Apple has rewarded its investors with spectacular returns in the past 10 years. An investment of $100 at the start of 2001 yielded over $4200 by the end of 2010. How can big companies keep growing at such an impressive rate? According to the theory of Disruptive Innovation, companies have to continue to disrupt themselves and innvovate repeatedly. That is exactly what Apple has done in the last decade.

Clayton Christensen and his co-authors have articulated disruptive innovation at great lenghts. At the time of writing The Innovator’s Solution (2003) and Seeing What’s Next (2004), the authors were not convinced that any company has continued to be a serial disruptor for long.(1) Solution lists Sony as the only example of a serial disruptor that went on to create a string of a dozen disruptive new-growth businesses between 1950 and 1982. In Seeing What’s Next, the authors are less enthusiastic about Sony and concluded there were no serial disruptors to date.(2)(3)

The authors might have a different opinion if they were to revise these books today. Apple is an example of a large firm sucessful at serial disruption. In the past decade, Appple has found three growth engines iPod, iPhone and iPad.

To sustain the growth momentum, disruptive innovations need to start early before pressure mounts from slowing growth and profits from existing products. iPhone came out before the profits from iPod slowed down. iPad came before the profits from iPhone slowed down.

PA Semi Acquisition and Apple A5

According to Value Chain Evolution theory, companies ought to control any activity within the value chain that drive performance that matter most to customers.

Apart from the legendary intergration of software and hardware, what do users value most in an Apple mobile device? It is the snappiness and the elegance of user interface.

By being able to develop processors internally, Apple is able to fine tune the heart of hardware to power what it values most — user experience. By developing the processor in house, Apple was able to bring improvements faster to market. It now has the ability to control, tweak the component capability to suit product features that users value most — A5 sports vast improvements to rendering graphics than to the raw processing power of the CPU. This will go a long way to keep the user interface snappier.

iPad

The original iPad is a disruptive innovation. The iPad targeted non-consumption. It is easier to use. The task can be accomplished with fewer skills. It is more inuitive and does not force the user to adapt to the product to get things done.

It is cheaper than a laptop that would have been used to accomplish tasks that an iPad would now do. This is significant considering how Apple products are considered expensive than competition. Almost a year later, competitors are not able to beat Apple at cost.

15 million iPads were sold in the first 9 months. While that number in itself is huge, it is more significant for a first revision product. Early adaptors and enthusiasts are ready to buy a version 1 product, the mainstream user on the other hand tends to wait a bit. Case in point :  slow uptake of first versions of iPod and iPhone.

It could be claimed that Apple has learned from the iPad and iPhone and got the first version iPad closer to the liking of mainstream, or that even the first version of this product was irresistible for a wait-and-see approach.

iPad2 is a sustaining innovation. Segments of the press have derided the improvements to be too small. When sustaining innovations overshoot customer needs, a firm risks commoditization. When product capabilties exceed what customers can meaningfully use, sustaining innnovations are overshooting. In that sense not adding NFC capabilities is the right thing to do at this time. Tablets are not commoditzed yet, and Apple does not have any incentive to expedite that.

Succession Planning

It is beyond argument that Steve Jobs is a genuis and his knack for elegance in product design will be dearly missed when he eventually leaves Apple. All signals indicate that the disruption engine that Apple has morphed into will keep humming.

Successful disruptors are powered less by the genius of the founders than by the processes and values at the firm that identify, cherish and grow dirsuptive ideas. Processes and values more than people.

Managers who have the experience in identifying and nurturing disruptive innovations have gathered the requried skills and put in place the processes to continue disrupting. So, unless there is a mass exodus of the executives, who have driven the company to be a serial disruptor in the past decade, there is no need to panic.

Notes:

1. The Innovator’s Solution, 2003, ch 10: Notes #2
2. Seeing What’s Next, 2004, ch 6, pg 67 … “We can’t yet point to an example of a firm that actually has become a serial disruptor”.
3. Seeing What’s Next, 2004, ch 6, pg 291 … “To our knowledge, no company has been able to build an engine of disruptive growth and keep it running and running”

Segmenting the market according to user needs, profitability and product capabilities is not new. The automobile industry, for example, has been there — and has taught us a few lessons on the necessity of focus in the process. The big three auto makers in the US had stretched the branding too thin (primarily through retaining acquisitions as independent brands) and had segmented the market to such unsustainable levels that they had to jettison some brands (for e.g., Ford offloaded Volvo, Jaguar, Land Rover) to focus on profitability.

