The smartphones has been the fastest growing category within the mobile phone space for the last couple of years. In 2009, a total of 172 million smartphones were sold which was a growth of 24% over 2008 (source: Gartner) whereas the mobile phone category was more or less flat in 2009 in the backdrop of severe recession. Analysts expect over 240 million Smartphones to be sold in 2010.

What is a Smartphone?

Unfortunately, there is no one universal definition of Smartphones. Some analysts have defined it as phones using open operating system which means that Symbian, Windows and Android based phones qualify as Smartphones but then what about Apple iPhone and RIM that run on proprietary operating system? Some define it as phone that gives PC like functionality and for some, it is the one with most advanced mobile phone features and hence the feature set of smartphones keep changing. A few industry analysts define it at mobile phones running on operating system with standardized interface and that provide easy access to developers for application development.

Whatever is the definition, it is commonly accepted that Smartphones have strong email clients, third party applications of some kind, QWERTY hardware or software keyboard support, high-speed internet, powerful calendar, contact and organizational features and support for powerful processors and touch screens. The operating systems that can support the above feature requirements are Symbian, Windows, Android, iPhone OS, RIM, Maemo (Meego going forward with Maemo’s merger with Moblin) and Palm OS.

Why does everybody want to win the Smartphone battle?

Smartphones are not even 10% of the total mobile phones but still all the handset players want to win this battle for the following reasons:

1. High ASP - The average selling price of a smart phone is almost 3 times that of a non-smartphone which means it has a higher impact on not only the value share but also on the profitability. Apple and RIM though have just 3% market share in the mobile devices but have over 50% share in industry profits which reflects the high profitability of the smartphones.
2. Thought leadership - Success in the smartphone business gives the device vendor the status of “Thought Leadership”. Any vendor having the “Though Leadership” benefits in the non-smartphone devices as well as the consumers want to buy the devices from the leading brands (in terms of “Thought Leadership”) even if they are not buying the devices that gave the vendor this status. This status is like the quality assurance certificate.
3. Future of mobile phones – The smartphone market is expected to expand significantly in future to almost 40% of the total device market by 2013 which means that no vendor can afford to ignore this market.
4. Operators prefer Smartphones – The increasing popularity of iPhones has led to increased data usage on the mobile. This has enabled the carriers to maintain their ARPUs despite fall in voice tariffs. The data usage on smartphones is almost 3 times higher than a normal phone. 55% of iPhone users use mobile social networking and 80% use it for surfing web daily. The high data usage has led to the situation of data scarcity from data abundance and carriers love this situation.

Who will win the battle?

Anybody who wins in the smartphone business has to win it on back of the operating system.

Symbian has been the market leader in the Smartphone segment of the market with 47% market share in 2009. However, Symbian is facing a stiff challenge from iPhone OS, Android and RIM OS and has lost market share in the recent few quarters. The figure alongside gives Smartphone market shares in 2009. Android though has only 3.9% market share in 2009 but is making the most noise in the smartphone segment.

Each operating system has its own positives and negatives and before we attempt to answer the question that who is going to win the battle, it is important to evaluate the pros and cons of top operating systems:

Andriod:

This operating system has been developed by Google with the aim of not only to get a foothold in the lucrative mobile industry but also to change the way the mobile owners consume data on the net.

Pros – Open, free and supporting many devices. Great experience of Google’s web properties on the mobile like messaging

Cons- Fear of excessive fragmentation due to its open architecture and is also more susceptible to security threats

iPhone OS:

This operating system has been developed by Apple and is a closed, proprietary operating system and is only for Apple devices, iPhone and iPod Touch. iPhones have been so popular that they are now being blamed for the increasing data congestion on the networks.

Pros - Single unified platform and its biggest asset is the application store

Cons- Proprietary and hence its dependence on one vendor is a risk. Application submission process is a cumbersome and Apple keeps a tight control on the 3rd party applications.

Blackberry OS:

Blackberry OS is owned by Research in Motion (RIM) and is a proprietary operating system.

Pros - Strong in enterprise mobility segment and has created a perception amongst IT managers of being a much secured OS. Strong messaging service

Cons- Proprietary and hence its dependence on one vendor is a risk. Aged operating system and requires the special BES server. Lack of focus on consumer segment in the past limits the lure to potential developers. This operating system also suffers from lack of optimization on touchscreen devices and a bad web browser.

Symbian:

Symbian is owned by Nokia  and used by many other vendors like Samsung, LG and Sony Ericsson. It is market leader but is seen as an archaic operating system. However, it is still holding out with promise to launch Symbian 3 and 4 by the end of the year.

Pros - Largest installed base and hence the economies of scale. Backing of Nokia, the market leader helps Symbian maintain its market leadership.

Cons- Aged OS and not really optimized for touchscreen devices. It is virtually absent in the North American markets and is facing huge competition from Android, iPhone OS and Blackberry OS. Dependence on Nokia is a risk as many of the other vendors are shifting to Android.

Windows Mobile:

This operating system has been developed by Microsoft and promises to mirror the PC experience on the smartphone. After continuous decline in market share in the past many quarters, Microsoft recently announced Windows Mobile Version 7 which has got rave reviews from analysts and handset vendors.

