North America United States Company                          TMT Wireless Equipment                                       ...
North America United StatesTMT Wireless Equipment11 April 2011                                                            ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 Table of Contents             ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 Table of Figures              ...
11 April 2011           Wireless Equipment Mobile Operating Systems                                               Executiv...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 market share of Android phones...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 Expectations                  ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 Developer math                ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 Plants, sells for between $0.9...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 To better gauge the sense of t...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 State of the mobile OS        ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 Smartphone growth             ...
11 April 2011           Wireless Equipment Mobile Operating SystemsFigure 8: Smartphone landscape summary Vendor          ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 However, there are many areas ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 each OS provides to developers...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 This problem looks so complex ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 important to mobile is that th...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 Browser wars                  ...
11 April 2011   Wireless Equipment Mobile Operating Systems                                 Historically, the web develope...
Mobile OS OVerview April 2011
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Mobile OS OVerview April 2011
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  1. 1. North America United States Company TMT Wireless Equipment FITT Research 11 April 2011 Fundamental, Industry, Thematic, Mobile Thought Leading Deutsche Bank’s Company ResearchGlobal Markets Research Product Committee has deemed this work F.I.T.T. for our clients seeking a Operating differentiated view on the smartphone market. Our wireless technology team looks at long-term trends shaping the mobile operating system landscape which is emerging as a key battleground Systems for the future not only for mobile but for all computing. Fundamental: The landscape is changing Choices are multiplying rapidly, making a long term impact Industry: Android has numerical superiority but will not become ‘dominant’ Thematic: Developers matter most, and Apple offers them the best returns Thought-leading: The Web will win, and the fight is on to shape HTML5 Jonathan Goldberg, CFA Brian Modoff Kip Clifton Research Analyst Research Analyst Research Associate (+1) 415 617-4259 (+1) 415 617-4237 (+1) 415 617-4247 jonathan.goldberg@db.com brian.modoff@db.com kip.clifton@db.com Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010
  2. 2. North America United StatesTMT Wireless Equipment11 April 2011 FITT ResearchMobile Operating SystemsChoices are multiplyingJonathan Goldberg, CFA Brian Modoff Kip CliftonResearch Analyst Research Analyst Research Associate(+1) 415 617-4259 (+1) 415 617-4237 (+1) 415 617-4247jonathan.goldberg@db.com brian.modoff@db.com kip.clifton@db.comFundamental, Industry, Thematic, Thought LeadingDeutsche Bank’s Company Research Product Committee has deemed this workF.I.T.T. for our clients seeking a differentiated view on the smartphone market. Ourwireless technology team looks at long-term trends shaping the mobile operatingsystem landscape which is emerging as a key battleground for the future not onlyfor mobile but for all computing.Fundamental:impact The landscape is changing rapidly, making a long termWe expect a continued pace of weekly changes in the state of the market thisyear, but decisions being made today will eventually lock in future performance.Smartphone growth is strong and we think it will accelerate even further as pricesfor components fall. We forecast smartphone share into 2015.I ndustry: Android has numerical superiority but will not become ‘dominant’Android has taken the lead in shipments and could attain leadership in installedbase in a few years. Despite this numerical superiority, we think flaws in theplatform (like fragmentation) mean that Google will not become the dominantvendor. The smartphone OS landscape will not resemble PC landscape. Thisleaves open the door for other vendors to potentially carve out profitable orstrategic niches, which leaves room for Microsoft to pick up the pieces if Googlestumbles.Thematic: Developers matter most, and Apple offers them the best returnsHardware is a commodity, and the only way for phones to differentiate is throughsoftware. This puts priority on building app developer ecosystem. Android’sinstalled base still lags Apple’s. More importantly, by our math, the revenueopportunity on Apple is an order of magnitude higher than on Android. Wecalculate hypothetical returns and find the frictions in the Android Marketplace areso high that monetizing apps is difficult. This is a major hurdle, and has opened thedoor to others, like Amazon, which risks further fragmenting the developer base.Thought-leading: The Web will win, and the fight is on to shape HTML5Over the long term, we believe the only force that can bridge the splinteredlandscape will be the Web itself. Most OS vendors seem to share this view. Weexpect a new round of browser wars, but this time around the battle will takeplace within the bodies that define web standards, particularly the nascent HTML5standard. Obscure debates over topics like video codecs will play an importantrole in shaping the future landscape. We also see a far-ranging change in the Webitself and the way in which we interact with the Internet.Investment options: Component vendors to prosper, giants are challengedIn our view the great irony of this rapidly growing market is that there is no easyway to invest in a mobile operating system. Smartphones run either proprietaryOS, captive within larger companies or provided free by Google. Nonetheless,smartphones are now computers in their own right, and consumers will continueto find new ways to use them. We believe this will drive the need for moreadvanced radios, basebands and processors. It will also likely boost demand forcameras, speakers and sensors. We believe there are still many componentvendors who can benefit from this, a factor which may not yet be reflected in theirshare prices.Deutsche Bank Securities Inc.All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from localexchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DeutscheBank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P) 007/05/2010
  3. 3. 11 April 2011 Wireless Equipment Mobile Operating Systems Table of Contents Executive summary ........................................................................... 4 Expectations ...................................................................................... 6 Developer math ................................................................................. 7 State of the mobile OS.................................................................... 10 Smartphone growth ........................................................................ 11 The nature of the Web ............................................................................................................ 15 Move toward the cloud........................................................................................................... 20 OS landscape ................................................................................... 23 Installed base .......................................................................................................................... 25 App Store update .................................................................................................................... 27 Security ................................................................................................................................... 29 Cheat sheet ...................................................................................... 30 How to challenge a giant ........................................................................................................ 30 Individual OS review ....................................................................... 31 Android............................................................................................. 32 Fragmentation......................................................................................................................... 34 Conclusion .............................................................................................................................. 35 Summary................................................................................................................................. 36 Android – Other than Google ......................................................... 37 These are not the Androids you were looking for ................................................................... 37 Symbian/MeeGo.............................................................................. 38 End of an era........................................................................................................................... 38 RIM.................................................................................................... 40 RIM is fragmenting itself......................................................................................................... 40 HP webOS ........................................................................................ 43 Surprise underdog or just an underachiever?.......................................................................... 43 Microsoft Windows Phone ............................................................. 45 The best defense is a good offense........................................................................................ 45 Apple................................................................................................. 49 It is good to be in the lead ...................................................................................................... 49 Adobe Flash ..................................................................................... 51 Beneficiaries..................................................................................... 52 Faster, higher, denser ............................................................................................................. 52 Components ........................................................................................................................... 55 Future features ................................................................................ 59 Feature phones ....................................................................................................................... 59 Mobile payments .................................................................................................................... 59 Augmented Reality.................................................................................................................. 60 M2M – Skynet’s First Steps.................................................................................................... 61 The nature of phones .............................................................................................................. 62 Appendix A: Cellular standards roadmap ..................................... 63Page 2 Deutsche Bank Securities Inc.
