Shifting fortunes of mobile phones

Computing devices are supplanting the handset.  The reason is simple. Handsets are quickly becoming all about instant messaging, Web access and applications that let you do nifty things like find a free parking space. Voice is becoming an afterthought, a trend that favours the Silicon Valley crowd.

The stock market has already figured this out. Motorola and Nokia have lost $25 billion and $24 billion, respectively, in market capitalisation since Apple’s iPhone was unveiled at the start of 2007. That, and much more, has migrated to Apple’s market value, which has increased by nearly $150 billion over the same period. The iPhone accounts for most of the gain.

The gadget’s sales now account for a 40 per cent share of revenue at Apple, led by Steven P Jobs. Research In Motion (RIM), the Canadian company whose BlackBerry devices have a particular facility with e-mail, is another winner, albeit a smaller one. It has added $11 billion of value.

So what’s wrong with the old guard? Nokia and Motorola were excellent at making basic wireless telephones. Unfortunately, their software tended to be clunky, impeding the transition to high-end devices. That’s a big part of the problem, but there are other factors.

First, cellphone operators subsidise advanced handsets that require customers to sign up for expensive data plans. The resulting low upfront cost makes iPhones and BlackBerrys appear almost as affordable to consumers as basic phones, so they naturally go for more bells and whistles. Second, competition is fierce at the high end of the market, keeping consumers interested. Hewlett-Packard, for example, has recently bet on getting back into the handset game with its purchase of Palm.
And third, basic phones have become cheap and commoditized. The market for simple phones could shrink to $37 billion in 2011 from last year’s $65 billion, according to the German bank WestLB. In contrast, sales of smart phones could be worth $70 billion in 2011, the bank reckons.

While this rising tide may lift most boats, investors in the older handset companies still have reason to worry. Nokia captured nearly half of all money spent on smartphones at the beginning of 2008. It now takes less than 30 percent, according to research from Royal Bank of Scotland. Sure, the pie is growing, but it’s alarming for Nokia’s owners that Apple’s share has grown to about a third from close to zero.
Nokia and Motorola are taking different tacks to catch up. Nokia, based in Espoo, Finland, is bundling services — such as e-mail, navigation and free music in some markets — into phones and introducing an improved operating system this year. It’s also aggressively taking on Apple in court, claiming the iPhone and iPad infringe Nokia patents.

Motorola’s response has been to ramp up production of phones that use Google’s Android operating system. It sold 2.3 million of the expensive handsets in the first quarter alone. That’s far fewer devices than Apple, but it does mean Motorola, based in Schaumburg, Ill., is finally regaining its innovative spirit.  The danger is that Apple’s current lead in high-end devices will be difficult to overcome because it is self-reinforcing.  Nokia’s status could erode quickly if consumers perceive its software to be second-rate. The once dominant Sony Walkman franchise, after all, was crushed when Apple introduced the iPod.  Motorola faces a different danger. While the Android platform is increasingly popular, the handset maker could eventually become one of many producers of relatively standardised, low-margin devices running the system – leaving Google to skim off most of the advertising revenue cream. The old guard still has a chance to halt the phone industry’s shift to Silicon Valley. But it’s getting late in the game.