By Andy Reinhardt At the big mobile communications show in Cannes in mid-February, the big focus was on third-generation (3G) networks and phones, with a particular emphasis on downloadable and streaming music (see BW Online, 2/22,05, "A Telecom Show's No-Show: Gloom"). But that wasn't the only news. After several tough years, the mobile business is infused with a new sense of energy and promise. Here's where some of the action is:
One of the most noteworthy trends at this year's show was the growing prominence of Asian equipment makers. Companies such as Korea's Samsung Electronics (SAMCF) and LG Electronics (LGEAF) are already big players in Asia and North America, and now they're pushing to boost their share in Europe, where Nokia (NOK), Motorola (MOT), Siemens (SI), and London-based Sony Ericsson still hold sway.
STAKING OUT POSITIONS. Japanese makers such as Sharp (SHAR), NEC (NEC), and Panasonic (Matsushita) (MC), which dominate their home market but are minor actors in Europe, have scored hit products in the Old World by collaborating closely with operators like Vodafone (VOD) on custom-built phones. And Chinese newcomers, both from Taiwan and the mainland, are racing into the market with sophisticated, cutting-edge products.
All of these companies want to take advantage of what management gurus call an "inflection point" in the mobile market. The transition from second- to third-generation networks presents newcomers with a chance to stake out a market position. After all, it was just such a shift in the 1990s that famously cost Motorola its lead to Finland's Nokia: The American company waited to make the transition from analog to digital cellular systems, and though it remains a strong No. 2 worldwide, it has never regained preeminence. Asian companies hope history repeats itself with the switch to 3G.
The industry already shows some signs of a repeat. Japanese companies have a head start with 3G because the technology -- albeit a nonstandard version -- has been in use in the country for more than three years. Sharp, for one, has more hands-on experience with the rigorous demands of 3G handsets, which need to handle complex data types such as streaming video.
CRAMMING IN FEATURES. Korean outfits also have gotten off to an early lead in Europe. The U8120 phone from LG Electronics, for instance, was the first 3G handset chosen by France Telecom (FTE) subsidiary Orange for its 3G rollouts in France and Britain. It's also being used by Germany's T-Mobile, Britain's O2, Spain's Telefonica, and the multicountry "3" network owned by Hong Kong-based Hutchison Wampoa.
James Kim, the president and CEO of LG Europe, says the company isn't even trying to compete with the old guard in second-generation GSM phones. "We decided to focus only on UMTS [3G] phones in Europe," he says. Samsung is also putting its emphasis on 3G, rolling out handsets that support music and video-conferencing through more than two dozen European mobile operators.
Analysts say Asian companies with strong roots in consumer electronics and digital media could have an edge over European counterparts whose background lies more in telecom. The thinking is that with their experience in audio, video, and miniaturization, they could do a better job of cramming multimedia capabilities into consumer-friendly devices. But don't tell that to Jorma Ollila, the CEO of Nokia.
CHECK BACK LATER. Ollila concedes that Asian makers are ahead in 3G in Europe, in part because Nokia held back introducing phones until operators finished building their networks and started marketing 3G services. But Nokia unveiled several new 3G handsets in Cannes and is investing heavily in multimedia. "Check back in a year from now," Ollila says. By then, he predicts, Nokia's market share in 3G handsets will match or exceed its overall market share of around 32%.
No category of handsets gets more press attention than so-called smart phones, which combine traditional voice calling and messaging with built-in personal organizers and multimedia functions. Smart phones are a hot topic in part because Nokia, Microsoft (MSFT), and others have jousted for the last five years over who would provide the underlying operating system to power such devices.
For now, Nokia and its close partner, Britain-based software consortium Symbian, have the clear lead: More than 80% of the smart phones sold to date use the Symbian operating system, vs. single-digit share for Microsoft's Windows Mobile and the PalmOS from PalmSource (PSRC), the company that supplies the basic software for Palm handhelds.
All the hoopla obscures an important fact: Smart phones represent only about 5% of the handsets sold last year. They remain expensive, relatively large and heavy, and often complex to use. Now, operating-system providers are trying to push smart phones into the mass market. Symbian and Nokia have announced plans for a lighter-weight version of the operating system that would allow it to be used on smaller, less-expensive devices. Feeding the trend, Taiwanese manufacturers such as Arima and BenQ (BNQCF) are already churning out Symbian-based phones that they relabel for brand-name handset makers or sell directly to operators.
OUTSOURCED DESIGN. Not to be outdone, Microsoft is seeking new avenues for getting its mobile version of Windows into the hands of consumers. Its original plan to sell the operating system to handset makers a few years back was stymied by their mistrust of the PC software giant and by Symbian's successful counter-marketing. That forced Microsoft to take a different tack, selling the software to contract manufacturers such as Taiwan's HTC, which produces custom-made Windows phones for several operators including Orange. Still, such devices represent only a fraction of the handset business.
Microsoft is trying a new strategy in partnership with the world's leading contract manufacturer, Flextronics (FLEX). The two companies announced in Cannes that Flextronics will manufacture mass-market Windows-based smart phones for resale to handset makers who can relabel their phones as their own.
Handset-makers may feel more amenable to such an arrangement today than they did a few years ago, because price pressure and growing commoditization of phones are forcing them to outsource more manufacturing and design than they used to. Working with giant Flextronics, "gets us to lower price points and higher volumes," says Pieter Knook, the head of Microsoft's mobile initiative.
PalmSource is also trying to go down-market. For several years, it has sold a phone-friendly version of its operating system, with limited success except in the popular Treo line of handheld organizer/phone hybrids. Now, PalmSource is aiming a new version of the software, called PalmSource Feature Phone, at mid-market devices. (Though definitions vary, the difference between smart phones and so-called feature phones is that smart phones are programmable devices, like PCs, that can run a wide variety of third-party software programs, while feature phones tend to be more fixed-function, analogous to consumer-electronics products. Their more limited functionality makes them lower-cost and often easier to use.)
COST REDUCER? PalmSource is also jumping on the Linux bandwagon. Last year, it bought a four-year-old Chinese company called China MobileSoft that had developed a low-cost Linux-based operating system for phones. That software now forms the basis for a new PalmSource offering called mFone, which the company says will allow for less-expensive but still feature-rich multimedia phones.
PalmSource CEO Dave Nagel sees Linux as a natural direction for the company. "Most consumer-electronics products are now built on Linux because it's virtually free," he says. Add to that the collaborative contribution of thousands of volunteer Linux programmers the world over, and mFone could allow PalmSource to deliver whizzy devices for a fraction of the cost of earlier smartphones.
The final installment of this Reporter's Notebook will appear on Monday, Feb. 28. Reinhardt is a correspondent for BusinessWeek in Paris