  4. 4. 11 April 2011 Wireless Equipment Mobile Operating Systems Table of Figures Figure 1: Smartphone landscape summary............................................................................... 4 Figure 2: Smartphone OS market share.................................................................................... 4 Figure 3: Hypothetical developer revenue ................................................................................ 8 Figure 4: Hypothetical app market sizing by platform ............................................................... 8 Figure 5: Android ecosystem sensitivity to conversation rates and installed base ................... 9 Figure 6: Android ecosystem sensitivity to app downloads and installed base ........................ 9 Figure 7: Windows ecosystem sensitivity to app downloads and installed base ..................... 9 Figure 8: Smartphone landscape summary............................................................................. 12 Figure 9: Smartphone OS Market Share ................................................................................. 23 Figure 10: Our view on future OS market share ..................................................................... 24 Figure 11: Our longer term view of smartphone market share ............................................... 24 Figure 12: Installed base by smartphone OS .......................................................................... 26 Figure 13: Installed base by smartphone OS .......................................................................... 26 Figure 14: Application Store – applications available as of latest date .................................... 27 Figure 15: App Store growth, from launch to one year, number of apps................................ 28 Figure 16: App Store growth, from launch to 2.5 years, number of apps............................... 28 Figure 17: Android installed base by OS version..................................................................... 34 Figure 18: Android versions by OS release ............................................................................. 35 Figure 19: Nokia’s mobile OS forecast.................................................................................... 38 Figure 20: webOS developer activity as measured by RSS feeds of the App Catalog ........... 44 Figure 21: Growth of all iOS apps ........................................................................................... 49 Figure 22: Number of iPad vs. iPhone apps, days after launch of App Store.......................... 50 Figure 23: Median mobile phone clock rate (MHz) ................................................................. 53 Figure 24: Median mobile phone ROM capacity (MB) ............................................................ 54 Figure 25: Median mobile phone RAM capacity (MB) ............................................................ 54 Figure 26: Cellular standards roadmap.................................................................................... 63Deutsche Bank Securities Inc. Page 3
  5. 5. 11 April 2011 Wireless Equipment Mobile Operating Systems Executive summary In this report we look at the developments in the mobile operating system (OS) landscape. Many people believe the smartphone market would look like the PC market 30 years ago with one OS eventually becoming dominant. In this comparison, they substitute Android for Windows, and Apple for Apple. We believe this view is mistaken. Instead, we think the landscape will remain fragmented for many years. The only platform which we think can unify the landscape is HTML5 and web tools, and these are still several years from maturity.Figure 1: Smartphone landscape summary Vendor 2010E units (m) Installed base (m) App Store Apps New models shipped Tablet models in 2011? in 2010 Symbian 100 ~300m 30,000 10 0 Windows Phone < 2m ~20m (incl. WM) 11,500 3 0 Android >50m ~50m >200,000 >100 >100 Limo/Lisp ~10m 100m ? ? 0 iOS ~100m ~100m >300,000 1 3? RIM 50m 60m 10,000 5 2? Palm <2m 5m 5,056 0 1 MeeGo 0 0 0 0 0 Bada <5 m <5m ? 3 0Source: Deutsche Bank, company data In this kind of fragmented landscape, many vendors will be able to carve out niches based either on some specific demographic or along individual strategic lines. Android unit volumes are already the leading smartphone OS, but we see no one who, as a result of this, wants to short Apple. Instead, we think Apple will continue to grow its very profitable ‘niche’. Android will grow faster, but the vendors making these devices will struggle with profitability levels amid a sea of undifferentiated phones. RIM’s QNX, HP’s webOS and Microsoft’s Windows Phone 7 all have the potential to build viable niches as well. Moreover, we think there will be new entrants to the field as various market participants look to steal a march on future trends and build HTML5-based alternatives or twist Android to their own ends.Figure 2: Smartphone OS market share Linux/Other 2008 Linux/Other 2010E 8% 5% Android 1% PALM/webOS RIMM 2% RIMM 15% 17% PALM/webOS Android 1% 17% Apple Symbian & 19% Apple Symbian & MeeGo 27% MeeGo 45% 33% Windows Windows Mobile Mobile 10% 0%Source: Deutsche Bank and company data A key component of this fight will be winning the loyalty of app developers which help each platform differentiate. For developers, Apple’s iOS remains the focus. Android has become the default second choice, but developers continue to struggle monetizing this platform. We see two important elements to this analysis. The first is installed base. Despite the growingPage 4 Deutsche Bank Securities Inc.
