Page last updated at 23:01 GMT, Tuesday, 6 October 2009 00:01 UK

Why smartphones are not suffering in the recession

By Tim Weber
Business editor, BBC News website

Nokia N97
Nokia's N97 combines a touchscreen and keyboard

Smartphones are not only revolutionising the mobile phone industry. They are also about to change the way we use computers.

The mobile phone industry is in trouble. Network operators are squeezed for margins. Handset makers either suffer sharp losses or fight hard to stay profitable.

Hurting most are the stars of years past, like market leader Nokia and eternal runners-up Motorola and Sony Ericsson.

'Expensive' sells

This new generation of phones have so much power in them, so many activities, they've got so much information on them that it is the defining new category for our industry
Eric Schmidt, Google chief executive

They specialise in so-called feature-rich mobile phones - work horses that deliver good performance but are neither cheap-and-cheerful nor smart-but-expensive.

But with the world still feeling the impact of the global recession, it is this middle market that suffers most.

"When the downturn hit, we went from an annual growth rate of 10% to a 10% decline between the last quarter of 2008 and the first quarter of 2009," says Anders Runevad, global head of sales for Sony Ericsson.

Samsung Jet
Samsung has developed its own operating system

It is true across all phone makes. In "the current economic climate" the squeeze on mid-range mobile phones is "accelerating", says Patrick Chomet, who is in charge of terminals (i.e. handset selection) at mobile phone network Vodafone.

In stark contrast the market for high-end phones - like Apple's iPhone - is buoyant. In Europe, smartphone sales are expected to rise 22% in 2009, defying the 21% slump in handset sales predicted by Pyramid Research. In the United States a poll by ChangeWave Research in June suggested that 37% of consumers already own a smartphone, while more than 14% planned to buy one in the next three months.

Microsoft predicts that in a few years smartphones will make up 30% of the volume and more than 50% of the value of the mobile phone market.

Back to the drawing board

For network operators this spells excellent news. With most consumers squeezed they can focus on easy-spending smartphone customers to "keep their margins comparatively stable in the current economy and increase them once the economy improves", says Stela Bokun, an analyst with Pyramid Research.

For companies like Sony Ericsson it means going back to the drawing board.

Sony Ericsson Satio
Sony Ericsson promises rich multi-media capabilities

"We have to regain ground... and revitalise our portfolio," acknowledges Mr Runevad. Having smarter phones is part of the strategy, he says, because once "more normal market dynamics" return, customers "will trade-up" when they get a new phone.

But getting smart is not easy. Back in February, Sony Ericsson announced the Idou. A high-spec phone with touch screen and 12 Megapixel camera, it was well-received. But the buzz fizzled out as Sony Ericsson first rebranded the phone as Satio and then told customers they would not get their hands on it until October at the earliest. And while the hardware appears to be impeccable, a first play with the phone suggests that this will not be Sony Ericsson's most easy-to-use mobile.

Delays like this give rivals plenty of time to leapfrog. Little wonder that Sony Ericsson just got itself a new chief executive, who promises to "improve the product design and development process, and... a different product portfolio to reflect what customers are asking for".

Playing catch-up

Market leader Nokia managed to get faster to market. The Finnish company readily admits that it missed the smartphone boat, although Kai Oistamo, its executive vice-president for mobiles, insists that "we have an aggressive plan now" for catching up.

The smartphone-personal computer boundary will get fuzzy
Jen-Hsun Huang, Nvidia co-founder

Its first new smartphone out of the door is the N97 - a somewhat bulky slider phone with full qwerty keyboard, billed as a "mobile computer handset".

It is an impressive phone boasting huge amounts of storage. However, the N97 has a "designed by committee" feel about it, and I found it very awkward to use.

HTC HD2 phone
HTC puts its own user interface on a Windows phone

Also playing catch-up is Microsoft. "Yes, there certainly has been a gap for the last 12-18 months, we are behind," admits Jean-Philippe Courtois, the president of Microsoft International.

Microsoft hopes version 6.5 of Windows Mobile will help relaunch its fortunes, with software powering phones that can straddle the worlds of corporate and private life.

Rebranded Windows Phone, it drops Microsoft's fiddly "computer desktop" user interface. Large-lettered menus and jaunty iPhone style icons help owners navigate their phones. Great software, except a couple of years late and not quite up there with some rivals.

Secrets of smartphone success

It is Asian companies that make a lot of the running right now. South Korean phone maker Samsung not only launched its new Jet smartphone in June and pushed it into shops just weeks later, but also delivered a phone that was both intuitive to use and had a touchscreen keyboard that did not make me yearn for a real "qwerty" keyboard.

Apple iPhone
Apple's iPhone is still the benchmark for other smartphones

However, Samsung's new line of smartphones also illustrates that manufacturers need more to make their phones stand out.

Once a phone was all about the hardware, with fickle phone buyers flitting from candybar phones to clamshells to sliders, from chunky to super-slim and back again, from keyboard to touch screen, from megapixel mania to GPS.

And then came Apple.

It is two years since the iPhone was launched, more than a lifetime in mobile phone development. Even now rivals are reluctant to use the "i-word", although they all acknowledge that the iPhone changed what the phone market is all about.

It's a "stand-out" phone, both in terms of user experience and data usage, says Vodafone's Mr Chomet.