Toyota has been a beacon in segmenting the market according to demographics. The Lexus brand symbolizes luxury, Toyota symbolizes reliability and economy. Sensing that the average age of Toyota owner was 47, Toyota spanned a new brand Scion to address the youth segment.

The phone business in contrast has been a monolithic branding endeavor. Whereas an Apple phone or a Blackberry phone signifies luxury and sophistcation, a Nokia phone or a Motorola phone could be a cheap device or a high end smartphone. Nokia could have started a trend.

As Horace Dediu summarized in a series of articles analyzing Nokia’s partnership with Microsoft, Nokia had to address issues on several fronts: low ASP, unattractive margins, lack of focus, high development costs. Nokia abandoned Symbian in favor of Windows Phone, effectively rendering itself to be a high end player given the high costs of hardware required for Windows Phone.

Nokia has an installed base of 250 million users. Agreed that the platform stickiness is not a big factor, and the current installed base does not guarantee loyal customers in the future. A majority of Nokia’s installed base is from the poor and developing economies. Every one seems to agree that, in the near future, a majority of phones would be smartphones. Who will bring smartphones to the masses?

ZTE and other low cost handset vedors seem to have the momentum at the moment. In his famous burning platform internal memo to employees, Nokia CEO Stephen Elop indicated pressure from low cost manufacturers producing devices based on chips from the likes of MediaTek.

At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us.

According to Clayton Christensen‘s theory of Disruptive Innovation, disruptors start off serving customers currently unserved by the incumbents. The poor and the masses are currently unserved by the smartphone vendors.

Should Nokia chase profits at the high end or address low cost handset vendors eating into its installed base? One solution offered for the Innovators Dilemma is to span a separate unit that is independent and is focused on serving the currently unserved. Why did Nokia not take this path?

TI sees the Tablet space as a significant opportunity. This is clear from the following comments from TI executives during the most recent conference call discussing earnings for Q4 2010.

“We are deeply engaged in collaborating with multiple customers on tablet programs that reach across TI product lines, including OMAP 4 applications processors, single-chip wireless connectivity solutions that integrate four radio technologies: WiFi, GPS, Bluetooth and FM, and Analog Power Management technologies that optimize overall power distribution and consumption within the tablet.” – Ron Slaymaker

“…tablets are a targeted area for us across a number of product lines just because that’s a new emerging space with a lot of opportunities.” – Ron Slaymaker

“We need to expand our wireless connectivity and applications to process server positions in the smartphone market, as well as in tablets” – Kevin March

source: Seeking Alpha earnings call transcript

While TI is well positioned with competitive products. Market forces are set to ensure a rough ride ahead. Again, in TI’s own words:

“So again, we’ve acknowledged for a long time the tablet market, as is the smartphone market will be a competitive market. But I think you’re going to find that translates to great opportunity for TI across a variety of product areas.” – Ron Slaymaker

So what is going on in the Tablet space for application processor vendors?

1. It is still early days and the market is wide open.

Anecdotal evidence from the current crop of popular devices in the market and the ones announced show that competition for application processor slot is fierce.



2. Smartphone slots do not translate to tablets.

Device vendors are not clinging to relationships established with SoC vendors for smarphones. Several Tablet vendors have shown willingness to start their tablet efforts on a different platform than just extending their successful smartphone designs.
Motorola Droid was a showcase device for TI OMAP 3; Motorola’s Xoom tablet uses NVIDIA processor. Blackberry phones for the most part were split between Marvell and Qualcomm; However, RIM playbook uses TI OMAP 4. All recent Palm phones use TI OMAP 3; HP (Palm’s Web OS) TouchPad uses Qualcomm Snapdragon.


3. Tablet slots might translate to smartphones.

So far we have one example: Motorola devices announced for the near future use NVIDIA Tegra 2. We might see more.

