will continue to hold both the number 2 spot in the global smartphone market and the top spot in the North American smartphone market.

Android is expected to grow exponentially through 2014, gaining the 3rd

largest share of the smartphone OS market globally, and the 2nd largest share in North America.

Key Market Items

Market Driver:In order to drive the smartphone market in North America, carriers will have to create a more open, and more effective environment.

Market Restraint:Smartphone pricing needs to stay close to the $100 mark in order to really penetrate the market.

Market Challenge:With multiple devices and applications available, finding a way to provide consistent performance will be crucial.

Mobile devices have grown in number more significantly in recent years than computers and

televisions combined. With feature phones being the primary market of recent years, smartphones

are emerging as the dominant device in the mobile industry.

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