  6. 6. 11 April 2011 Wireless Equipment Mobile Operating Systems market share of Android phones, the installed base of all iOS devices remains far larger. Market share estimates tend to only look at smartphones, but we think it is important to count iPod Touch and iPad units as these constitute a large part of the addressable market for app makers. As such, we think the iOS installed base was about 121 million at end-2010, while the Android installed base was around 50 million. The Symbian installed base is larger, but has been rendered effectively zero by Nokia’s announced intention to move away from that platform. We think the Android installed base will catch up with Apple this year. However, our second tenet is that developers will still prefer iOS because making money on Android is difficult for most developers. By our math, the revenue opportunity for developers is an order of magnitude higher on iOS than on Android. We detail this math below. One of the great difficulties in reviewing this space is the lack of suitable investment options to tap into this growth. We think there is little correlation between Google’s or Microsoft’s share price and the growth of Android or Windows Phone 7 this year. Aside from buying Apple, there are a few direct investments in the growth of smartphones and the maturity of mobile OS. However, we think there are several handset suppliers who stand to benefit. Smartphones are becoming more powerful, and they are being used for a wider array of tasks. This means handset vendors will need to cram more components and features into their devices to tap into consumer demand. This should prove to be good news for a variety of suppliers. We would include: the processor companies (QCOM, ARM, and CEVA); the radio components (Skyworks, Avago); audio component vendors (AAC Acoustic, Wolfson, etc); camera and video makers; touch screen controllers; connectivity vendors (e.g. BRCM, NXPI); and arguably, memory vendors. In this note, we analyze trends around the growing density of phones, which has nearly doubled in the past ten years. We expect this trend to continue. We also discuss ancillary beneficiaries in areas like mobile payments, augmented reality and M2M.Deutsche Bank Securities Inc. Page 5
  7. 7. 11 April 2011 Wireless Equipment Mobile Operating Systems Expectations Writing a report like this is something like running on a treadmill. In the time between pen-to- paper and publishing a lot can change. We began this report in January 2011. In the interim, we have had Nokia’s choice of Microsoft, HP’s re-launch of webOS, RIM’s Playbook launch, several iterations of revisions to Android’s openness and any number of new product launches. Sometimes, this makes it hard to see the forest for the trees. To counter that minute-by- minute view of the details of the landscape we want to present a few changes we expect to see to the landscape this year. We see these as separate from our higher level investment thesis on the subject which we outline in the reports. We offer these as tactical suggestions for what we think may happen. Firstly, Android is likely to continue to grow rapidly. Advances in silicon mean that price points for sufficiently powerful smartphones are reaching mass market levels, and most of these phones will run Android. We think every headline for some time from the Street – third party data firms and the blogosphere– will point to some other way in which Android share is advancing. Secondly, we expect to hear more about legal issues relating to Android. Oracle is already suing Google for Android patent issues. Many other members of the Android community are also involved in similar litigation. While we have no idea how any of these law suits will turn out or if others may emerge, we think this is a topic that a few people are discussing. Over the next year, we think this reality will seep into the industry’s consciousness and gain further attention. Microsoft will remain persistent. We think sales of Windows Phone 7 will remain modest. We estimate that a full slate of Nokia WP7 products will not be on the market for another year, and the other WP7 vendors appear to be losing interest. Despite that, Microsoft has the resources (both financial and energy) to stay in the game. We think they will continue to aggressively market the OS and encourage carriers to support it. Finally, we think several new operating systems will enter the market. Some of these will be Android variants from other web properties. Others will be HTML5-based stepping stones towards what we consider to be the future of mobile, web tools-based devices. Others will not be truly new OS, but instead platforms for feature phones that emulate many of the key features of smartphones such as social networking integration. The press has already reported that Baidu, Facebook and Motorola are all working on variants of these. We think these reports have some truth to them, and believe others will emerge with time.Page 6 Deutsche Bank Securities Inc.
  8. 8. 11 April 2011 Wireless Equipment Mobile Operating Systems Developer math In this note we will tend to focus on each OS from the point of view of developers, and try to gauge each OS’s appeal on that basis. While we cannot exactly quantify that appeal, we do offer the formula below as the framework for our discussion. This will not provide a numeric answer to the question, but we present it by way of introducing the assumptions on which we base our analysis. Put simply, each OS holds appeal for developers as a function of: Installed Base * Marketability * App Value-- Cost of Development The installed base is the number of users who own a device that runs each OS. We provide estimates of installed base for each platform. Marketability – this is the number of users that could potentially end up buying an app. This is a function of user behavior, how many people actually use apps on each platform. It is also a function of the friction involved in making a transaction on each platform. These are both highly qualitative assessment and impossible to calculate accurately. App value – refers to either the price of a download or the lifetime value of having a user with that app. This includes services subscriptions, ad revenues, premium upgrades and other in-app purchases. This then needs to be adjusted for revenue share with each platform provider. We do not have the data to calculate these numbers today, but believe that with time we could eventually put some more solid math behind this calculation. Cost of development – this includes resources needed to write the app and is largely measured in engineering person hours. We explore each of these elements in general in the following sections then in detail in section on each individual OS. We think looking at it from this perspective adds an important dimension to the discussion of OS. Today, most comparisons among OS look at the number of apps. We think this is meaningless as not all apps are created equal. More important for developers is to calculate how much money they can make off each platform. Dealing with Apple is not easy, but the installed base is large, most users download apps and the App Store works very well. There are also numerous ways to monetize each app. By contrast, Android has a rapidly growing installed base and is easy to develop for, but suffers on the other two metrics. Emerging OS like Windows Phone and webOS have a relatively low cost of development but are playing to almost no installed base. Let’s put some numbers behind this. First, to be clear, there is no solid data on this topic. We have seen dozens of individual developers’ blogs about the performance of their apps on various platforms. There are also about a dozen analytics companies with published data on the topic. So far, we have seen nothing truly comprehensive. Apple, Google and Microsoft have this data. We believe all smartphones based on these operating systems regularly report back usage data to their respective motherships. However, none of them have shared this data, in part, we believe because they do not want to draw attention to this particular reporting feature. For example, let’s say you are a developer. You have developed a game. On the desktop, you would sell this game for anywhere between $20 and $40, but that still requires a publisher, physical hardware and distribution costs associated with selling to Best Buy. Apps on the Apple App store sell for a large array of prices. One of the top grossing, Zombies VersusDeutsche Bank Securities Inc. Page 7
