Smartphones Look to Dominate Handset Sales - Which OS will Thrive, Which will Fail?

Smartphones Look to Dominate Handset Sales – Which OS will Thrive, Which will Fail? Todd Day, Industry Analyst Mobile & Wireless Communications October 27, 2009

Focus Points North American Mobile Operating System Profiles Global Smartphone Forecasts North American Smartphone OS Forecasts Smartphone Challenges and Drivers Smartphone Key Trends and Suggestions Hot Topics Industry Participants Conclusion 2

Android – Google Inc. Developed by Google, the Android Operating System is completely open, allowing developers to use any of the phones core functionality from an application, including placing calls, sending SMS or MMS messages, capturing pictures or video, and utilizing GPS coordinates for Location Based Services (LBS). While the license is free for the OS, Google plans to drive advertising through the platform via mobile search. Pros: Notes: Cost – Android is distributed under an open Although HTC is the only manufacturer with Android source license, meaning that the cost to use it is powered devices currently on the market, free. Samsung, LG, and Motorola have all announced Application performance – Android was built to plans to have Android powered phones out by the allow equal access and performance to any and all end of 2009. applications for a device. In the U.S., T-Mobile is the only carrier that has an Android powered phone available. However Sprint, Cons: Verizon, and AT&T have all been pursuing Android Security – Because Android is an open source devices as well. Sprint is expected to be the next operating system, unlocking, hacking, and viruses carrier with an Android device available to could pose more of a threat than it would to a customers some time in late 2009 or early 2010. closed operating system. 3

iPhone OS – Apple Inc. Developed by Apple, the iPhone Operating System is a proprietary operating system only used on Apple’s own iPhone and iPod Touch devices. Although early on, the iPhone OS was closed to developers, it is now open to registered iPhone developers. Pros: Notes: Applications – The iPhone store has The iPhone OS runs on four abstract layers: Core approximately 85,000 applications available for OS layer, Core Services layer, Media layer, and download on its application store – which has Cocoa Touch layer. These layers allow the iPhone accumulated over one billion downloads to date. to handle multiple tasks simultaneously, providing a Performance – Equipped with a full web browser, better user experience. rich media, fast processor, and plenty of memory, the iPhone is one of the top phones in the industry. The iPhone OS is only manufactured on Apple Ease of Use – One of the biggest contributing devices which reduces the speed at which the factors in the success of the iPhone is that iPhone OS can be adopted, however, it also helps consumers have been able to use the device to keep the quality of the applications and the user easily. experience high. Cons: Availability – Currently, the iPhone is available in the U.S. only on AT&T’s network. This is limiting the adoption rate of the product. Closed Architecture – Apple acts as a censor on applications that are allowed. 4

Blackberry OS – Research In Motion (RIM) Developed by Research In Motion (RIM), the Blackberry Operating System is a proprietary operating system only used on RIM’s own Blackberry devices. RIM became the kings of email when their first Blackberry products came out. Their OS provides security and enterprise integration that has helped make Blackberry the most widely used Enterprise mobility product on the planet. Pros: Notes: Security – The Blackberry OS was designed for In recent years – after the success of the security in an enterprise environment. Although Blackberry Pearl, RIM has been focusing on the today, that same security is nice to have for consumer side since that segment has been consumers as well. showing the most growth. Enterprise Connectivity – Email, Mobile Web, Mobile Resource Management (MRM), and The Blackberry OS is only manufactured on RIM Location Based Services (LBS) all work very well devices which reduces the variety of the available with the Blackberry OS. products, however, it also helps to keep the quality of the applications and performance high. Cons: Variety – Although RIM has recently been more focused on providing more variety in the product lines, most of the Blackberry products have a similar look and feel. Poor Ease-of-Use – Although it shines in other areas, RIM needs to do a better job of creating a more simplistic interface for consumers. 5

