Sunday, June 10, 2012

Who Will Win the Smart Phone Wars?

Nokia $NOK gave disappointing results recently and, it is hard to see where the company can go from here. In less than a decade, smartphones have captured over 50% of the US market and, Nokia has been nowhere near competitive enough in this market. In terms of US smartphone handsets, the clear leaders are Samsung, LG, Apple $AAPL and the declining RIM $RIMM.  So Nokia is challenged at the high-end, but it is also challenged at the low-end where local Asian manufactuers are issuing cheap non-smartphone models.

The investment thesis behind Nokia is usually the opportunity for it to establish itself as the handset (smartphone & non-smartphone) of choice to the emerging markets. Nokia certainly, has the brand name and positioning in emerging markets and, the current situation looks favorable for this idea.
Countries like China are still a couple of years away from a 4G network, and according to official figures, their mobile penetration rate is still at an internationally relatively low figure of 74%. Moreover, 3G penetration in China is still at a very low 14%. This suggests that Nokia can see growth via increasing Chinese mobile penetration with non smartphone models.

However, this is the current situation. It is not the future. Frankly, I see no reason why future growth in China will not be focused on smartphones and Nokia’s positioning looks weak.

In the update, Lumia smartphone sales were lower than forecast and, the launch of the Lumia 900 did not go well. Nokia has been hoping Lumia could create and, then expand upon, a niche with its Microsoft $MSFT Windows operating system. The weak opening does not bode well.
In addition, The previous Nokia system, Symbian, is being phased out and Microsoft is an also-ran in the mobile OS space. Their appears to be little clamor for Windows mobile operating systems and, even if Nokia decided to use Google’s $GOOG Android, it could take years before a handset is produced. It looks like Nokia is stuck with Windows for now.

Who are the Winners in the US Mobile Market?

I’ve adopted some figures from Comscore in putting together this table for US mobile subscribers and Operating Software (OS) share. 

Share of Mobile SubscribersSmartphone OS Market Share

(All data is for the US as of Feb 2012)

Samsung, LG and Apple are doing well. As for Motorola, even with a currently declining market share, the company will have the opportunity to flourish given that Google’s ownership looks ready to spur investment. Turning to operating software, Google gives Android away free but, as yet, has not found a way to meaningfully monetize it. Android is multi-channel and is used by Samsung, LG, Sony Ericsson, Motorola, HTC and many others.

Going forward, the key issue will be the ecosystem created by the operating system and, developers simply do not create applications to run on platforms with little market share. Scale means everything for a developer and, right now, Google and Apple are the runaway leaders. Indeed, Facebook even mentioned the possibility that Google might try to exclude Facebook apps from its Android system, as a potential risk to the business.

Google Winning?

Longer term, Google looks like a winner, because it knows how to monetize search and display in mobile. Facebook does not make meaningful revenues from mobile and, I think is more structurally challenged by mobile than Google is.  Also, Android is only part of Google’s cross product offering and it can be subsidized in order to create revenue from search based ad revenue.

RIM’s Blackberry is losing market share and, is threatening to become a footnote product in the history of technology. The Blackberry seemed to hit a cultural sweetspot as a smartphone option before the Iphone and Android based systems gathered steam.

Apple is a smartphone leader and, the company is about much more than just the Iphone. Nevertheless, a failure to keep innovating in hardware design in future could hurt market share for Apple’s iOS. By way of comparison, Android runs across a range of handset manufactures so, in a sense, it is hedged. However, what Google plans to do with Motorola is still not clear. One thing that is certain, is that Google is actively dealing with the shift towards internet usage on mobile. I’m not sure the same could be said of Facebook!

Another Way to Play the Theme?

While the usual analysis of the sector involves trying to pick a winner from companies competing to capture the current within strong structural trends (smartphones, apps, mobile internet etc), investors can also try and buy stocks exposed to these themes in other ways. I think it is an inexorable fact that increased smartphone penetration will demand enhanced bandwidth and increased data speeds. That said, I like the Internet Protocol (IP) and network testing solution providers. The leaders in this field are the Ixia $XXIA and the UK’s Spirent.

Both are exposed to long term trends in spending on upgrading networks that are seeing increasing demand put upon them. The more that is spent on networks, the more testing that needs to be done. Whilst most of the excitement centers around the next generation 4G/LTE networks, both companies can see upside from the continued roll out of 3G networks in countries upgrading their mobile networks.

Ixxia is a company well worth watching. It tends to be volatile over results because the market reacts to short term guidance over carriers spending plans, but longer term this is an exciting industry to be invested in.

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