Pros - Backing of Microsoft which has virtual monopoly on personal computers. Microsoft’s ability to provide resources and its possible integration with its other hot properties like X-Box, Zune can ignite developer interest in this operating system.

Cons- Past failures to haunt version 7. Heavy operating system and hence requires higher hardware specifications. Last version had a bad user interface (UI) and web browser. I hope the new version has targeted the UI for improvement

There are many other operating systems like Maemo, LiMo, Samsung’s Bada that are trying to get a foothold in the lucrative smartphone business but only time will tell if they can manage to break into the top five operating systems.

I am not going to pass a verdict on which operating system will win but I will publish the results of the poll that I conducted on this site and no prizes for guessing the winner (refer to the image on the left). The winner was Android with over 40% of votes. In the backdrop of its popularity and the confidence that the ecosystem players are putting in Android, it is not at all surprising that it is going to be the fastest growing operating system for next five years. In the recently concluded Mobile World Congress, Android managed to get the highest number of handset announcements. Though even iPhone OS is a wonderful operating system but its proprietary nature would limit its expansion.

The author writes regularly on Telecom Circle. Other similar articles by Mohit can be read at Telecom Circle

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New analysis from Wireless Intelligence reveals that the top 20 mobile operators and operator groups ranked by total connections represented over 58 percent of global mobile connections in 1Q09.

Aggregated top 20 operators and operator groups*, Q1 2009

The largest operator is China Mobile with just 11% market share. Vodafone is a distant second with 5% market share. This data underscores the fact that the operator market is very fragmented and ripe for consolidation. Compare this with the market share of handset vendors – Nokia is at 40% and Samsung is approaching 20% (top 2 handset vendors have 58% market share while 20 top operators together are able to garner this much). Till very recently, the upper hand was with carriers and the other players in the ecosystem had to follow the operators. The mobile services were about voice and simple services like SMS, MMS and mobile internet. This means that the scale was not so important for the success and even smaller operators with 10-15 million subscriber base were able to sustain themselves. However, now after the popularity of Apple application store, there are many such stores that have been announced by handset vendors but only one by a carrier (Vodafone). The device vendors can pre install the application store in new devices that they sell and can use the carriers like a bit pipe. Due to their high market share, they get higher reach and hence they become the preferred platforms for developers. Nokia sells over 400 million devices every year is well positioned to reach as many as a billion mobile phone users due to their installed base. This means that Nokia not only becomes the favorite destination for developers but also has the ability to apportion its platform development cost over a large base. The operators cannot match the scale of Nokia as even the largest operator does not have the subscriber base which is as large as the installed base of Nokia. Android is an open source operating system and hence can scale itself fast as it can be used in handsets across the vendors.

It requires millions of dollars to develop SDP (Software Development Platform) and if the scale is missing, then the operator would either need to charge higher tariffs from its subscribers or would have to partner with platform owners like Android, Nokia and Apple to offer high end services. Vodafone recently announced its own application platform and hopes to implement across its alliance partners. The $23 billion deal between Bharti and MTN would help them to spread the IT and platform cost over a larger base. Low ARPUs in their markets does not justify high investment in IT at the same time, it is important to invest in IT to get the subscriber satisfaction and prevent its consumers from churning.

Over the last few years, the decline in ARPU has been significant with the voice tariffs and roaming charges coming down. The roaming tariffs in Europe are under severe pressure. At the same time, the subscriber base is stagnating as the mobile penetration is reaching the saturation stage. This means that the only alternative left with operators in Europe and US is to look at acquisition in Asia and Africa. Vodafone has been following the strategy of expanding into African nations and has taken over Hutch’s operations in India to get a foothold in emerging markets. Falling ARPUs also mean that the cost recovery of platform development would take a lot longer and hence unless there is operator consolidation, the mobile operators would continue to destroy wealth at the stock exchanges.

In a few countries, the spectrum available for mobile services is too small or it is divided amongst a large number of players, e.g. in India, there are 15-16 players offering their services leading to very small quantum of spectrum for each player. In such scenarios, consolidation may happen sooner than later. I expect the incumbent operators in India to takeover the new operators not for their subscriber base but for the spectrum that they hold.

There are three levels of consolidation – Domestic, regional and inter-continental. Governments across countries have argued that they need to increase the number of operators to increase the competitive intensity leading to benefits to consumers. However, it is seen that the impact of competition on tariff diminishes steeply after the 3^rd or the 4^th operator in any market. It is likely that the smaller operators without scale would be taken over by larger operators in their markets. The next level of consolidation would be within the region like there are operators which operate in markets across Africa or Middle East and have expanded by taking over smaller operators in other countries but within the same continent or region. Finally, I expect M&A activity amongst the regional players across continents to be able to get the scale. There are many targets that are ripe for a potential take over, e.g. Orascom (operations in 11 countries), Zain (operations in 24 countries), and Telekom SA

Due to the current economic conditions (read credit crunch) and reluctance of smaller operators to sell, the consolidation may not move at a fast pace. In such a scenario, it is possible that mega alliances are formed amongst operators. The already exist a few alliances like the Bridge Alliance of 11 operators in Asia, East African Operators Alliance, Vodafone alliance with China Mobile and Verizon, etc. The existing alliance would be strengthened and new onces will be formed that would be more tightly knit together rather than just a preferential roaming agreement.

