Price Wars Likely to Spur Smartphone Explosion in 2010

Are you one of those holdouts who hasn't yet jumped into the high-tech world of smartphones? Well get ready, because the mobile-phone makers of the world are about to make you an offer that will be very difficult to refuse.

This may be the year when cheap prices finally drag millions of behind-the-curve consumers into the blossoming smartphone market, unleashing unprecedented strains on broadband networks as handset makers wage a price war in the midst of booming demand.

"The smartphone market will become ultra competitive in 2010," analyst Neil Mawston from Strategy Analytics told Reuters.

More than 1 billion mobile devices will access the Internet in the New Year, research firm International Data Corp. (NYSE: IDC) says. That's catching up to the 1.3 billion users that use a PC to go online, and the rate of growth for mobile users is 2.5 times the growth rate for PC use.

New technologies like smartphones generally take some time to gain consumer adoption, but smartphones for some people have become a necessary part of life - not because those functions can't be found elsewhere, but because the devices increase a person's efficiency.

Instead of just a phone with a few widgets like a Web browser and a music player, phones have become remote controls, global positioning devices, newspapers and cookbooks, to cite just a few of the functions they perform.

But with smartphones growing in popularity even among the technically challenged, there are reasons to believe 2010 will the year they finally go mainstream.

The versatility of smartphones made a growing number of people overlook the high cost of ownership and kept sales from slumping in late 2009, despite the recession. 

A slew of new, cheaper models and improving economies helped the handset market recover in the 2009 fourth quarter, after a generally lackluster early part of the year. 

ABI Research reports that handset sales hit 336.5 million globally in the fourth quarter of 2009, which is up 15.1% compared to the same period one year ago.

Nokia Corp. (NYSE ADR: NOK) has played mostly a minor role here in the United States, but the Finland-based manufacturer led global handset sales once again in 2009, boasting a 37.7% market share. Samsung Electronics Ltd. grabbed the No. 2 spot with 20.5% share, a huge increase over its 15.2% position one year ago. And LG Electronics nabbed third place with 10.1% market share.

But that's the worldwide market for the entire cell phone universe.

If you focus on just the smartphone segment -by far the most profitable slice of the market - the market grew 30% year-over-year in the December quarter to 53 million phones, the highest ever, according to Strategy Analytics.

Nokia - which continues to sell more smartphones than its two closest rivals, Research In Motion Ltd. (Nasdaq: RIMM) and Apple Inc. (Nasdaq: AAPL), combined - shipped 20.8 million smartphones, up 38% from a year ago.

But Apple's iPhone, Microsoft Corp.'s (Nasdaq: MSFT) Mobile OS and Google Inc.'s (Nasdaq: GOOG) Android models, are making significant inroads.
As the chart below shows, operating-system software determines market share in the smartphone world.

But things are changing. As the Android and iPhone platforms widen their distribution networks, they are expected to make significant gains against Symbian, Nokia's smartphone OS.
Market research firm Gartner Inc. (NYSE: IT) expects Android to appear on 14.5% of all mobile phones by the end of 2012, behind Symbian, which the research firm predicts will still command a whopping 39% of the market. The iPhone OS will be third by that time with 13.7%, while Mobile OS will be fourth with 12.8% of the market. RIM's BlackBerry OS, currently No. 1 in the United States and No. 2 in the world, will fall to fifth place with a 12.5% share of the market.

In 2010, more buyers are likely to be moved off the fence as rivals fight to gain a piece of this most-lucrative part of the handset market.  Several new vendors are set to enter the market and established players will battle to maintain market share by lowering prices.
"Economic recovery mixed with pent-up demand will create positive conditions for handset vendors in both developed and emerging markets in 2010," Ramon Llamas, an IDC analyst, said in a statement, obtained by Reuters.

More than 200 million smartphones are expected to ship in 2010, fueled by falling price points that will be lower than $150, IDC said in a report.

South Korean firms Samsung and LG Electronics, the world's No. 2 and No. 3 handset vendors, are planning to aggressively market new models, hoping to sharply increase smartphone sales, while new players like Huawei Technologies Co. Ltd. and Dell Inc. (NYSE: DELL) are ramping up their offerings.

"The smartphone wars will be good news for consumers, but the fierce competition will inevitably place downward pressure on vendors' pricing and margins," Strategy Analytics' Mawston said. 

The usual suspects will lead smartphone sales in the United States, including RIM and Motorola Inc. (NYSE: MOT). But look for the Android and the iPhone platforms to increase marketing campaigns and wrest market share from RIM and others.

But RIM is not about to go quietly. Analysts are predicting a new 3G Pearl 9100 will be "a big success, just like the last Pearl," based on feedback about such features as a high-quality screen and responsive optical trackpad, Reuters reported.

"RIM continues to expand its international footprint beyond the core territory of North America deeper into Western Europe and parts of Asia," market researcher IDC said.

As demand for smartphones explodes, it appears about the only thing that could put a crimp in growth will be a lack of broadband spectrum.

Wireless capacity - so often an afterthought to smartphone buyers - is paramount, since it's the ability to connect to the many apps and services that make consumers want a smartphone in the first place.

Factors like weather, trees, network loads, cell tower locations, and other things can cause service from a single wireless service to vary widely from day to day and even from neighborhood to neighborhood, according to tests run by PCWorld Magazine.

The current advertising feud between AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) shows that mobile broadband could become a choke-point as more users stream video, read e-mail, and update their Facebook status on the go.

In a recent speech in San Diego, AT&T Wireless CEO Ralph de la Vega cited research showing that demand for wireless broadband has grown 5,000 times in the last three years. And that growth is actually expected to accelerate rapidly in the coming years.

In fact, AT&T's exclusive deal with Apple to sell the iPhone has brought it preeminent status as a wireless provider. Ironically, however, the additional traffic brought on by the big boost in subscribership is now threatening AT&T's entire 3G network as the provider struggles to handle the large bandwidth appetite of the popular device.

Since it takes huge capital investment and several years to expand broadband networks, AT&T has moved to search for ways to solve broadband bottlenecks, which have led to crippling outages and service problems for its users, especially in big cities like New York and San Francisco.

AT&T recently released a research report showing that just 3% of its smartphone customers account for 40% of all broadband data.

In the face of exploding-data-service demand and scarce wireless spectrum, some companies, including AT&T and Verizon, have hinted they may begin to quietly begin rationing duration and speed of 3G connections to their heavy bandwidth users.

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