We last wrote about the cell phone space in September 2008, when we predicted further market share gains for both Apple (Nasdaq: AAPL) and Research in Motion (Nasdaq: RIMM). We correctly identified software as the new and important differentiating factor in the smart phone market, which had been previously hardware focused. This paradigm shift drove the success of the Blackberry and iPhone and undid the Motorola (NYSE: MOT)/Nokia (NYSE: NOK) dominance of the cellphone market. The key factor now is the “ecosystem.” It’s just like the PC industry, one in which a small number of players create platforms for users and software developers alike. The battle today is Google's Android (GOOG) and Apple's iPhone.
Google makes Android available to any cell phone maker, while Apple maintains a closed platform. Google's open platform will end up dominating the space, while Apple will settle for second place, and other players like RIMM and the mighty Microsoft/Nokia collaboration while have to settle for picking up the scraps left over. The core battle will be between Android and Apple, and we believe the winner will be Android.
Google has successfully developed an ecosystem which incentivizes both hardware and software developers to devote maximum resources to the Android platform. “The reason hardware vendors like Android is because Google shares revenues from applications and ad sales. That makes it very unlikely for any cell phone or tablet manufacturer to not adopt Android; your competitors will have a built in major margin advantage in very thin margin business. Google uses advertising cash flow to subsidize their products and Google is the Web advertising king by a large margin - Android is an open source platform with a profit motive,” says Reggie Middleton, a strategist and entrepreneur who publishes analysis on his boombustblog website ( a complementary sample of his work is available to RegisterRedrep.com readers on his website).
The coming months (and years, of course) will demonstrate just how powerful the Android platform is. Android driven Honeycomb tablet devices have just landed, and the future will bring 3D cell phones and tablets. Motorola and Apple will not be able to keep up, in my opinion.
Nokia and Microsoft are the two jilted lovers: They have formed a strategic alliance out of weakness and necessity. Nokia's decision to use Microsotf (MSFT)'s O/S wisely got them out of the software development, but it leaves them with no compelling opportunity, since the MSFT’s offering is so inferior to the leading platforms. MSFT and Nokia are asset rich, but unlikely to succeed, in my analysis anyway.
From a stock picker's perspective this is actually an unhappy outcome. Android is too small to matter for Google's stock price, and the other companies should be avoided. Apple and RIMM seem incredibly cheap, based on trailing and forward earnings and estimates. But the Android tsunami will knock down their margins and market share.
I am making this bold statement: RIMM will continue to lose market share, and face declining revenue, margins and average selling prices. The end result will be a firesale of RIMM, perhaps to Dell (DELL), MSFT, or an East Asian hardware maker.
Apple may hit their 2011 earnings numbers, but I expect margins to come down steadily in 2011 and beyond, which is usually deleterious for stock performance. “Apple is a lifestyle company that sells technology ecosystem products,” says Middleton. The strength in Android phones and Honeycomb tablets will hit Apple's margins and selling prices.
Motorola's spun off cell phone division, Motorola Mobility Holdings (MMI), has had popular Android models, but don't expect its early success to last. Motorola is vulnerable to low cost competitors. “South East Asian firms are experts at high volume, low margin businesses,” notes Middleton. Motorola's recent success in unit sales and pricing will wither, making MMI unlikely to achieve reasonable margins and earnings multiple. These stocks may bounce short term, since their recent results have left sentiment low. Like Nokia in 2008, the strategic obstacles it faces will, keep the stock under constant pressure.
MSFT is a cheap stock, but its weakness in mobile computing will eventually catch up to earnings and (probably earlier) the stock.
In my opinion, Nokia should be avoided at all costs. The five-year the best-case scenario for the company is one in which it sells large numbers of cheap phones in developing markets, and has some portion of the market for the MSFT O/S, which will be the number three or four platform for cell phones. Nokia finds itself in a worse position than even we could have predicted in 2008. I know I am making bold predictions, but I have done some serious research.
Nate Wendler is the penname of a hedge fund analyst.