  9. 9. 11 April 2011 Wireless Equipment Mobile Operating Systems Plants, sells for between $0.99 and $4.99 on the iPhone and typically $9.99 on the iPad. There is a significant body of bloggage about developers experimenting with prices, promotional price cuts and freemium models. We think standard practice on the App Store is to give away a ‘Lite’ or Trial version of the app for free or $0.99 and separately sell a $5 fully- featured app that includes more gaming levels or additional characters. Microsoft has actually built a Trial mode into the OS. The top grossing app recently is Angry Birds which is $0.99 on iTunes and free on Android. For this example, let’s say the Lite version of the app sells for $0.99, which is probably the median app price on iOS, and the full version of the app is $4.99 The next question is of downloads. A large problem on all these platforms is ‘discoverability’, that is the ability to make consumers aware that an app exists. This is a thorny problem, with many companies including Chomp emerging to address. Currently, the best way to gain awareness is to be prominently featured on the Apps store. The process for achieving such status is completely obscure, and we sense it is something that even Apple does not fully manage. A top ten or even a top 50 apps, does significantly better than anything further down. We refer to 2D Boy’s blog (2dboy.com) which provides us with some interesting insights on the trends for one app. When they launched the iPad version of their app, they were featured on the App Store and saw 125,000 downloads during the first month. Without prominent featuring, downloads are at best half of that level. The next question would be what percent of users upgrade to the premium version. Our sense is that this rate is in the low single digits. We also think conversion is much higher on iOS and Windows than it is on Android. We argue below that payment friction on Android is very high due to a variety of factors. Based on these assumptions, developer revenue works out to something like the data in Figure 3. This would seem to indicate that even without a prominent App Store placement, the revenue opportunity is much higher on Apple. An important difference is the fact that Android users are very reluctant to purchase apps on the marketplace and as a result the majority of Android apps are free. If consumers were willing to pay $0.99 for an app, the situation would be drastically different and the revenue would be close to iOS. In the formula above, this is what we refer to as marketability, and it is an area where Android struggles. Figure 3: Hypothetical developer revenue Downloads Lite Price Conversion Rate Full Price Total Revenue iOS 50,000 $0.99 3% 4.99 $56,985 iOS Featured 100,000 $0.99 3% 4.99 $113,970 Android 50,000 $0.00 3% 4.99 $7,485 Windows Phone 1,000 $0.99 3% 4.99 $1,140 Source: Deutsche Bank We also examined this from a top-down perspective wherein we look at the installed base and the number of apps each user, on average, downloads per month. This gives us a rough sense of the size of the whole market, but we emphasize that it is very rough because of the assumptions around pricing. The results (Figure 4) are similar. Figure 4: Hypothetical app market sizing by platform Installed Apps Per Total Lite Price Full Price Conversion Total Base Phone Per Downloads Rate Revenue Month iOS 121 10 1,208 0.99 4.99 3% 1,377 Android 52 10 520 0.00 4.99 3% 78 Windows Phone 1 12 12 0.99 4.99 3% 14 Source: Deutsche BankPage 8 Deutsche Bank Securities Inc.
  10. 10. 11 April 2011 Wireless Equipment Mobile Operating Systems To better gauge the sense of the problem we also tested the Android developer revenue opportunity’s sensitivity to a variety of factors. First, we looked at a sensitivity to conversion rate, then we looked at the number of apps per month, and finally compared both of these to the size of the addressable market. By this math, the most important factor is the size of the installed base. All else being equal, the Android developer opportunity cannot match the iOS opportunity until the Android installed base reaches 800 million, from roughly 50 million at the end of last year. We think it can reach that size, but not until 2015. If Android users started doubling the number of apps they download, then could pull that date forward by a year, but that seems difficult to achieve. Figure 5: Android ecosystem sensitivity to conversation rates and installed base Conversion Rate 78 1% 2% 3% 4% 5% 50 25 50 75 100 125 Installed 171 85 171 256 341 427 Base (m) 250 125 250 374 499 624 400 200 399 599 798 998 500 250 499 749 998 1,248 800 399 798 1,198 1,597 1,996 Source: Deutsche Bank Figure 6: Android ecosystem sensitivity to app downloads and installed base Apps Per Month 78 5 10 15 20 25 50 37 75 112 150 187 Installed 171 128 256 384 512 640 Base (m) 250 187 374 561 749 936 400 299 599 898 1,198 1,497 500 374 749 1,123 1,497 1,871 800 599 1,198 1,796 2,395 2,994 Source: Deutsche Bank We then compared these figures to the Windows opportunity. WP7 has a tiny installed base today so the opportunity today is essentially immaterial. However, their willingness to share some of this data points to a better ‘Marketability’ on this platform. This is extrapolating considerably, but shows how much easier it is for this platform to become profitable than Android with a much smaller installed base. Figure 7: Windows ecosystem sensitivity to app downloads and installed base Apps Per Month 14 5 10 15 20 25 50 285 570 855 1,140 1,425 Installed 171 974 1,949 2,923 3,898 4,872 Base (m) 250 1,425 2,849 4,274 5,699 7,123 400 2,279 4,559 6,838 9,118 11,397 500 2,849 5,699 8,548 11,397 14,246 800 4,559 9,118 13,676 18,235 22,794 Source: Deutsche BankDeutsche Bank Securities Inc. Page 9
  11. 11. 11 April 2011 Wireless Equipment Mobile Operating Systems State of the mobile OS Two years ago we published a FITT report looking at the mobile landscape titled Anarchy in the OS. As the title implies, we noted a huge degree of fragmentation across the mobile OS landscape. Since then much has changed, but we are no closer to a common OS platform for mobile phones than we were two years ago. In an update piece that we published in March last year, Digits #20 The Big Idea, we updated our thesis on the space with the idea that over time the only unifying force for the mobile OS will be the Web itself and the use of web tools for developers. Slowly, the industry is moving in this direction. We think a few trends have become apparent: Smartphones are exploding, and will continue to grow rapidly. Android has tremendous momentum. It already has the largest share of smartphone sales, overtaking Symbian in December. And this is only the beginning. We think its growth will accelerate this year and again in 2012 as smartphone component prices continue to fall sharply. Despite its success, Android has many flaws. These are unlikely to put a dent in its momentum but will likely leave open the door for others to carve out niche markets or grow their already highly profitable segments. With even Google talking openly about the eventual move towards web-based operating systems, we expect the fight this year to center on the features of HTML5, the next generation of the web standard towards which many OS makers aspire. Key among these will be the codecs for video and the <video> tag, cloud synchronization, and the struggle between apps and web pages as metaphor. Developers will go where the money is. Android offers volume but uncertain monetization. Apple’s iOS remains far more lucrative for app developers. All other platforms remain works in progress. In short, the industry remains in flux, and we expect many companies to continue to find ways to build strategic advantage through various approaches to mobile operating systems.Page 10 Deutsche Bank Securities Inc.
