I’d like to thank Marcel Warmerdam and Pim Bilderbeek – both great analysts who have contributed to this article.

Worldwide Mobile Handset Highlights Q2 2010

• In 2009 1.1 billion handsets were sold, the equivalent of one for every six people alive on the planet
• 147 million Smart Phones were sold in 2009 – worth $49.1 billion
• In the year to June 2010 the 166 million Smart Phone sales were $57 billion
• Apple leads the market for Smart Phone handsets and operating system
• Android is growing fast, but is not yet challenging Apple or Blackberry OS on a worldwide basis
• Nokia is the world leader of the Basic Phone and overall handset market
• No single supplier – with Android or any other operating system – is likely to overtake Apple any time soon

In order to look in more detail at competition in the handset market we thought it a good time to break out Smart Phones. It’s important to get an idea of the speed of development for each operating system and manufacturer to test out the theory that phones based on Google’s Android operating system are in some way encroaching on Apple’s incredible success in the short time it has been a handset supplier. It is also vital to our research into corporate client refresh activities, where Smart Phones and Smart Tablets have a major role to play as client devices.

As anyone would I encountered a number of important issues in assessing the market sizing, In particular:

• There is no common definition of ‘Smart Phone’ – if I was a manufacturer I would, of course, claim that all of my phones are ‘Smart’ and all others ‘Dumb’
• Shipments by operating system are difficult to calculate for those suppliers who offer multiple choices and for operating systems which ship on multiple platforms

In assessing the handset market luckily there are good unit and revenue data in vendor financial results and analyst presentations, from which we’ve estimated the enclosed statistics.

Basic Phone Sales Still Exceed The Rapidly Growing Smart Phone Sector

We defined Smart Phones by:

• Technology (larger – often touch – screen sizes, physical or virtual keyboard, colour screen)
• Connection (3G and above – not just GPRS – and often in multiples such as tri-band) and
• Usage (a high proportion of Internet and ‘apps’ rather than just voice and SMS)

Having defined the product category we then set about splitting the information for the various vendors. We decided to classify all Apple, HP/Palm, RIM Blackberry phones as ‘Smart’. For the other suppliers we estimated the ratios of their Basic and Smart Phones and their average values. We did not include Apple’s iPad in these statistics – rather we consider it part of a new ‘Smart Tablet’ category which will require additional research as the market develops. We also count ‘sales in’ (from manufacturer to channel) in these numbers, which in a growing market will be less than ‘sales out’ (from channel to end-user). As always we have much more information in our market model than we publish here – so please get in contact with us to see if we can help you with your specific research needs.

Our market sizing is shown in Figure 1. We actually increased our sizing of the overall 2009 handset market (from $139 to $145 billion) as a result of adding HTC and updating a number of quarterly results from the various vendors. There are a number of interesting findings. In particular:

• Smart Phones have increased as a percentage of market value from 18% of all mobile handsets in 2003 to 34% in 2009 and 38% in the 2010 year-to-date.
• In 2009 on a unit basis shipments of Smart Phones were 147 million out of a total of 1.1 billion – around 13%
• Growth rates for Smart Phones have been higher than for Basic Phones, with a 28% increase to $49.1 billion in 2009
• In comparison the revenues of Basic Phones dropped by 15% to $96.0 billion while the overall market dropped 4% in the year

However it is important to note that Basic Phones continue to be the biggest part of the handset market. As these products have comparative definitions it is certain that the proportion of ‘smart’ to ‘basic’ will increase over time. It is more than likely that the economy of scale in manufacturing will lead to Smart Phone hardware being deployed often in Basic Phone contexts. There are also geographic issues in the mix of phone types. In particular:

• Nokia has made major inroads into the Chinese and Indian markets over the last few years
• Apple – the archetypal Smart Phone supplier – is expanding internationally but currently has a relatively small market share in Asia Pacific
• The Japanese market has been the home of Docomo phones, making it one of the most advanced countries for Smart Phone adoption
• Much of the analysis published concerning the development of the Smart Phone market over the last few months has been generated from analysis of the US market. The massive saturation of that market is limiting growth prospects for a number of vendors who find no such pressures in international markets.

