Summary: New analysis suggests that only only three or four mobile handset software platforms will remain by 2012. 

This is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete's Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

Mobile Software Home Truths

Wireless Devices

Amidst all the swirl of excitement around mobile software, some dull realities are setting in.  As the barn gets crowded with ever more exotic breeds (in alphabetical order: Android, Apple OSX, Blackberry, LiMo, Maemo, Moblin, Symbian, WebOS, WindowsMobile), there is a growing risk of fragmentation and consumer confusion.  We see some unglamorous "home truths" about mobile software getting lost in the weeds.

 

Few, if any, vendors make money from mobile software.  Microsoft makes $160 of gross profit per PC while mobile software is moving royalty-free. The few pure plays (like Opera) rely on sales of services around their software.  Mobile software only gets leverage from related services (often a single one).  These must be tightly linked to devices, e.g., e-mail (Blackberry), e-books (Kindle), music (iTunes) or gaming (XBoxLive), with resulting communities controlled by their choice of software; few services work equally well on all devices (e.g., search, YouTube).

 

AppStores are not (yet) content stores. OEMs must link themselves with cloud services (like Motorola's new BLUR platform) or offer their own (e.g., ITunes, Ovi, etc.).  Individual developers find it hard to make money through AppStores: if even one were making $10m in sales, it would be widely publicised.  Exclusive or "sponsored" applications like navigation or content-like games should fare much better.

 

We see room for only three to four platforms by 2012.  The pace of innovation, R&D cost, and need for customisation (for hardware, operators and languages) invites consolidation.  Supporting OEMs and reaching out to developers is costly and labour-intensive; only over time might HTML5 browsers supplant device-specific applications.  No platform is so productised as to simply hand over to licensees (be they OEMs or operators).

 

Every smartphone will support one (or more) AppStores.  We do not know how many services or what content AppStores 2.0 might offer, or how they will be made relevant to consumers.  The most popular applications should work on every smartphone, even as some devices (like INQ) are optimised for versions of Facebook, Amazon, Twitter, Skype and other popular digital brands and services. AppStores may help OEMs build relationships with users of those services, though both vendors and operators will try to control billing.

 

All phones are becoming smart.  So-called smartphones get attention as a growth segment in a declining handset market, but "dumbphones" (using proprietary software like Nokia's S40, Samsung SHP/TouchWiz or LG's S-Class) are getting more sophisticated.  The costs of the two are converging. Featurephones will soon also support AppStores and Internet services.

 

	'09E	'11E
Symb. v9.3+/S60	~110m	~240m	S60 goes mid-range
Apple OSX	~30m	~120m	Incl. iPod Touch
B'berry OS 4.5+	~40m	~80m	Doubling OS base
Android	<10m	~80m	From >10 OEMs
WinMo 6+	~10m	~50m	Transition to Win7
Palm WebOS	<5m	~15m	Limits w/o licensing
LiMo	<5m	~20m	Platform for LCHs

 

Hard Graft

The costs for developing and maintaining complex software platforms are increasing.  There are no shortcuts to the sheer volume of work, especially in building on legacy code bases and supporting operator requirements, or developing language packs.  Every platform faces significant roadmap issues. Some handset OEMs are building adaptation layers to port a range of applications to their own branded UIs.  Just supporting multi-core chipsets for handling streaming or managing financial transactions needs additional processing power to deal with security and viruses.  Yet it requires software re-writes and poses power management challenges (i.e., tripling or quadrupling processing will drain batteries faster).

 

We long predicted video would become as ubiquitous as voice, i.e., with devices designed around handling video traffic.  There are a wide range of solutions to cope with streaming video, including in software (i.e., Flash or Silverlight) rather than via hardware optimisations. Apple patented technology around adaptive bit rate codecs to handle streaming in its forthcoming iPhones.  All platforms need to support over the air (OTA) updates, embrace graphics-rich applications, handle HD content, and comply with an array of USB drivers and accessories.

 

It is also not clear whether application downloads are a novelty or a mass market phenomenon. Discovery and recommendation engines need to be improved on most platforms, and marketing must focus on what applications offer. The gap between legacy platforms and an over-the-air customisable user experience is a wide one, and will not be resolved by AppStores, fresh UIs, or moves to go open source. Widget and webkit technologies could bring similar UXs across multiple devices.  Most developers will not need access to lower layers or optimise applications for specific hardware.  Over time, HTML5 browsers could supplant device-specific applications (e.g., GMail runs on an iPhone as a web application, as does WebOutlook on Android), but OEMs are unlikely to embrace this approach.  This also does nothing to extend billing or allow for collection of detailed customer analytics.

 

At the same time, operators’ selection criteria are moving from form factors to user experiences.  Operator UX teams now number in the 100s of staff, even if they fake a fragmented approach: Vodafone-subsidised devices currently support Android Market, Blackberry AppsWorld, OviStore and iPhone AppStore, and runs its own developer programme (Betavine). Few telcos develop native applications, but mostly use ones that run in Java, Webkit, Widgets, etc. Only a few (e.g., Verizon Wireless) offer customised UI.

 

While Apple and Google get the most attention (as pioneers of the AppStore concept, and for providing a shop-front for the open source community), Nokia and Microsoft have pivotal roles to play.  Both offer unprecedented scale (in handsets and computing software), even if both are fast followers.  We do not see Nokia's commitment to Ovi or Symbian wavering. Though Microsoft's successive versions of WindowsMobile failed to get traction beyond 10-15m units p.a., we expect a renewed push around Windows7 in 2H10. The MSFT/Yahoo search deal could be a blueprint for closer collaboration with Nokia. With its resources (a $9.5bn R&D budget) and assets (enterprise installed base, XBox, HotMail, and Bing), Microsoft could offer handset OEMs revenue share deals. LGE already committed to ship 50+ Windows models by 2012.

 

Figure 1: Product Differentiation?