  12. 12. 11 April 2011 Wireless Equipment Mobile Operating Systems Smartphone growth One of the clearest trends in technology today is the growth of smartphones. Our current handset forecast estimates 39% growth in 2010. We are still compiling end-of-year numbers and suspect that estimate will prove to be too low. Similarly, we think growth in 2011 will exceed our 28% target. Most importantly, as we pointed out in our sister publication Signals to Noise last week, we believe smartphone growth will accelerate in 2013 as powerful new processors enter the market at far lower price points. In particular, we believe that by 2013 we will see volume shipments of 1 GHz processors in phones priced at USD100. At that point, feature phones will quickly disappear, with survival dependent on the pace of consumer education and carrier data plan pricing. We think smartphone growth will have a profound impact on broad technology trends along two axes. First, as noted above, smartphones are now essentially as powerful as laptops. Most of the population of the world will never own a PC, but within a few years most of them will own a smartphone. The phone will become the data device for most people. Second, the kind of things that people use their phones for will greatly expand. By comparison, the changes brought upon by the advent of the Internet a decade ago will seem minor in comparison. In developed markets, we expect to see a significant change in the way that people shop and interact. In emerging markets, we are already getting a glimpse of the impact of having unfettered access to data on the political process. Not all the effects will be positive. For example, those concerned that video games dumb down children, will likely rue the effect of having video games become completely portable Ask any parent with an iPhone. This is not the venue to expand on the wonders of technology; we will save that for Wired and the tech press. Suffice it to say that the Mobile Web will be a powerful force. Big picture thesis We believe that smartphone hardware is rapidly become a commodity. By this, we mean that any hardware feature can quickly be replicated, providing no sustainable barrier to entry. There is still immense room for improvement and we expect to see some very impressive improvements in industrial design in coming years. However, all of this can be copied. In some cases, we have seen top tier handset models copied before the phone even reached the market. In this kind of environment, the only way to differentiate a phone is through improved software, brand building and distribution. These are all tricky and often rest outside the expertise of many incumbent vendors. The obvious example of this sort of differentiation is Apple’s iPhone which has a powerful combination of software expertise, marketing prowess and a wide retail network to distribute its products. No other company can match these precisely. By software, we are referring to two elements: first, the operating system (OS) of the phone including its user interface (UI) or user experience (UX) and second, the ecosystem of third- party software applications available for the phone. These concepts are clearly linked. And for a phone or a company to be successful both elements need to be in place. Operating system landscape In our first report on the topic two years ago, we identified seven prominent smartphone operating systems. There are nine today, but only a few of these are shipping in any true volume today. We provide of a summary of the nine in Figure 8 and detail the outlook for them in a later section.Deutsche Bank Securities Inc. Page 11
  13. 13. 11 April 2011 Wireless Equipment Mobile Operating SystemsFigure 8: Smartphone landscape summary Vendor 2010E Units (m) Installed base (m) App Store Apps New models shipped Tablet models in 2011? in 2010 Symbian 100 ~300m 30,000 10 0 Windows Phone < 2m ~20m (incl. WM) 11,500 3 0 Android >50m ~50m >200,000 >100 >100 Limo/Lisp ~10m 100m ? ? 0 iOS ~100m ~100m >300,000 1 3? RIM 50m 60m 10,000 5 2? Palm <2m 5m 5,056 0 1 MeeGo 0 0 0 0 0 Bada <5 m <5m ? 3 0Source: Deutsche Bank, company data Changes in the OS landscape In recent weeks, it has become clear that Android has overtaken all other OS unit shipments. Despite this, the landscape remains highly fragmented. The total cell phone market in 2010 was about 1.4 billion units, of which around 20% or close to 300 million were smartphones. When viewed on this basis, it should be clear that the landscape is still fragmented. While Android led the market in December, for the year it only had 20% of the smartphone market, a small piece of the overall market. We think this fragmentation is important. Despite Android’s success, we think there is still room for other platforms to exist. There are also powerful forces that will likely mean the market remains fragmented for many years to come. On the other hand, we think the economics of software will pressure the market to move towards a common platform that works on all phones. Our view, which we detailed in Digits #20 (The Big Idea, March 2010), holds that the only solution to this dilemma will be web tools. The only force capable of reconciling the industries players and providing a unified platform will be the web. The idea of web tools is itself very complicated but we expect it to be the key battleground in coming years. We had originally viewed this trend as meaning that eventually cell phones (and probably all computers) would eventually become very sophisticated browsers. It turns out the vision is more complicated than that. So first let’s look at what these devices will have in common. We believe that ultimately smartphone run times will be entirely accessible by common web programming tools using HTML, CSS and JavaScript. To simplify, developers who program apps today using advanced languages will eventually be able to use far simpler set of programming languages. This will open up app development to a far wider range of developers. There are probably a few million programmers today working in C, C++, Objective C and the like. By contrast there are hundreds of millions of people who can write in HTML. Most high school students in the US today learn basic HTML skills, if for no other reason than they learned how to customize their MySpace pages. This will also open the market to websites that even further simplify the design process. For instance, as MySpace wanes many teenagers have started to create custom sites using Tumblr, a popular blogging app that is actually a disguised HTML authoring tool. As smartphones move to HTML environments we expect an explosion of development. In many areas, these tools are already accessible but are yet to fully move into mobile. This delay is in part due to the early stage of the smartphone industry. One area of investment we think could prove particularly interesting for the venture community would be in this area. The search for the mobile Tumblr is on.Page 12 Deutsche Bank Securities Inc.
