All iWant for Christmas…
Where Wireless is Trending as 2011 Approaches
The launch of the iPhone in 2007 was both a shot across the bow of incumbent wireless players and a seminal event in the history of mobile computing. The resulting “smartphone revolution” has rapidly accelerated data usage, creating risks and opportunities across the wireless food chain. Wireless data revenue globally has surged from $38 billion in 2008 to an estimated $70 billion in 2010, according to Gartner. Ericsson estimates that global mobile data traffic nearly tripled in the second quarter of 2010 to 225,000 terabytes per month.
Recently Baird initiated research coverage of current smartphone leaders: Apple and HTC Corp., an Android original equipment manufacturer (OEM). Following are observations and a near-term outlook for this vital market space.
A Mindshift with Seismic Implications
Much the way DVRs changed the way we watch TV and the iPod changed music listening, smartphones have turned the mobile computing universe on its head. The best of these devices have become far more than e-mail enablers and to-do list tethers for OCD professionals. They are portals to the World Wide Web as users have wanted to experience it since Sprint first offered its skinnied down “Wireless Web” a little over a decade ago. They are pocket communications and entertainment centers and, thanks to a nearly limitless universe of software applications, all-around life enhancers for users including young kids, urban hipsters, soccer moms, grandparents, CEOs and even U.S. Presidents.
Of course, such a usage explosion was bound to inflict collateral damage. Recent global share data suggest that Apple’s iPhone and Google's Android platform have gained significant market share at the expense of incumbents such as Nokia, Microsoft, RIM and HP/Palm.
Apple brought software, hardware and application integration to a whole new level with the iPhone, leaving the early device leaders in the proverbial dust. A game of catch up has ensued, with higher-end Android devices further catalyzing the space.
Survival of the Fittest
Today smartphone growth is dominated by Apple and Google's Android platform. Apple accounted for roughly 39% of total handset/smartphone industry operating profit in the first half of 2010. RIM's growth remains robust, though its early technology leadership has taken a backseat to Apple's and Google's software innovation, which greatly threatens RIM’s longer-term prospects.
According to Gartner, Apple accounted for 14.2% of total global smartphone sell-thru shipments in calendar Q2 2010 vs. 13% in Q2 2009, with Google Android-based devices up to 17.2% vs. just 1.8% for the same period. Nokia remains the global smartphone share leader, though it fell from 51% in Q2 2009 to 41% in Q2 2010. Interestingly, Nokia's actual smartphone shipments grew 42% over the same period, highlighting the blistering pace of smartphone growth globally. RIM has also rapidly lost share in its largest market, the United States, dropping from 53% in Q2 2009 to 33% in Q2 2010. RIM and Nokia are losing share at the high end, which is the largest source of industry profits.
Microsoft's share decline is also notable, falling from 9% in Q2 2009 to 5% in Q2 2010 on a global basis. Even with a software background, Microsoft fell behind on software innovation, highlighting the challenges facing Nokia and RIM as they try to transition to software centric models. Microsoft recently unveiled Windows Phone 7 in hopes of resurrecting its fortunes.
Baird forecasts global smartphone shipments to rise 36.5% by the ened of this year to 240.8 million, accounting for close to 17% of global handset shipments vs. 14% a year ago. Global smartphone shipments should rise 35% in 2011 and 30% in 2012 as compared to total handset growth of 6.9% and 5.3%, respectively.
There is probably opportunity for a third and perhaps even fourth major smartphone player in the space, but Nokia, RIM, Microsoft and Palm have all struggled to take up Apple's challenge. And the longer they wait, the more difficult it will be to get developers on board. Nokia is betting on MeeGo and its new CEO, RIM on its QNX software, Microsoft on WP7 and Palm on an HP metamorphosis. Ultimately any viable player in this space will need to improve their hardware/software integration for a better user experience.
The Droids Google was Searching For
With multiple OEMs on the Android bandwagon, these devices are likely to continue taking share. This could accelerate even further as they reach to lower-end segments. Yet within this section of the smartphone space, success will be hard earned. While HTC Corp. was an early Android leader, the company faces increasing competition, particularly in the United States, and a challenge to differentiate itself over the long term.
Apple has insulated itself from these pressures with a closed OS, but some believe by doing so Apple is heading down the same path that led to Microsoft’s dominance of the PC market in the 1980s, when Microsoft maintained an open OS that may OEMs could rally around. Some conspiracy theorists are calling Google the new Microsoft as it spreads its seed to multiple OEMs, which could make it a de facto standard. It is possible that the intensity of competition among Android OEMs could result in Google being the only real winner over time.
Apple’s Enduring Appeal
A key differentiator for Apple seems to be its focus on optimizing the user experience through a more tightly integrated software and hardware solution. These efforts have forged seemingly unshakable loyalty among early adopters, who habitually gobble up new or improved product as soon as it falls from the Cupertino, California-based tree each June.
Despite some technical and PR hiccups in the rollout of its iPhone 4 earlier this year, Apple clearly occupies the pole position in the race for smartphone market share heading into the holidays. And the well-received iPad appears to have opened up a whole new channel for growth. In short, even though the stock is performing quite well now, Apple has further upside potential.
Data Surge Brings Challenges, Opportunities
Smartphones have already necessitated innovation and growth across the wireless food chain with their unprecedented data demands. The advent of 3G and now 4G networks are prime examples. Now the iPad and its inevitable tablet competitors are poised to take data usage higher.
The proliferation of online video in the age of YouTube is playing no small part in this rapid evolution. A recent report from Bytemobile estimates that video traffic on high throughput networks already accounts for 60% of data traffic, and online video is still a very young medium.
Due to the significant capital investments needed to accommodate increased demand, and limited pricing power in what’s become a highly competitive landscape, carriers could face significant challenges in this environment. However, surging wireless data revenue could help drive modest expansion of average revenue per user (ARPU), which would be positive. Meanwhile, infrastructure and software and services providers are well positioned to capitalize on surging data demand.
To provide some perspective on the pace of the wireless industry’s evolution and its possible implications for investors, consider this: It took the U.S. wireless carriers approximately three years to reach the first $1 billion in wireless data revenue, and just another 3 years to reach $10 billion in annual revenue. Baird estimates that the Big Four U.S. carriers will generate roughly $70 billion in wireless data revenue by the end of 2010.