webOS – Palm The webOS developed by Palm is a new product just released in 2009 along side Palm’s new Palm Pre smartphone. The webOS is a closed source operating system with some components of it open source. The webOS was designed to make use of web technologies like CSS, HTML 5, JavaScript, etc. Pros: Notes: Usability – The webOS was designed to function Palm has stood firm to the idea of continuing to efficiently and yet effectively. The OS interacts develop its webOS and future products internally. with the web directly, allowing the web servers to Ultimately, the best part about the Palm Pre is the handle the transactions and thus requiring less operating system. Palm will likely change their processing power. This in turn always saves on mind if they don’t start gaining market share fast battery life (the holy grail of the wireless industry). though. Synergy – This feature integrates data from multiple web sources into one screen or application area in order to create a very sophisticated user experience. Cons: Still New – Since the webOS from Palm is still fairly new to the market, there aren’t as many applications, and bugs are still having to be worked out. 6

Symbian OS – Symbian Ltd. Symbian OS has the largest market share worldwide. Much of this is attributed to the connection between Symbian Ltd. and Nokia. Although, Symbian is also used by companies such as LG, Motorola, Samsung, and Sony Ericsson. Pros: Notes: Economies of Scale – Because of the large Nokia, once Symbian’s largest customer bought number of devices running Symbian OS, it reduces Symbian in 2008. However, Nokia turned over the the costs significantly to use it. Although licensing intellectual property to the Symbian Foundation in costs don’t come into play much, the research & order to ensure the further development of the OS. development costs associated with manufacturing a new device on a new OS can increase. The Symbian Foundation has a stated goal of opening up the Symbian OS within two years. Cons: Once that happens, it could change the landscape Enterprise Support – Applications that run on a of the mobile OS market. mobile phone powered by the Symbian OS have to be signed. Furthermore, Nokia has been unsuccessful in the Enterprise area in the past. As a result, Symbian has been unable to become a widely spread OS due to the limitations in functionality for Enterprise Applications. 7

Windows Mobile – Microsoft Windows Mobile is currently up to Windows Mobile 6.5. The mobile operating system developed by Microsoft was long thought to be the future of the smartphone OS. However, licensing fees and performance problems have caused Windows Mobile to have a decreased market share in recent years. Pros: Notes: Microsoft Connectivity – With many enterprises Windows Mobile still has the 3rd largest market using Microsoft products like Windows, Outlook, share of the global smartphone market. If the Exchange Server, Windows Server, etc., there is a licensing model changes soon, Microsoft could see Microsoft connectivity advantage built into OS that a resurgence in manufacturers using their Windows many enterprise customers find advantageous. Mobile OS. If it doesn’t, they will likely find themselves dropping to 5th behind Google and Cons: Apple. Licensing Fees – Sticking with the classic Microsoft licensing fee model has proven troublesome for the adoption rate of Windows Mobile. Unless this model is changed, Windows Mobile is expected to continue to see a loss in market share. User Interface – Microsoft has had a problem with the user interface that will likely continue unless they rework their approach. 8

Global Mobile Device Forecast Device growth remains steady. Global device growth continues to remain steady with a compound annual growth rate of 4.29 percent through 2014. Growth should exceed 1.5 billion devices. Devices are continuing to be created to utilize the full potential of mobility for governments, global enterprises, and individual consumers alike. As the world continues to evolve into the mobile age, its no surprise that mobile devices are at the forefront of all electronics sales. Having already exceeded the one billion device mark, by 2014, the world should see 1.5 billion devices. Source: Frost & Sullivan Smartphones are expected to provide the most opportunity in the device market. There is no doubt that smartphones are leading the way for growth in the mobile device market. Unlike the 4% CAGR for the overall device market, smartphones should grow at a compound annual growth rate of nearly 26% through 2014. Smartphones market grows to 4 times its current size. Already having reached the 100 million smartphone mark – 139.3 million smartphones in 2008, smartphones should grow to over 550 million by 2014. This will be growth of 4 times its current size over the next 5 years. Furthermore, this is an increase from 11% to 36% of the overall device market. 9

North American Smartphone Operating System Forecast Android is expected to become the second largest smartphone OS in North America by 2014. Trailing RIM, Android should grow to over 30 million devices by 2014 – sustaining a 77% CAGR. Palm WebOS is still too early to tell. The Palm WebOS should grow at a fairly quick pace, however, with Palm deciding not to license their OS to other device manufacturers, it will likely make up a small (around 2%) portion of the market. RIM should hit sales milestones in North America by 2014. With an already strong foothold on the North American smartphone market, RIM should continue steady growth, hitting the 30 million device mark by 2012, and exceed 40 million by 2014. 10

