In cellphone wars, computers kill the radio stars

May 11, 2010

Video may have killed the radio star on MTV. But in the cellphone wars, it’s the computing industry that’s destroying the former leaders of the handset business, namely Nokia and Motorola , whose roots lie in the wireless radio business.
The reason is simple — handsets are quickly becoming all about instant messaging, accessing the web and applications that let you do nifty things like find a free parking space. Voice is fast becoming an afterthought — a trend that favors the Silicon Valley crowd.
The stock market’s already figured this out. Motorola and Nokia have lost $25 billion and $24 billion, respectively, since the iPhone was unveiled at the start of 2007. That, and more, 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.
Indeed, the gadget’s sales now account for 40 percent of revenue at the group led by Steve Jobs, a figure that’s rising quickly. Research in Motion — the Canadian company whose phones have a facility with email — is another, albeit, smaller, winner. It has added $11 billion of value.
So what’s wrong with the old guard? While Nokia and Motorola were excellent at making basic wireless telephones, their software tended to be clunky, impeding the transition to high-end devices. Several other factors have compounded their difficulties.
First, operators heavily subsidize advanced cell phones that require customers to sign up for expensive data plans. The resulting low upfront cost makes iPhones and Blackberries appear as affordable to consumers as a basic phone — so they naturally prefer those with more bells and whistles. Second, competition at the high end is becoming fiercer, as every firm tries to squeeze its way into the fast growing market. For example, HP , a perennial also-ran in handsets, has bet it can get back into the game with its recent purchase of Palm .
Third, basic phones have become largely undifferentiated commodities as electronics prices continue to fall. The market for simple phones could shrink from last year’s $65 billion to $37 billion in 2011, according to German bank WestLB. In contrast, smart phones could be worth $70 billion in 2011, the bank reckons.
While this rising tide may raise most boats, investors in the old guard firms still have reason to be worried. Nokia captured nearly half of all money spent on smart phones at the beginning of 2008. It now captures less than 30 percent, according to research from RBS. Sure, the pie is growing, but it’s alarming for Nokia’s owners that Apple’s share has gone from close to zero to about a third.
Nokia and Motorola are now taking different tacks to catch up. The Finns are bundling services — such as e-mail, navigation and free music in some markets — into phones and introducing a better operating system later this year. It’s also aggressively taking on Apple in court, claiming the iPhone and iPad infringe Nokia patents relating to wireless data transmission.
Motorola’s response is to quickly ramp up production of phones which 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 Motorola appears to have finally regained its innovative mojo.
Still, climbing back to the top won’t be easy. Far fewer applications are available to Nokia phone users than are available on the iPhone. The danger is Apple’s lead in high-end devices will be difficult to overcome because it is self-reinforcing. Users tend to flock to the most useful handsets, and software developers go to the most popular platforms.
While Nokia still produces about a third of all phones made, its status could erode quickly if consumers perceive its software as second-rate. Don’t forget the experience of the Sony Walkman franchise, which was crushed by Apple’s introduction of the iPod.
Motorola faces a different danger. While the Android platform is becoming increasingly popular, Motorola could eventually become one of many producers of commoditized, low-margin mobile devices running the system — leaving Google to skim off most of the advertising-based cream. HP’s purchase of Palm appears motivated by a desire to avoid falling into this trap.
The old guard still has a chance to halt the phone industry’s shift to Silicon Valley’s computer kids. But it’s getting late.

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And how is this breaking news? Rewind to 2009 pal

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