  14. 14. 11 April 2011 Wireless Equipment Mobile Operating Systems However, there are many areas in which web tools are not yet ready for mobile. HTML was originally designed for desktop PCs with always-on connections to the Internet. For the standard to proliferate on mobile, it needs to be able to operate in areas where there is no network connection. The standards body behind HTML, the W3C, has been working on this problem. The next version of the standard, HTML5, is being designed to make better use of a device’s local capabilities. That is to say browsers of the future will be able to execute code without an Internet connection. They will be able to use the local processor and be able to store large amounts of data on the device. Again, many of these features are available today, and are slowly being incorporated into devices and web pages. But the standard is not complete, and work still needs to be done on a few important areas. The most contested of these, so far, is the video component. HTML5 includes a new function for video, <video>, but much of the specs for this component are still being ironed out. Among the difficulties here are agreeing to a common video codec or compression scheme. Codecs are important for ensuring minimum bandwidth requirements for video streams. The most common codec today is H.264 and is commonly used on most video web sites. Most of the HTML constituents are comfortable with this standard which has been around for many years. The issue is the associated intellectual property (IP) and the patents on which the standard is based. These are owned by MPLA, a media industry patent pool. MPLA requires content providers, the companies that stream video, sign a license for use of this technology. Some in the web community are concerned that MPLA will eventually begin charging for the license. Google, concerned about this, launched an alternative codec called WebM which is entirely open-sourced. MPLA responded by extending the current license until 2015 and then further extending it saying H.264 will be royalty free for its lifetime. This offer is actually not as straightforward as it sounds, but conversely no one has tested WebM’s patents so there may be patent holders there who could emerge. The debate about web video is ongoing, and it is too soon to call a winner. To further complicate matters the existing de facto web standard for video is not an open license at all; it is Flash platform. This is an important revenue stream for Adobe, or more precisely the tools used to create Flash video. This is the root of a public debate between Apple and Adobe. Our view is that Flash will likely remain a video platform for the mobile web, but will gradually give way to the common HTML <video> format. On the PC web, Flash is not only used for video. It is a complete programming environment in its own right and is used to write ‘apps’ for web pages today, especially games. Adobe had hoped to make this a common platform for mobile apps as well, in effect a competitor to HTML5. This now seems unlikely to occur. Aside from Apple’s refusal to implement Flash on the iPhone, there are technical barriers that make this unlikely. Getting Flash to work on different processors and different operating systems remains a surprisingly cumbersome project. Essentially, Flash has to be ported to each version of a chipset. This is immensely time- consuming and labor-intensive. While Flash (may) have some performance advantages over HTML5, the time-to-market issue will likely prove to be a significant barrier to widespread adoption. It should be clear that the subject of web video will not be resolved soon and thus HTML5 will take some time to achieve its goals. And this is just one aspect of HTML5 being resolved. At heart, the key difficulty faced by the World Wide Web Consortium (W3C) and HTML5 is the same issue that has plagued the mobile community for years. Smartphones are incredibly diverse with innumerable combinations of processors, screen sizes, form factors and input methods. HTML5’s task is to unify all of these in a common framework, but device difference will persist. Until HTML5 becomes more mature, OS makers will continue to deploy various tools to bridge this gap. As a result, we have seen many of them launch alternative software environments. One of the key elements of an OS is the Software Development Kit (SDK) thatDeutsche Bank Securities Inc. Page 13
  15. 15. 11 April 2011 Wireless Equipment Mobile Operating Systems each OS provides to developers. SDKs have three key elements that rest at the heart of a developer’s ability to tap into a particular OS. These three are the Application Programming Interface (API), an emulator and developer tools. (SDKs contain many more elements, but these are the three major ones). APIs are the list of functions or commands available to programmers, and each SDK contains a dictionary-like list of APIs that describe all the ways in which they can be used. To put this in context, version 4 of Apple’s iOS contained 1,500 new APIs to the thousands available in previous versions. APIs are a key metric for developers, measured in quality and not only quantity. Google, for instance, withholds APIs of each new version of Android for several months, giving one hardware partner an advanced set to give them a short-term advantage in the market for launch of flagship devices. There is also a debate about so-called “private” APIs for use only by the OS designer to build special apps. In iOS, the various multi-task functions are controlled by Apple. In Android, Google restricts access to Google apps like Gmail and Google Maps. (This is a complex issue which we will save for a further note.) Emulators are tools that run on desktop computers which can simulate how an app will perform on a phone. This is useful for testing new apps and is emerging as an important differentiator for developers as well. There is a perception that Android’s emulator offers a better likeness of actual app performance than Apple’s, but as with all technology there are trade-offs and no perfect solution. Finally, each OS comes with a set of developer tools that perform a variety of functions. These range from Apple’s well-regarded X-Code authoring tool (essentially a very advanced word processor for typing code) to Nokia’s Qt toolkit which aids in developing common UIs across multiple platforms (and potentially offers much more, please see Digits #25 for more on this). So far this is all relatively straightforward. However, each OS comes with its own set of design principles. Those are expressed in the SDK, but do not always live up to the reality of developing in the real world. Many device makers have found that their original intentions cannot fully address the device diversity and have begun to add a more advanced set of APIs. The most important of these currently is Android’s Native Development Kit (NDK). HP Palm’s webOS was originally built to be entirely run by web tools, but due to the shortcomings in HTML, they eventually released a Physical Development Kit (PDK). RIM’s new QNX is also built with web tools in mind, but also offers Adobe AIR to let developers write more advanced apps. Even the iPhone began life with only web tools available for app development before releasing the full iOS with the launch of iPhone 3G. This is a blur of names, but at heart, these alternative SDKs perform the same function. They let developers take advantage of lower level processor functions. The key property here is to tap into hardware acceleration for graphics and audio processing. Despite the appeal of web tools, they are ‘higher layer’ or ‘more abstract programming languages. The goal here is to abstract or decouple the app software from the underlying hardware so that devices can bridge multiple hardware platforms. Apple is the furthest along here because they only ask developers to support two highly similar devices (iPad and iPhone/Touch). Higher level languages essentially insert a level of translation in between the app and the hardware. This is highly desirable but can result in either a performance penalty or a lack of access to device functions, and sometimes both. We see all of these as necessary stop-gap solutions that could persist for a number of years. Like the “Temporary” buildings built during World War II which housed classrooms at UC Berkeley into the 1990s, we think these patches will persist until these issues are solved by HTML5.Page 14 Deutsche Bank Securities Inc.