North American Mobile Operating System Market Share Despite a likely decline in market share, RIM and the rest of the smartphone companies should have record growth over the next 5 years. With 57% of the North American smartphone market share, RIM has faired very well in the North American smartphone market. Although Apple has been successful with it’s iPhone product, it hasn’t been able to gain on the breadth of RIM’s blackberry product line. Windows Mobile has been limited by licensing fees and underperformance. However, with the introduction of Android and Palm WebOS, competition and products will be coming from all angles. This competition should provide the variety in the North American smartphone market that is likely to fuel the growth of the market as a whole – making everyone a winner. Chart 3.2: North America Smartphone OS Market Share Forecasts North American Mobile Operating System Market North American Mobile Operating System Market Share (2008) Share Forecast (2014) 11

Market Challenges Lack of Variation in Pricing Models. With the U.S. and Canada carriers maintaining smaller amounts of carrier competition than Europe, pricing flexibility by the carriers is very slight. This creates less choice to customers. Ease-of-use Concerns. Consumers are often intimidated by a smartphone. Ease-of-use helps to create an environment that should allow users to try new products and services. The iPhone is an example of how this has helped. Getting Applications to the End Users Without Compromising the User Experience. As applications have become one of the key areas of interest for consumers, they have also become a key headache for carriers and manufacturers alike. Ensuring that applications installed through application stores and side loading do not affect the performance of the device will be crucial for both the carriers and the manufacturers alike. Security Awareness. Many consumers will have personal data used on their smartphone, similar to the way personal information is stored on a computer. Security features and awareness for devices will be important to maintaining a customer base. Continual Performance. With multiple connections, applications, networks, and devices available, a key challenge for the industry will be creating an environment which provides consistent performance levels during the entire user process. 12

Market Drivers Figure 1.1: North American Smartphones Market: Market Drivers Ranked in Order of Impact (U.S.), 2008-2014 Rank Market Drivers 1 – 2 Years 3 – 4 Years 5 – 6 Years 1 Rapid Adoption of Smartphones by Consumers. High High High Lower Price Points for Smartphones Creates a Closer 2 Comparison to Feature Phones High High High Convergence of Mobile Devices in the Mobile 3 Industry Will Continue to Shift All Devices Toward High High Medium Running Mobile Operating Systems Lower Costs for Data Service Plans Due to Increased 4 Competition Amongst U.S. and Canadian Wireless Medium High High Carriers Increasing Number of Applications, and Application 5 Stores for Smartphone Devices Provides Greater Medium High High Benefits to End Users Carriers Creating an Environment That is More Open 6 for Consumer and Enterprise Applications Will Medium Low Low Increase Adoption Source: Frost & Sullivan 13

Smartphone Key Trends Camera/Video Phones A key feature for mobile end users is the ability to capture still images and video alike. Originally, the camera feature was seen in primarily feature phones. However, with changing demand and a very strong crossover between enterprise and consumer devices, over 70% of smartphones being manufactured today have cameras built into their design. Dual SIM Card Phones Dual SIM card phones are a newer feature that is still in the testing stages. Some devices have already been manufactured that have this feature, however, it is yet to be determined if the feature will gain much traction amongst customers. Some advantages to a dual SIM card design would be multiple profiles for end users who use their device for both work and personal use (one card is used during work hours, the other is used outside of work hours). Another possible use would be for international travelers. A traveler could have a US carrier card for use while in the US, but then a T-Mobile card for use when traveling to Europe. The disadvantage to this would be the engineering costs associated with the new design and spacing requirements of the phone. Wi-Fi Enabled Phones Wi-Fi has quickly been adopted as a quick and secure wireless standard for connecting to the internet. There are hundreds of thousands of hot spot locations from airports to coffee shops all over the world. As data traffic continues to increase, end users are looking to Wi-Fi enabled devices as a faster and less expensive way to connect to the internet using their phone. Furthermore, the wide spread adoption of Wi-Fi has led to very favorable pricing on the chips, making it a fairly inexpensive feature for manufacturers to include in their phone designs. Looking forward, internet sharing will likely become an included feature for many smartphones, allowing the end user to use their cellular data connection (3G or 4G) on their phone as a broadband gateway for other phones and/or Wi-Fi enabled devices like notebooks. Integrated GPS and Assisted GPS (A-GPS) Integrated GPS (Global Positioning System) is rapidly becoming a must have feature on nearly all smartphones. Assisted GPS enhances startup performance of a GPS system allowing for quicker location tracking. The most compelling part of an integrated GPS smartphone is the ability to use Location Based Services (LBS) and Mobile Resource Management (MRM) products and services. These services include personalized weather, location-based games, tracking enterprise resources such as work vans and equipment, maps, directions, etc. 14