In summary, the operator landscape is going to change tremendously in next five years with the emergence of mega operators or operator alliances. The consolidation would help the operators gain scale that would give them higher bargaining power against the resurging ecosystem players. There is no alternative to consolidation in front of operators.

Read other articles of Mohit on http://www.telecomcircle.com

Views expressed by Authors/Users/Subscribers etc on this website are completely their personal views and in no way reflect the views of their employers or any connected parties. Please view our detailed Terms & Conditions.

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Read my other articles at www.telecomcircle.com

In this post, I would discuss the current and emerging business models in the wireless industry.

The key activities in the value chain of the business model are Service Creation, Identity Management, Service Provisioning and Billing. The key players in the ecosystem are the carriers, handset vendors, platform owners (e.g. Symbian, Android), application providers and the content partners. In different business models, different ecosystem players try to control most of the activities. There are broadly 4 business models that exist today in some form or the other.

1. Carrier Dominance Model: In this model, the users visit the portal screen of the carrier and download/use services from the portal (also called the walled garden). The walled garden directs the user’s navigation within particular areas, to allow access to a selection of material, or prevent access to other material. Traditionally, the carriers have followed the walled garden business model and controlled all the entities of the value chain of the business model. This model got prominence when the wireless industry was in infancy. The carriers took upon themselves to offer end to end solutions to the users. In this model, the content providers need to tie-up with the carriers for their presence on the carrier portal. The carrier is responsible for marketing of the service to the users and also for billing and collection. In return, the carriers charge a huge revenue share (as high as over 50-60%) plus the user access charge. Common examples of this model have been Vodafone Live, NTT Docomo’s i-mode, Airtel Live. AOL followed the most successful walled garden on the web and at one point of time, as per Economist magazine, 40% of the time Americans spent on web was within the confines of the AOL walled garden
2. Device Dominance Model: In this model, the device vendor is controls the device, platform and the content & application partners. Service provider tie-up with the device vendor who puts the service either on its application store or on its own portal. In this case, the device vendor controls the key activities of service creation, identity management, service provisioning and billing. Carriers get the access revenues and have a shared responsibility for identity management. This results in the highest differentiation for device vendors but the least for the carriers. In this situation, the data adoption and usage is normally high and the revenue share is better for the content partners. However, the content partners are expected to take some load of marketing, billing and care in return for higher revenue share. Also, the development cost of services is likely to be high as separate development is required for each device vendor. Common examples of this approach are Apple and RIM. Both Apple and RIM have complete control over the value chain and they decide on which services to offer
3. Platform Dominance Model: In this model, the mobile OS platform takes the dominant position. The platform is available across many device vendors and hence the development effort on part of the content and application partners is lower. There are limited service differentiation opportunities for the carriers or the device vendors. The content players need to partner with the platform owner. The carrier gets the user access revenue and the service revenue is shared between the platform owner and content partner. In this model, the platform replaces the device vendor in the device dominance model. The content partners get better revenue share (up to 70%) in return for billing, care and marketing. Symbian and Android are examples of this kind of approach
4. Application Dominance Model: This model is very much similar to the web model. The application is accessed using the carrier as pipe. The carrier gets the user access charges but entire service revenue goes to the content and application owner. The activities of service creation, identity management, service provisioning and billing are all done by the application owner. The marketing and care responsibilities also lie with the application owner. The role of the device and platform owner does not change in this case. Due to multiplicity of the devices and platforms, the service/application development cost is very high. Facebook, Linkedin, Google gmail client could be examples of this approach. However there are not many examples of paid applications in this model

There are many changes taking place simultaneously in the wireless space. The platforms are changing from proprietary in-house operating system (OS) to proprietary industry OS to collaborative open industry OS. Carriers are lowering the walls of the walled garden due to demands of the users as well as pressures from the content and application vendors. New opportunities are evolving which enable the content providers to completely by-pass of the carrier. All these changes require a change in the business model in the wireless industry

The emergence of the optimal business model needs to ensure that the consumer interests are taken care of and the consumer interests are the weakest if the entire or most of the value chain is controlled by one single large player. In that respect, the platform dominance model probably is best suited to the consumer needs. Due to higher base, the development costs are likely to be lower and all the ecosystem players are likely to have an equal say in the platform dominance model. However, the outcome of the success of any business model would depend on the outcome of the power play between the different entities of the ecosystem

Views expressed by Authors/Users/Subscribers etc on this website are completely their personal views and in no way reflect the views of their employers or any connected parties. Please view our detailed Terms & Conditions.

Aspiring Consultants can seek free & valuable advise by Clicking Here

Related Posts

• April 26, 2010 -- Smartphones – A Overview of Operating Systems (1)
• August 25, 2009 -- Consolidation Amongst Mobile Operators is Inevitable (0)
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