Apple’s iPhone – Clear Leader Of The Smart Phone Market

While Nokia retained its position as the largest overall mobile handset supplier ($8.9 billion revenue and 111.1 million shipments in Q2 2010), ITCandor placed Apple in first position for revenues in the Smart Phone sub-market (see Figure 2). It is important that the two newest suppliers – Apple and RIM – have managed far stronger growth than others in recent quarters. More established players (Nokia, Samsung and Sony Ericsson) have suffered substantial losses in market share as a result. We believe there are a number of reasons for these significant differences. In particular:

• Both Apple and RIM have gone out of their way to define overall ecosystems into which their handset products fit as components.
  • In the case of Apple, developing iTunes and iPhone apps has taken significant resources.
  • In the case of RIM, supplying email servers, data encryption and focusing on security have made Blackberry phones a natural (and sometimes mandated) choice for many businesses and government organisations.
• Both Apple and RIM have a proprietary approach to product development – they get all the ‘wood behind one arrow’; there is no template for compatibility in the handset market as there is in the PC area

Many vendors have multiple product and operating system SKUs making up their current portfolio. While users don’t require interoperability between devices, there are significant management costs for supplier in maintaining them. In addition the use of ‘open’ operating systems makes it unlikely that a supplier will settle on a single operating system for all future handset designs.

Apple’s iOS Is Operating System Leader

When looking at the Smart Phone operating systems (see Figure 3) there are some important developments. In particular:

• HP’s has gained significant expertise through its recent acquisition of Palm, but not much business as it is currently the smallest of the major products; ITCandor believes that past history makes it unlikely that HP will attempt a full ‘ecosystem’ approach in the Smart Phone area
• Symbian is not exclusive to Nokla’s phones of course, although we believe its success as an operating system follows a very similar curve
• Google’s Android has attracted a long list of adherents, including Samsung, Sony Ericsson. LG and HTC among the handset suppliers; however the combination of these has so far failed to dent Apple’s success; while there are clear advantages for users in the common development of apps (Google claimed 100k were available by August 2010), Android lacks a focused push
• Apple announced that there were 180k applications available for the iPhone in March 2010 and that 15k more were being launched every month; only the Android operating system has anything like the same attraction for developers.
• Microsoft is about to ship its new Windows Phone 7 product, although it looks as if apps will not be compatible with its current Windows Mobile 6 operating system

Maintaining close version control, ensuring compatibility between operating systems (if possible) and making platforms attractive and easy for application and infrastructure software programmers are very important for handset operating system developers.

It’s Apple – More Than The iPhone – That’s Smart

Technology-wise the iPhone is not a lot smarter than its competitors. It is Apple that was very smart. They made a clever and stylish design using state of the art, but readily-available, technologies. Yes it has sensors, which is a relatively new phenomenon and opens up a tremendous amount of opportunities for creating a whole new breed of applications – but the smartest thing Apple did was to make the iPhone Developer Program available for free to everyone. Halfway through 2010 almost a quarter of a million applications have been developed since the iPhone’s introduction. The number of new applications is growing steadily by an average of 15k a month, according to Apple. The number of downloads currently stands at 4 billion – Apple claims to have registered 1 million downloads one day in April when Opera Mini was launched. It is interesting that Apple does not currently run its App Store at a profit – managing the stock of apps and the regulating new apps per month is no small task. The apps enhance its users’ experiences, have made it one of the most popular products ever-launched and help to keep its average system values higher than most of its competitors. Allowing its users to develop applications has made the iPhone part of an overall ‘social CRM’ ecosystem which extends beyond the typical commercial partnerships used by other handset suppliers. As a result, they’re all scrambling to catch up.

Some Conclusions – Ecosystem Approaches Build Success In The Smart Phone Market

Handset suppliers have been in the news in recent days – Apple’s senior VP Mark Papermaster left the company, perhaps taking the fall for ‘antennagate’; RIM has been getting into trouble in the UAE and Saudi Arabia over the lack of government access to email information, probably enhancing its reputation for security as a result.

The massive success of Apple since it produced its first phone in 2007 has been remarkable and puts paid to the immutability of market shares in the ITC market. Apple may be vulnerable from customer lock-in, ‘single points of failure’ from a small number of SKUs and its culture of secrecy typical of matrix integration. However, having looked at the Smart Phone market overall we believe it to be less threatened from Android than we had thought.

We’ve uncovered some important new areas to think about. In particular:

• Managing the transition between operating system versions is key for those who want to extend corporate applications to Smart Phones
• The clear success of proprietary (as opposed to open) strategies pushes us further down the line into matrix integration
• Smart Phones – but not handsets overall – were a countervailing business in the recession, not least because of the subsidies paid by mobile operators in many country markets

The big push for Smart Phones is into international markets – especially Asia Pacific, where sales have been weaker than in the US (see Figure 4).

ITCandor is moving forward to size the voice and broadband revenues of mobile operators as well as the revenues of ARM, Intel Atom and other chip manufacturers. This will allow us to compare market growth before forecasting the area thoroughly. Let me know if you’d be interested in collaborating or subscribing to the finished report by commenting on this post.