Smartphone Suggestions Mobile Industry Remains Strong Although the economy has been putting a damper on many industries, the mobile industry has remained relatively strong. Although forecasts were adjusted down slightly by many companies, most are still making profits and continuing to grow their business’. Cosmetics is the Key If there is one thing that the industry should have learned throughout the last year, it’s that the look and feel of a device are just as important as the functionality of the device. With the advancements of touch screen technology, Wi-Fi, LBS, etc., most smartphones are being equipped with the works. The key for manufacturers is to take all of the current features that are wanted, then create a design that looks and feels like an elegant accessory. Consumers are ruling the smartphone market now, and they care about the look of their phone the same way that they do about their purse or watch. Applications, Applications, Applications Applications has been one of the largest contributing factor in the success of the iPhone over the last two years. In order for any smartphone OS or device manufacturer to be successful, consumers have to have access to applications that both empower them as a customer. Open Source Operating Systems Will Reign Supreme With products like Android and webOS finally on the scene, ultimately, the mobile operating systems that provide open access for development of applications, and features that truly utilize the full capabilities of the device will likely end up being successful. The operating systems that do not will likely fail. 15

Hot Topics Nokia’s Interest in Buying Palm iPhone vs. Android RIM to launch Storm 2 with Verizon Clearwire and 4G WiMAX AT&T and Verizon 4G LTE Satellite Technologies: TerreStar 16

Major Industry Participants • Apple • Nokia • AT&T • Palm • Clearwire • Research In Motion (RIM) • Google • Samsung • HTC • Sprint • LG • T-Mobile • Microsoft • Verizon Wireless • Motorola 17

Conclusion Mobile devices have grown in number more significantly in recent years than computers and televisions combined. With feature phones being the primary market of recent years, smartphones are emerging as the dominant device in the mobile industry. Smartphones will make up a large portion of the growth in the overall Key Market Items mobile device market. Market Driver: In order to drive the Feature-rich smartphones will be the driving force behind successful smartphone market in North smartphone products. Camera/video, WiFi, and Location Based America, carriers will have to Services (LBS) will likely become mandatory. create a more open, and more effective environment. Symbian and Nokia are expected to continue losing market share to Android and iPhone OS, and companies like HTC, Samsung, and LG Market Restraint: who will likely be putting marketing muscle behind the Android OS and Smartphone pricing needs to a new line of smartphone products. stay close to the $100 mark in order to really penetrate the market. Research in Motion (RIM) will continue to hold both the number 2 spot in the global smartphone market and the top spot in the North American smartphone market. Market Challenge: With multiple devices and applications available, finding a Android is expected to grow exponentially through 2014, gaining the 3rd way to provide consistent largest share of the smartphone OS market globally, and the 2nd largest performance will be crucial. share in North America. 18

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For Additional Information Jake Wengroff Craig Hays Global Director Sales Manager Corporate Communications Information & Communication (210) 247-3806 Technologies Email@frost.com (210) 247-2460 chays@frost.com Brent Iadarola Global Program Director Mobile & Wireless (210) 481-0752 biadarola@frost.com 21

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Smartphones Look to Dominate Handset Sales - Which OS will Thrive, Which will Fail?

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