by Tony D’Altorio, Investment U Research
August 19, 2009
Many of us are familiar with the 1960s TV show “Get Smart” which starred Don Adams as bumbling secret agent Maxwell Smart – Agent 86. Perhaps the most famous gadget used by Maxwell Smart was his shoe phone.
Today we don’t have to take off our shoe to use the phone. We have many variety of mobile phones, particularly smartphones which are quickly turning into handheld computers. Maxwell Smart would probably say “That’s amazing, Chief!”
The global battle for share in the rapidly growing smart phone market is really beginning to heat up. Let’s take a look at that battle and possible ways investors can profit from it.
The Global Smartphone Market
The battle for the smartphone market is heating up because this year the smartphone market is the only game in town. Smart phones account for just 1 in every 7 mobile devices sold. But this segment has doubled its share of the global mobile phone business over the past three years. Revenues from smartphones are expected to double to comprise half the industry total by 2014.
Recent figures from market research company Gartner confirm this trend. Gartner’s figures showed that shipments of phones that allow web surfing, email and other popular software applications rose 27 percent in the second quarter to 41 million units. This occurred even while overall handset sales remained on track for their first full-year decline ever. For the three months to June 20, overall mobile phone sales fell 6.1 percent to 286.1 million units.
Even during the recession it seems, consumers are abandoning ‘dumb’ phones when, for just a little bit more money, they can get a pocket-sized computer instead.
Five Companies Investors Should Consider Owning
There are a number of companies jumping into the smartphone marketplace. Here are five companies with leadership positions in the smart phone market that investors should strongly consider adding to their portfolio. We will, in particular, take a closer look at Nokia and their strategy to win the battle.
- Microsoft (Nasdaq: MSFT) – the software giant was caught off guard by the entire mobile market. But they seem to have awakened.
- Google (Nasdaq: GOOG) – the search giant’s Android operating system is winning more and more converts and is definitely a major player in the mobile phone marketplace.
- Apple (Nasdaq: AAPL) – a true technological leader in many areas and their iPhone is one of the major combatants in the smartphone market.
- Research in Motion (Nasdaq: RIMM) – this company’s Blackberry product has many “addicts” including President Obama. The leader in smart phones for the corporate market.
- Nokia (NYSE: NOK) – this company is still the global leader in mobile phone sales. And due to recent problems, Nokia’s stock has really been beaten down over the past year. We’ll now take a closer look at the still-reigning champ in smartphones, Nokia.
The Still-Surprising Leader
Most American investors are probably surprised that the leader in smartphones globally is Finnish phone giant – Nokia. Nokia will ship more mobile phones worldwide this year than their next three biggest competitors – Samsung, LG, and SonyEriccson – combined. They will sell a dozen times as many phones as Apple or Research in Motion.
However, Nokia does have problems. Their share of the smart phone market has been declining steadily. Nokia saw its share of the smart phone market decline to 45 percent in the second quarter of 2009, from 47.4 percent a year ago. That is still, however, more than twice as much as its nearest competitor – Research in Motion – whose share of the smartphone market rose from 17.3 percent a year ago to 18.7 percent now.
Nokia’s stock tanked recently as the company warned several weeks ago that they would sell 10 percent fewer phones overall this year. Another problem Nokia is facing is that they have just relinquished the lead in mobile ads to Apple. The iPhone and iPod combined now carry 30 percent of all mobile commercial messages.
Nokia is basing their entire smartphone strategy, not on having smartphones with the most features, but on providing reasonably-priced smartphones that are tailored to fit the needs of emerging market consumers.
The emerging markets are a huge potential market for smart phone providers. Here is an example – for devices with many of the features of more expensive phones priced at around $300, the potential global market grows to about 400 million users. Two-thirds of those users are located in the emerging markets.
This is where Nokia is focusing its strategy – on not too smartphones – lower-priced middle level products that will sell well in the emerging markets.
Nokia already has a leg up in the emerging world and they have a dominant market share of the mobile phone market in many emerging countries. In India, Nokia is sold in 162,000 retailers and has roughly a 60 percent share of the mobile phone market. In China, Nokia is sold in 30,000 retailers. Across the Middle East and Africa, Nokia is sold in 120,000 retailers and enjoys a 52 percent market share.
Only in North America does Nokia lag with a 10 percent market share. The company is working hard to find solutions for their lack of sales in North America.
For example, Nokia trails behind Research in Motion’s Blackberry in the North American corporate phone market. In an effort to catch up, they recently formed an alliance with Microsoft. Nokia is planning to use Microsoft’s Office Mobile suite of software that includes email, word processing, spreadsheets and PowerPoint on its smartphones. Nokia is hoping that Microsoft’s popularity with US consumers will help them gain market share in the corporate market.
The Future of Smartphones
One thing is certain about the future of the smartphone market – competition will become even more intense. Other competitors are piling in. Motorola is preparing to launch smartphones based on Google’s Android operating system. It is rumored that even Dell is working on a mobile device. Meanwhile, Apple continues to raise the technological bar.
Investors can draw two conclusions from this melee in the smartphone market. The first conclusion is that as the line between phones and computers continues to blur, the key point of differentiation for handset makers may well be the software that is inside the phones.
The second conclusion is that intensifying competition means that the days of fat margins, such as Apple’s iPhone gross margin of over 50 percent, are numbered. This would point to Nokia’s strategy as possibly being the winning strategy.