Wireless industry members agree smart phones will become a critical differentiating factor for handset vendors and mobile-phone operators within the next two years, but the proliferation of these devices remains relatively unknown.
For handset providers, smart phones represent an opportunity to extend their products, boost their bottom line through higher-margin products and extend their markets to the growing handheld personal computer market, said Phil Redman, senior wireless analyst with the Yankee Group in Boston.
“With increased competition and razor-thin profit margins, vendors need to find new ways of generating revenue and differentiating their product line,” commented Redman.
Yet, mobile data services today remain significantly underpenetrated.
“Everyone knows that over the next two years, smart phones will be a big differentiating factor for companies,” said Lee Finney, North American marketing manager with LG Information & Communications Ltd. in San Diego. “No one knows what the volume will be. These units are bigger and more expensive … There’s very little value for data over wireless. It’s extremely slow, integrity of the connection is poor and the content provided is marginal to what you can get on a pager.”
Today, the Nokia 9000 Communicator and subsequent versions of the phone dominate the smart terminal market, with U.S. Global System for Mobile communications operators offering this handset for about three years. The terminal provides organizer/calendar, e-mail, fax and Web-access capabilities at speeds of around 9.6 kilobits per second. The Yankee Group estimates Nokia’s handset accounted for 1 percent of all GSM handset shipments in 1998.
Time Division Multiple Access operator AT&T Wireless Services Inc. was the first operator to launch a service using Phone.com Inc.’s UP.Link platform, with its Pocket-Net service. The service offers business travelers customized information from Internet sites, but the $500 analog handset coupled with coverage problems with Cellular Digital Packet Data technology have hampered sales, said Redman.
The popularity of the World Wide Web is taking the industry closer to understanding what the demand for wireless data will be. The majority of handsets shipped by the end of the year will be Web-enabled, and U.S. Code Division Multiple Access operators are moving to offer limited Web access at 14.4 kbps.
Nationwide operator Sprint PCS plans to introduce a package of wireless Web services in late September highlighted by the NeoPoint 1000 handset, a sleek phone with Web browser and personal organizer. Newcomer Innovative Global Solution Inc. teamed with Phone.com to introduce what IGS calls a “smart phone done right.”
“Our product is much slimmer and lighter,” said William Son, IGS chairman and chief executive officer. “Other phones introduced have taken the approach where they have integrated the phone product in a [personal digital assistant]. We’ve taken the other way, where we incorporated some popular organizer functions into a phone with synchronization capability.”
Analysts have heralded the new phone.
“It’s sleek, it gives up nothing in terms of pocketability, and it has voice recognition and an on-board modem,” said Cliff Raskind, analyst with Strategy Analytics in Boston. “Most importantly, it has a powerhouse like Sprint putting marketing muscle behind it.”
Sprint PCS, however, still lacks extensive digital coverage, evidenced by the fact that 50 percent of its handsets sales are dual-mode handsets. Web access won’t work over the analog system. The $400 price tag, which includes a $100 data kit, also is a barrier to wider acceptance.
“Up over $300 at retail, you are playing less than 5 percent of the total (handset) market,” said Matt Hoffman, analyst with Gartner Group’s Dataquest in Stamford, Conn. “People want smaller form factors, then you have a smart phone up there too. You’re competing in a small-volume space. To really make headway in the market, you need to get the price under $199 retail.”
As data services gain acceptance in the marketplace, handset vendors expect prices to fall. But acceptance means carriers must work to improve network reliability, increase data speeds, fill in coverage gaps and find the right mix of services, note analysts. Carriers today also are careful about pricing data services, afraid that big buckets of data minutes could translate into network congestion they would not be able to handle.
“The speeds have to increase dramatically,” said Finney, whose own company is looking to introduce more smart handsets early next year. “There has to be actual information, and you have to move from pure text to screens.”
And while vendors wait for the improvements, they are positioning themselves for entry in the marketplace. The smart-phone market is wide open for leadership. Today’s U.S. handset market has seen the likes of Sony Electronics, Siemens Wireless Terminals and Oki Telecom Inc. exit as the pressure to lower prices and offer a broad range of terminals continues to increase. Nokia Mobile Phones, L.M. Ericsson and Motorola Inc. continue to dominate the market.
“Forming the right partnerships to provide a total solution is going to be crucial to the success of the [smart-phone] market,” said Redman. “Increasingly, we will see a multitude of partnerships between operators, handset vendors, content providers, application developers and system integrators.”
Motorola, for example, is working on integrating smart functionality in high-end phones and is putting all the pieces together with the acquisition of Starfish and Microware, and Symbian investments. Qualcomm Inc. is market trialing its pdQ smart phone, which integrates 3Com’s Palm Computing platform with its CDMA technology.
“The market will not be owned by the big three anymore,” said Jane Zweig, vice president with Herschel Shosteck Associates Ltd. in Wheaton, Md. “Competition will be coming from the other side. Palm Pilots and Windows CE certainly will have a big play in this.”
Many industry experts agree, however, that the industry will end up with two types of smart phone devices: one that is voice-centric with data capabilities and the other that is data-centric with no voice capabilities, such as the Palm VII. Computer company Compaq is one of the leading computer companies working to develop and design handheld data devices. Microsoft Inc. and IBM Corp. are involved in Bluetooth developments and the Wireless Application Protocol Forum.
“As Microsoft gets more involved, we might see more mainstream computer manufacturers come in,” said Redman.
Strategy Analytics’ Raskind said interest exists in voice-enabled PDA devices, which would require some sort of ear piece. Users would be unwilling to pull the phone away from their ear to use data features.