Apple needed just two ingredients to be successful: ease of use and a wide range of "apps" - small software applications that allow owners to optimise their phone, whether it is Sudoku puzzles or sugar trackers for diabetes sufferers.

The success of Apple's app store caught out most rival phone makers. The store - with more than 65,000 apps and over two billion downloads - is now making serious money, not just for Apple but for thousands of developers as well.

It is here where rivals like Samsung falter. With few apps to satisfy the whims of owners (Samsung's meagre app store was launched just a few weeks ago) the Jet may well be a gorgeous phone, but can't be an iPhone killer.

Smart and cheap?

The gap is getting closer, though, not least because Apple appears happy to pitch only to the high end of the smartphone market.

Blackberry Curve
Blackberry's Curve is an entry-level smartphone

That leaves room for companies like Research in Motion (RIM). Once stuck in the niche of making Blackberry e-mail phones aimed at business people, the Canadian firm is pushing deep into consumer territory. Business magazine Fortune recently crowned RIM as the world's fastest growing company.

Most successful is the Blackberry Curve, an unabashed entry-level smartphone: it lacks 3G connectivity, making for slow internet access; its camera is at best average. Where the Curve excels, though, is user experience. Most applications on the phone - e-mail, browser, camera, sat nav, plus downloadable apps to find hotels or use Twitter - fit seamlessly together.

The Curve's success underlines the importance of software. "In many ways it's analogous to what happened to the PC industry. The hardware has become increasingly generic and the value of the device is in the software," says Shaun Puckrin, who is in charge of app development at Symbian, maker of the software that powers phones like Nokia's N97.

It is a mantra often repeated by Microsoft executives.

The G-factor

Making the most of it, however, and emerging as the iPhone's most dangerous rival, is a company that until recently had its chief executive sit on Apple's board of directors: Google.

HTC Hero - T-Mobile G2 Touch
The HTC Hero uses Google's Android operating system

With astonishing speed Google not only developed a smartphone operating system, dubbed Android, but also found many handset makers (LG, Samsung, HTC and Motorola) willing to use the software.

Leading the pack is HTC. Until recently, the Taiwanese firm stuck to using Microsoft's cumbersome Windows Mobile software. Not anymore.

HTC's Android phones - most notably the HTC Hero (also known as T-Mobile G2 Touch) - are the most serious challengers Apple ever had to face.

Following a software upgrade the touchscreen-only Hero is fast and very easy to use. Most owners will never have to consult its two-page "manual". Facebook, Twitter, Flickr, e-mail and SMS are seamlessly integrated, and if you trust your digital life to the Googleverse of Gmail, Google calendar and docs, the boundaries between your computer and mobile phone will blur.

The open-source Android app store, meanwhile, is growing at a furious pace, with currently more than 15,000 apps.

The return of Palm

Palm Pre
The Palm Pre has been hailed as a potential iPhone killer

Also in the running is the Lazarus of the mobile world, Palm. Once dominating the market for handheld computers, the company recently launched its Palm Pre phone (which next week is being rolled out across Europe).

The pebble-like Pre - compact, but with a tiny slide-out qwerty keyboard - makes the most of its new webOS operating system that allows multi-tasking and promises to hook into the digital worlds of Google, Apple and Microsoft.

But like most other smartphones, battery life is its Achilles heel, and Palm's app store is in its infancy. Its "developer program" to build apps for the Pre's operating system will launch only in December.

Computer revolution

Promises of smartphone riches are drawing companies into the fray like Taiwanese computer maker Acer, which dominates the laptop market.

True to its PC heritage Acer currently bets on Microsoft's Windows mobile software. One of its first efforts, the Acer M900, is still fairly clunky, but chief executive Gianfranco Lanci has big plans. The real difference, he says, will be the development of a better user interface and especially Acer's own app store.

Some of Acer's ambitious plans do involve Android, and point to the real future of mobile computing.

Acer is set to launch small computers that run both Android and Windows 7, says Mr Lanci; Android will give owners a phone's instant-on experience, while Windows 7 will provide full computing power.

It hints at the start of a revolution in personal computing. Not PCs but mobile phones will be the centre of everybody's social and multimedia experience.

Microsoft calls it the world of "three screens and the cloud", where the location of your data - your contacts, music, pictures and films - does not matter anymore. Whether you use them at the computer, television or mobile phone, they will be tied together by software, and storage in the internet "cloud".

Mobile future

Maybe it is time not to speak of smartphones anymore, says Google boss Eric Schmidt. "The smartphone is really not a smartphone. It's really a GPS device, it's a camera, and a video camera and a place that you can play games and you can browse, and oh by the way, you can make calls. So this new generation of phones have so much power in them, so many activities, they've got so much information on them that it is the defining new category for our industry."

The "smartphone-personal computer boundary will get fuzzy," predicts Jen-Hsun Huang, co-founder and chief executive of chipmaker Nvidia. "In five or 10 years, your mobile device will be your platform, whether you are on the move or at home." The "mini supercomputer" on your desktop will only be used for "high-end, high-resource computing".

My vision? Your phone will hide an extremely powerful computer and internet access base station. Thin sheets of roll-up electronic paper would replace your computer monitor and phone screens.

When I put this vision to the chief executive of a rapidly growing Asian phone manufacturer, I get a startled look, then a wry smile: "You should visit our labs, you will find that we've got something very interesting there."

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