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Mobile phones
The battle for the smart-phone's soul
Nov 20th 2008
From The Economist print edition
Competition heats up to provide the software that powers mobile phones
BRACE yourself for disappointment: there may not be a flashy new mobile phone waiting for you under the Christmas tree. On November 14th Nokia, the world’s largest maker of such devices, announced that it expects the industry to sell no more than 330m of them in the fourth quarter—about 6m fewer than in the same period last year and 20m fewer than it predicted just a few months ago. Worse, Nokia expects sales in 2009 to drop below this year’s level. This would make it only the second year ever in which the global handset market has contracted.
Yet not all is doom and gloom in the mobile-phone industry. On the contrary, it is going through two important shifts that promise to generate much growth and profit in the years to come. First, even though overall sales may fall in 2009, sales of “smart” phones—those that allow you to surf the internet, download music and use other data services, as well as make calls and send text messages—are booming. According to Informa, a market-research firm, the market for smart-phones will grow from $39 billion in 2007 to $95 billion in 2013, by which time they will make up nearly half of the handset market by value (though only 34% by volume).
Second, and more important, as handsets get smarter the nature of the industry will change. It will be less about hardware and more about software, services and content. In fact, for the first time, more will be spent this year on such intangibles than on the handsets themselves (see chart). And this is why, also for the first time, a fierce battle between operating systems for handsets has broken out.
Mobile phones had operating systems before, of course. Just like personal computers (PCs), they always needed such software to enable the hardware to function and to allow add-on programs to run. But most mobile operating-systems were proprietary, meaning that handset-makers had developed them specifically for their own devices. Only at the top of the handset market was there any rivalry between operating systems, with a struggle mainly between Research in Motion (RIM) with its BlackBerry; Symbian, controlled by Nokia; and Windows Mobile, a cut-down version of Microsoft’s operating system for PCs.
This set-up was fine as long as mobile phones were relatively dumb, wireless-data connections were slow and users were happy just to make calls and send text messages. But in recent years it became the main impediment to the take-off of the mobile internet. On their own, handset-makers did not all have the necessary resources, expertise and culture to develop top-notch operating systems with intuitive user interfaces. Add-ons such as games had to be laboriously tweaked to run on multiple platforms, which often existed in multiple versions.
All this amounted to a tax on mobile phones: on average, 20% of the cost of a handset goes on software. It did not help that mobile operators, keen to keep control of their customers, decided which applications would run on a handset and which services it could access. They also confused customers with complicated pricing schemes for wireless data.
It has taken two outsiders to shake things up. One is Apple, with its iPhone. As well as being a paragon of hardware and user-interface design, it comes with a flat-rate “all you can eat” data plan. Apple also provided powerful tools to develop software for the iPhone, and a novel way to distribute them: the App Store. As with a PC, users are free to download applications and install them on their iPhones. Launched in July, the App Store has taken off even more quickly than iTunes, Apple’s industry-leading online-music store. In the first two months, iPhone users downloaded more than 100m programs.
The other disrupter is Google, with its Android platform. It also lets users download applications from an online store, called Android Market. But it differs from the iPhone in that Android is just software, which Google makes available to handset-makers and operators. The first operator to adopt it was T-Mobile, for its G1 phone, launched in September. What is more, Android is “open source”, meaning that its underlying recipe is freely available and can be easily changed and understood. This, Google hopes, will speed up adoption and allow more innovation than the iPhone platform, which Apple controls tightly.
The appearance of these two newcomers has led the industry’s incumbents to redouble their own platform efforts. One scheme, called LiMo, is run by an eponymous foundation with a membership comprising more than 50 handset-makers, mobile operators and other industry bodies, all of which share intellectual property. Just like Android, the software is based on Linux, an open-source operating system (“LiMo” stands for Linux Mobile). But in contrast to Google, the LiMo foundation intends to offer only the basic elements of a platform, leaving its members room to differentiate themselves, for instance by developing their own user interfaces.
And then there is Symbian, which has been around for a decade. In June Nokia announced a deal which seems counterintuitive, to say the least. It paid €264m ($411m) to buy out the other shareholders in Symbian and transfer its software to a non-profit foundation that will continue to develop and distribute it, on an open-source basis. But by doing so Nokia kills two birds with one stone. The acquisition means it no longer has to pay licence fees to use Symbian, and open-sourcing it makes the platform more attractive to programmers and other handset-makers.
Let battle commence
How will this conflict play out? There are actually several front-lines. One is between the open-source platforms and their proprietary rivals, in particular the iPhone and BlackBerry platforms. Although the majority of smart-phones will ultimately be powered by open-source software, the proprietary platforms are here to stay, predicts Geoff Blaber of CCS Insight, a market-research firm. Many users, he says, value their tight integration of hardware and software, which makes for a more seamless package. Only Microsoft has a real problem: it does not make handsets itself, so it cannot exploit such integration, and handset-makers that do not wish to develop their own software now have a choice of free alternatives to Windows Mobile.
Then there is the fight between the three open-source platforms. All have their strengths and weaknesses. Symbian is proven technology that powers some 159 phone models, but has limited momentum among independent software firms. With Android, it is the other way around: the software powers only one handset model so far, but its online marketplace already boasts a few hundred programs. LiMo is behind in both, but has the merit of not being controlled by one big firm.
In 2009 each platform will be trying to win the hearts and minds of software developers, says Roberta Cozza of Gartner, another market-research firm. But even if one comes out ahead, it is unlikely that the market will consolidate soon. Strong economic interests are keeping each platform alive. Google wants to get its services and advertising on mobile phones. Nokia is also betting on services as a source of growth. And handset-makers and operators will probably continue to support LiMo, if only because they do not want to depend on Google or Nokia.
The best outcome, indeed, is a continuing battle. If the market for mobile-phone platforms were to consolidate quickly or go down the same route as PC operating systems, which wound up being dominated by Microsoft Windows, the result would probably be less innovation. And it is by innovating rapidly that the mobile-phone industry, and any other for that matter, has the best chance of weathering the oncoming recession.
