Mobile Devices: Flying in the Clouds – Who Will Make it Through?

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It has been just 4 years since the introduction of the iPhone.  In that short time, Apple, joined in bitter competition by Google and its Android ecosystem, has laid waste to the traditional cell phone industry and with the popularity of the smartphone’s younger but bigger brother, threatens to render the venerable PC obsolete.  The trajectory of the Apple/Google rivalry is driving both companies to define their platforms as suites of services that reach far beyond the device and make it doubly difficult for would-be contenders to get back into the game.  Hewlett Packard, Research in Motion and Microsoft have all made clear their intention to compete, each claiming a better mousetrap and an ability to exploit strength with enterprise IT buyers.  We are skeptical and grant only Microsoft better than even odds of surviving the mobile platform wars

Apple’s simultaneous announcement of its new iCloud service and its revamp of the iOS operating system is a spur to the ribs of its arch rival Google and its Android ecosystem, but also a stark challenge to the would-be rivals circling below.  It will not be enough to offer a competitive standalone smartphone or tablet OS.  Future user experiences will be defined not just by the functionality, ease of use and performance of the device, but also of the network-based services tied to the device.  These services geometrically expand functionality extending across multiple devices, but require deft integration, and severely tax the delivery infrastructure.  As this evolves, mobile devices will be just a piece of an end-to-end service controlling the way that consumers communicate, access information, transact business and entertain themselves

A key question for Hewlett Packard, Research in Motion and Microsoft is how quickly an enterprise specific market for tablets and smartphones will emerge.  Relative to consumers, IT departments have different priorities – i.e. application customization, security, organizational control, and vendor diversification – that may favor alternative platforms and traditional IT vendors.  We believe that the pace of adoption will be set by the movement of enterprise applications to the cloud and the acceptance of portable devices as appropriate replacements for PCs, developments that are finding a bleeding edge now, but will take a few years to become commonplace.  Given scale economies and the grass roots pressure on IT departments to support consumer mobile platforms, we believe an enterprise only approach is unlikely to be successful

Hewlett Packard and RIMM have flailed in the smartphone market and are both late to the party with tablets that have generated some “geek cred” buzz.  Even if the devices live up to the expectations of the blogosphere, both companies face an uphill battle.  Neither has established a meaningful ecosystem of commercial partners.  Both have tired consumer brands and tepid distribution support.  Neither appears to have the intention or wherewithal to deliver a viable end-to-end service response to Apple’s iCloud challenge. Both are subscale and, likely, high cost.  We view both companies as unlikely to thrive in the smart portable device market of the future

Microsoft’s position is slightly better.  Mobile Windows7 smartphones have been on the market for a year, having gained critical kudos if not market momentum.  An update, pitched for tablets as well, is due before year end.  Microsoft has established a modest ecosystem of device partners, with Nokia the notable new enlistee.  The brand is far more valuable than either HP or Blackberry and carriers view Mobile Windows as a best alternative to ward off an Apple/Google duopoly.  Importantly, Microsoft may have enough pieces to deliver a viable consumer cloud strategy, with both applications and infrastructure in house.  Microsoft’s scale is really that of its manufacturing partners, which include the four largest non-Apple mobile device makers.  If Microsoft’s next version, code named “mango” meets delivery targets and technical expectations, and if its hardware partners hit their marks as well, Mobile Windows may live to see its positioning with enterprise IT managers actually mean something

As for Apple and Google, their strategies, though equally comprehensive are a study in contrasts.  Apple’s approach emphasizes integration, both of the user experience and of the company’s value chain.  By keeping the most important elements in house – processor design, device design, application distribution, retail, branding, and now, cloud service design and operations – Apple is able to deliver a rigorously coherent and intuitive user experience that remains its biggest advantage

Google leverages the reach of its ecosystem partners, including the biggest device manufacturers and wireless carriers in the world, to flood the market with choice, while iterating three system upgrades in the time its rival completes one.  Speed is Google’s ace in the hole, and its biggest manifestation is in the company’s distributed data center infrastructure, which puts more processing power and storage closer to more users, thus assuring lightning response from its cloud-based services

Like most, we believe Apple and Google will sustain leadership at the top of the device food chain.  Between the two, we favor Android, as its ecosystem is fueling a faster innovation and broader choice, while Google’s infrastructure is a sizeable and unappreciated advantage as the market runs headlong into the cloud era.  We expect the tablet market to play out similarly to smartphones, with Android software catching up to iOS in both functionality and market share, with Apple sustaining itself as a premium priced and super-normally profitable number two.  We also believe that Microsoft’s Mobile Windows will establish itself as a viable third alternative, with particular strength in the slowly emerging enterprise market, but that neither HP’s WebOS or RIMM’s QNX OS has enough momentum to survive

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