  16. 16. 11 April 2011 Wireless Equipment Mobile Operating Systems This problem looks so complex that it may never be solved and devices could potentially always carry an element of proprietary programming. Critics of HTML5 point out that new features are continually being added to smartphones and the ponderous pace of deliberation of the W3C means HTML will always be several steps behind the curve. We think time will eventually heal this issue, but several elements will need to be added to the standard and the timeline is not entirely clear for their inclusion. They include: Hardware graphics acceleration. As noted above, the ability for an app to tap into extra processing power for graphics is important, especially for game developers. It will be a long time before all phones offer this, so each OS and HTML will have to take this into account. GPS. The W3C is working on a specification for Geolocation but we believe this still requires significant work, particularly around building common support across multiple location data sources (GPS, location databases, etc.) Device sensors. One of the key hardware advances of the iPhone was the addition of motion sensors. We imagine that with time devices will have other similar sensors to detect real-world phenomenon like temperature and light. This remains a work in progress for web standards. Connectivity. Wi-Fi and especially Bluetooth have a wide range of software profiles that need to be supported. To achieve a truly web-only device this will need better support in HTML. Screen size. Perhaps the trickiest issue in smartphones will be the diversity of screen sizes and resolution. This problem has largely been solved on the PC-based web, but those computers have the advantage of ample processing power and screen real estate. The issue will prove particularly troublesome in mobile for graphics intensive apps such as games and design-heavy web sites. The nature of the Web Our belief is that with time all of the abovementioned issues can be resolved. The web community may not be able to find a perfect solution, but should be able to find one that works well enough for most. However, we think there remains another emerging divide in the mobile web. This is a more existential question of what does having the web or the Internet on a device truly mean. This sounds somewhat abstract but will likely become a key issue in years ahead. Over the past decade of the Internet’s existence we have grown accustomed to accessing it through a common medium - the web browser. Users open a browser, the browser sends a request to a web server which responds with various pieces of data. The browser then renders this data into a readable format on the user’s computer screen. Users then navigate to various other web pages and the process repeats. We think ten years from now this metaphor will look dated. In the future, when we talk about web pages our children will look at us like we look at our parents and grandparents when they regale us with stories of the golden age of radio. We will access data on the web through a variety of other mechanisms. We see the issue dividing into two separate disputes. First, there is ownership of the browser and the rendering engines that powers it. Second, there is the heart of the metaphor – the web page. Browser engines Rendering engines, also known as layout or browser engines are the workhorse component of a browser. They take data, in the form of HTML code, and convert it into colorful, information-packed web pages. This is a relatively straightforward process, but one that still allows different browsers to customize on a common engine. One of the reasons that this isDeutsche Bank Securities Inc. Page 15
  17. 17. 11 April 2011 Wireless Equipment Mobile Operating Systems important to mobile is that these engines are able to bridge the gap between the various web standards and the hardware the browser runs on. Rendering engines execute a fair amount of code but all strive to maintain compliance with the various W3C standards. Historically, each browser vendor had their own engine, but over time many of the vendors began using a common engine and sought other areas to differentiate. This is a complicated arena with many proprietary and open source engines on the market. However, increasingly the browser makers are standardizing on the WebKit engine, with a few notable exceptions. WebKit is an interesting case study. It began life as the internal engine for Apple’s Safari browser. In 2005, the company decided to create an open-source project with the WebKit name. They opened the code to outside developers and have worked over the years to merge this version into their computers. Since then, many companies have adopted WebKit as the common engine for their browsers. On the desktop, the leading WebKit-based browsers are Apple’s Safari and Google’s Chrome. More importantly, however, WebKit has gradually emerged as the default choice for mobile browsers. Almost every pre-installed web browser on a smartphone that ships today is based on WebKit. Essentially, the first dispute we mentioned above, has been fought and WebKit has emerged as the clear leader, but not yet the winner. There are, however, several notable exceptions. Arguably the most innovative browser vendor is Norway’s Opera. While not well known in the US, Opera has an important browser presence in many markets. They use an internally developed engine known as Presto. Opera is important as they are the largest independent browser company on the market. As providing browsers is their only business, they have generally been a step ahead in delivering innovative features such as tabbed browsers. They have also developed a range of browsers optimized for mobile environments. Another important player is the Openwave mobile browser. Openwave was once the leader in the mobile web, when the mobile web meant low-res WAP browsers. The Openwave browser remains probably the most widely installed browser on the market today, although the limitations of WAP browsing generate only a tiny share of the traffic of smartphone browsers. Many of the thought leaders in the mobile web today are Openwave alumni, but the company went through several difficult years. They sold their browser to Purple Labs which is now part of the Myriad group, a leader in a wide range of mobile software. Mobile web browsers are by no means exclusively the domain of incumbent desktop browsers. The leading private mobile web browser is Skyfire. They have developed an optimized browser for mobile environments, which in certain situations involves caching content on their own servers for more streamlined delivery. Skyfire originally built their own Gecko rendering engine but have since transitioned to WebKit. The most prominent of these exceptions is Microsoft. They continue to build their desktop and mobile browsers on the Internet Explorer and their internal Trident engine. This matters for two reasons. First, if Windows Phone becomes successful (a big if) then Trident will remain important. This will depend on the success of Windows Phone, a topic which we explore further below. This is also important because Explorer remains the leading computer browser and Microsoft’s actions hold considerable sway over the broad development of web standards at the W3C. So there was a major sigh of relief when Microsoft announced it would fully support HTML5. This was an important validation of the standard, but then opened the door for the next wave of the browser wars.Page 16 Deutsche Bank Securities Inc.
