Commentaries

Smartphones’ ecosystem dilemma

Why  is the Motorola Droid apparently gaining traction in the smartphone market, when Microsoft and Nokia are failing so miserably?

The Droid, built on Google’s Android mobile operating system, sold 250,000 in its first week on the market. That’s way behind the 1.6 million iPhone 3Gs sold in the first week after its launch, but it’s still enough for Motorola to see possible salvation after years of decline and for Google to feel self-congratulatory about its venture into mobile.

Some of the success of the Droid, and the increasing number of Android-based phones available, can be ascribed to its clean and versatile operating system. Reviewers and users agree that Android still lags the iPhone, but the gap is closing. In contrast, Microsoft’s Windows Mobile has stumbled through numerous iterations — it’s now on version 6.5 — and endless renamings. No one has ever liked it.

 Nokia once ruled the roost with its Symbian-based smartphones, but its market share has been declining steadily. Nokia still sells more mobile phones than anyone else in the world, but Apple — which sold 7 million phones versus 113 million for Nokia in Q3 — astoundingly makes more profit, $1.6 billion on handsets in Q3 this year against $1.1 billion for Nokia.

The operating system alone, however, doesn’t explain the Droid’s initial success, or even the iPhone’s ascendancy. What Apple has done so successfully is build a thriving ecosystem around its product. The various Android-based phones are following the same path. There are now more than 100,000 applications (dubbed apps) for the iPhone, with hundred more appearing every week. As the advertisements tell consumers, there’s an app for that, whether it is timing your cooking for a complicated dinner party, using Facebook, tracking FedEx packages or getting snow reports from ski resorts.

As more apps are developed, there are more and more reasons to buy an iPhone rather than the competitor, the phenomenon economists call network effects. In contrast, there are about 10,000 apps available for Android-based phones. That probably covers the vast bulk of what most users want to do, but the perception is that the iPhone can do much more (hence the Droid’s advertising slogan: Droid Does).

Apps, overwhelmingly built by third-party developers, are nothing new. Apple’s innovative idea was to put an app store on its device, so users could browse, choose and buy apps casually and spontaneously. You didn’t need to search for different vendors, or download apps to your computer for future syncing with your phone. So the ecosystem becomes the phone itself, the app store and the thousands of developers.

Humbled giants eye business phone market

LONDON, Aug 13 (Reuters) – Once they were warriors battling one another on the digital battlefield. Nowadays, Microsoft and Nokia are worriers, huddling together for comfort.

The world’s top phone and software companies need each other to compete with Apple, Google and Blackberry-maker Research in Motion (RIM), whose products increasingly define what users expect from phones and charge premium prices in consequence.

In the market for so-called “smartphones”, Deutsche Bank estimates Apple and RIM now take home more than half of all profits, despite producing less than a third of high-end mobile phones. Nokia held a 45 percent share of the smartphone market in June, according to Gartner Inc. (Table 2 in Gartner release)

The news this week that Nokia will feature Microsoft’s office software — features such as Word and Excel — on phones aimed at business users is symbolic of what is possible rather than significant in itself. It fell short of predictions in the gadget trade press that Nokia might introduce phones running on Microsoft’s own Windows Mobile software.

But that doesn’t mean their collaboration should be dismissed. There’s more to this budding relationship than meets the eye.

First and foremost, Microsoft and Nokia say they are taking on the Blackberry email-phone, a must have among corporate professionals. So far the they haven’t done very much, for all the big talk. But they have pledged to make Microsoft Outlook work smoothly on Nokia phones.

This is crucial in overcoming Blackberry’s key advantage — the underlying software that companies rely on to securely manage corporate e-mail.

The hollow ring of tech earnings reports: Eric Auchard

By Eric Auchard

LONDON, July 17 (Reuters) – For technology investors looking for clues to how the sector is faring, Intel Corp sent a false positive signal with its upbeat quarterly report this week. Subsequent reports from IBM, Nokia and Google show how hollow any recovery for growth stocks is proving to be. Even though the growth sector has defied the broader market sell-off in recent weeks, all the signs point to weak trading in months ahead.

Nokia, the world’s largest mobile phone maker, offered a harrowing reminder of what life is like for companies exposed to the wider vicissitudes of consumer demand. It is struggling in a handset market set to decline around 10 percent this year, even though Nokia signalled the industry may be stabilising.   

Intent on keeping its dominant handset market share, the company said it was prepared to sacrifice profit margins in the second half of the year as it engaged in a price war with rivals. Meanwhile, its networks joint venture, Nokia Siemens, will lose market share instead of remaining flat as previously expected.

Adding to its woes is a shortage of components for its phones that will hurt its third quarter performance. Revenues are likely to fall a massive 25 percent for the full year. Any recovery in margins next year will depend on it showing improvement in the competitiveness of phone designs.

Or take IBM. Second-quarter revenues slumped 13 percent from a year ago, but record improvements in margins helped it top earnings expectations thanks to years of financial engineering efforts in which it has exited PCs, storage and memory chips.

Once the world’s largest computer maker, IBM has transformed itself into a supplier of technical services and niche software, from which it derives 90 percent of its profits and massive operating leverage. What is missing is much improvement in demand.

Don’t read too much into Intel’s success: Eric Auchard

By Eric Auchard

LONDON (Reuters) – Intel Corp has cheered up investors by once again making forecasts about its financial performance. The trouble with reading too much into its rebound, however, is that this is largely due to productivity gains of its own making, rather than a broader awakening of demand.

To be sure, Intel’s revenue, profit and margins surged past all published analyst expectations for the second quarter. Partly, this was merely the “snapback” that occurred after Intel throttled back production to as low as 25 percent of factory capacity in the first quarter, amid a glut of unsold chips and shriveling demand.

Things got so bad that it quit commenting on its outlook for the first two quarters of 2009.

The bigger news was its answer to the question of what was happening in the second half: Third-quarter margins should improve to around 53 percent on revenue around $8.5 billion, and could move up toward historic high levels by year-end. The comments sent Intel shares up as much as eight percent and sparked broad-based buying in technology shares around the globe.

However, there is little here to bolster confidence in other bellwethers of the technology sector reporting this week. Intel is benefiting from healthy demand in China and — to a lesser extent — the United States, among consumers rather than businesses. But these are not swing factors for the likes of Nokia, IBM or Google.