It's Not Easy Being a Smartphone

Posted on July 1, 2011 by Ben Connard

In early June, Nokia warned profits would miss expectations and shares fell 13%.  Shares of Research in Motion, maker of the Blackberry, have fallen 50% for the year.  Even shares of Apple are having their worst first-half performance in 3 years.
 
Nokia is hitting tough times as sales are falling more rapidly than expected after its February announcement that it would stop using the Symbian operating system and adoptMicrosoft’s Windows Phone operating system.  Consumers are wary of buying Symbian phones and Windows phones won’t be available until 2012.
 
The Nokia/Microsoft alliance was created to battle Apple’s iOS system used in iPhones (and iPod touch and iPad) and Google’s Android, used by HTC, Samsung, LG and other phone manufacturers.  The benefits to Microsoft are obvious- its operating system will be used by an established phone manufacturer.   The system will hopefully gain acceptance and attract more manufacturers.  The benefits to Nokia are less obvious, and the alliance reveals more about Nokia’s desperation than anything else, despite being the largest phone maker by volume.  Its Symbian phones were losing share and the company felt the only way to gain on the competition was to use an operating system with more scale.  The more devices using the system, the more likely 3rd party developers are to design an app.  Consumers demand Angry Birds on their phones.
 
Research in Motion is going through similarly tough times.  Blackberries are still favored by IT professionals who emphasize security and e-mail integration, but their features don’t excite anyone.  Investors fear that other smartphones will improve security and integration leaving Research in Motion with a phone that consumers don’t want and IT professionals don’t need.
 
Worries about Apple stem not from its current situation (iPhone revenue grew 126% last quarter) but fears that Google’s Android operating system will continue to gain ground.  May numbers show Android has a 38% share in the U.S. smartphone market, followed by Apple’s iOS at 27%, Blackberry OS at 21% and Microsoft Windows at 10%.  Investors are also getting anxious because the next generation of the iPhone 5 isn’t due out until September- it’s already been more than a year since the iPhone 4 was released in June 2010.
 
To understand how quickly things change, a year ago Blackberry was on top and the Android was running third.  The share breakdown is even more amazing when you consider the iPhone was launched in June 2007 and the HTC Android in November 2008, back when everyone was talking about their Crackberries.
 
The Smartphone competition is great for consumers.  New phones are constantly released with new features and prices are being driven down.  But the competition is brutal for the manufacturers- unless such a company is able to continuously innovate and maintain the consumer’s loyalty.  Once competitiveness begins to lag, lower prices cause margin compression and lower stock valuations.