  18. 18. 11 April 2011 Wireless Equipment Mobile Operating Systems Browser wars Mention the subject of the browser wars in Silicon Valley (or probably Wall Street) and old- timers will get a faraway look in their eyes as they relive those glory days. The browser wars were an integral part of the first Internet Bubble. For the 80% of our readers who are too young to remember that, the story is worth recounting briefly. The remarkable growth and then IPO of Netscape essentially sparked a great wave of interest in the Internet. It brought capital which fueled its early growth before reaching exaggerated levels. Netscape’s founders had created the first browser and then gone onto to start their own company with a commercial browser model. This was widely seen as a threat to Microsoft’s dominance of the desktop. Futurologists of the time talked about a future in which the operating system would be subsumed and all applications would run on the browser and the operating system would become irrelevant. Microsoft took that threat seriously enough to bundle its own Explorer browser with Windows. Over time, this made life difficult for Netscape and eventually pushed Netscape from the market, but at the price of exposing Microsoft to its antitrust woes which persist to this day. Despite the eclipse of Netscape, we would argue that the vision persisted and has already arrived. The best example of this is Apple. Set aside the iPhone for a moment, their computer business remains very strong today. True, the iPod and iPhone helped this, but more important was the web. A standalone computer relies entirely on the operating system. Anything that is interesting or useful about a non-networked computer has to rely entirely on the OS. Add the Internet, and suddenly there are many more interesting things to do with that computer. Most people use their computers today for three things – work, e-mail and web browsing. Of these three, only the work element really needs a robust operating system, and even this importance is waning. For all those consumers who did not need the best version of Excel and Word, and wanted a simple to use computer, the Mac was a perfect choice. Apple owes its existence to the Internet. So much for history. We recognize that the 1990s’ browser war ended with the OS remaining dominant, but it opened the door for other entrants. Some would argue that the OS remains important and the 1990s proved this. We do not agree, we think the browser wars were really just the first stage. The next round, the one looming, could very easily go the other direction. We are already seeing the signs of the direction that the next browser battle will take and think this time around the dispute will likely be a little trickier to follow. Instead of being fought between two competing browsers in full public view, indications are that this fight will take place in the committee and subcommittee meetings of the W3C. In the introduction we mentioned the dispute over web video. One the one hand we have H.264 a standard which has been designed in public set against WebM an ostensibly ‘open’ standard which has been designed by a single company, Google. The company has claimed noble goals for their effort around WebM whose code base they have donated to an open source initiative. There is some credit due their intentions, but we would also see this as their attempt to tilt the standard in their favor. This is just the most prominent of a whole range of issues to be debated. What is the Web? Stepping back from the minutiae of standards specs, there is a more fundamental debate taking shape over the very nature of the Web. So far this issue has seemed very minor, something that has sparked a little bit of interest on the blogosphere and very little notice in the wider public. That will change. We see this as almost an existential discussion that could change the way in which we interact with data.Deutsche Bank Securities Inc. Page 17
  19. 19. 11 April 2011 Wireless Equipment Mobile Operating Systems Historically, the web developed as a series of links to blocks of text. Over time, pictures, video and eventually applications were added, but the fundamental metaphor of looking at “pages” remained. Today people open web browsers and look at these web pages, but there is no reason that data has to be organized this way. Increasingly, most data is coming in the form of streams of data – RSS feeds, Tweets and Facebook updates. On mobile, the notion of the browser and web page has given way to the “app” or application. If you look under the hood of most iPhone and especially Android apps, they are essentially bookmarks that take users to web pages. Over time, we think alternative methods for accessing the web will become dominant. The browser will give way to apps, and apps will give way to widgets, embedded data and host other interface mechanisms. We believe that the apps will likely prove transitory for some unknown, more intuitive interface. In thinking about this, it is important to define a few terms. We tend to use the terms ‘web’ and the ‘Internet’ interchangeably, this is not truly accurate. The World Wide Web is a big collection of web pages; users access them by making HTML calls into the Internet. The Internet in turn is a vast collection of inter-connected networks that store all sorts of data most of which is not structured as a page. The debate of the nature of the Web is sometimes framed as a fight between HTTP and the Web, or of apps versus pages. We frame this as a spectrum of interfaces for accessing data. In some context, say sitting in front of a computer, the interface will remain the browser and the page. In other context, for example, looking up movie times at theaters near you, when an app probably works best. In other situations, embedded widgets with limited processing power, say a time and weather report in your refrigerator. All of these things will likely rely on the same set of Web standards, but the device in which they reside will play a large role in determining the content they can offer. In the context of mobile phones, tablets and other portable consumer electronics, this somewhat esoteric debate takes on real meaning. We recently spoke with a developer who contends that in the future companies will build new software with mobile in mind first, and their PC web presence as a second priority. By his reckoning, his latest project is not a ‘site’, it is an app, and this distinction has both technical and emotional connotations. All of this gives OS makers considerable leverage, and their decisions will shape software developments for their platform. From where we sit, it is still too early to see clearly how this will all shake out. On the hand, the major players – Apple, Google, Microsoft, RIM – talk about HTML5 eventually becoming the dominant platform, but that standard is not ready. In the interim, we anticipate a broad scramble over the definition of HTML5. To draw a historical analogy, this is like the end of World War One. Ostensibly, both sides called an armistice on October 4, 1918, but fighting did end until the agreement was signed on November 11. In the 38 days in between both sides kept up the struggle to lay claim to a final border line. Everyone knew where the end line was, but kept fighting until the end. In the mobile web, everyone knows the endgame will be HTML5, but instead of 38 days this ‘final’ stage of the conflict will last five years, with everyone struggling to eke out the best terms for themselves. We can make this a bit more concrete. Today most mobile apps are essentially web pages rendered by WebKit. Developers can already write their apps entirely in HTML5, but we think most app-makers would argue that doing so comes with a performance penalty. For instance, we recently heard of one developer who built their app using HTML5 only because they felt this would make it that much easier to port from iOS to Android. A few months later, the developer completed the project and in hindsight now believes this path was a mistake. Using web tools to write the app did save a lot of time in the initial coding of the app, but thePage 18 Deutsche Bank Securities Inc.

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