4. Integrated vendors are faster to market.

Is it just coincidence that Apple, and Samsung have devices in market and that they make their own application processors I house? Although iPad and Galaxy Tab are based on Cortex A8 parts, and the products announced by other major vendors use Cortex A9 parts, the early mover advantage is undeniable.

Conclusion:
The application processor market is undergoing a big realignment. Performance and design wins in the next year or two will lay the foundation for continued success. ARM architecture still reins supreme in smartphones and tablets. I will delve into the increasing competition for the ARM ecosystem from MIPS, SH in a future post. Competition has become fierce among ARM based SoC vendors. Performance in Tablets will affect attractiveness in smartphones.

Notes:
1. Application processor for a majority of smartphones from this vendor.
2. Application processor for the first Tablet from this vendor.

The question is, with baseband revenue expected to come to naught by end of 2012, will the rest of wireless segment make up for the revenue lost from leaving baseband?

Consider the entire wireless segment. The chart below shows progression of revenue of wireless segment.

Although overall revenue at TI has been growing, wireless segment has been contributing less. The next chart illustrates this better.

Wireless segment at TI was retooled to position the company for the strong growth anticipated in smartphones. While smartphone market grew at an astonishing rate, TI wireless segment did not ride the smartphone wave as well as some competitors such as Qualcomm have. The following chart helps understand the contrast. From 2007 to 2010, cumulative worldwide smartphone shipments have grown over 1500%. In the same period, TI’s cumulative revenue from application processors + connectivity solutions has grown over 1300%. At first sight it does not look bad, but this growth is not fast enough to make up for leaving baseband. In 2008, 2009 revenue from application processors and connectivity solutions exceeded or kept pace with worldwide smartphone unit shipments. In 2010, the parts of wireless segment focused on smartphone market slacked the overall smartphone unit growth.

If baseband is discounted, revenue generated by wireless segment has not kept pace with smartphone growth. From this chart, it is clear that TI lost market share in 2010. I will return to the quantitative aspects of market share later.

Consider the revenue split between baseband and the rest of wireless segment.

Revenue from baseband has not declined drastically since 2009. Baseband continues to be a significant contributor to wireless segment’s revenue. Revenue from application processors and connectivity solutions is not ramping up fast.

The question then becomes, with baseband revenue expected to come to naught by end of 2012, will what is left of the wireless segment grow much faster than the market to make up for the revenue lost from leaving baseband?

The wireless segment has been underperforming both within and without. Competitors are breathing on TI’s neck and are gaining ground. More on this later. Given this background, It will be a tough task and will take a big turn around in its performance to bring in the necessary growth.

Amazon recently announced that Kindle users would soon be able to lend books once for a 14-day period. While not being able to read a book that has been lent makes perfect sense, restricting it to just one lending, and to just 14 days does not. Amazon rightly directs user ire to restrictions imposed by content publishers and rights holders. The device-content synergy is an often overlooked and important factor in the success of Apple’s iPods, iPhones and now iPads. After ceding control of music pricing to Apple, publishers are now wary of letting anyone else set the prices for their wares. It is true that publishers hold the cards here, however the end user does not care who is to blame.

The restrictions placed on lending make sense in an institutional setup such as a library. Say a library owns the e-books and the e-readers are either leased/let/rented by the library or owned by the patron. Patrons can check out e-books and will be limited to a lending period of 2-3 weeks, at the end of the lending period the e-book returns to the library and is available for others. Makes perfect sense!

But for individuals, one should be able to lend a book to another person (who owns a compatible e-reader) without any restrictions. Lending books has traditionally been a way of sharing interests. What more, the author could be getting a new fan/follower.

If the restrictions on lending are to address the “problem” that e-books do not wear and tear as physical books do, then we should address the problem directly. The solution is to deteriorate e-books as they are shared more and used longer. One simple solution is to gradually reduce the readability of the e-book with prolonged use — reduce clarity of the font, reduce contrast. How about dog ears, crumbled edges, and coffee spills? It can all be done in software. Piracy is  not the problem. As long as these purchases are restricted to be used with appropriate devices or software (Kindle reader for other devices, Nook reader for other devices) and user credentials there is no fear of letting the content loose in the wild.

While we are at it, let us consider Amazon’s stated vision for books. “Buy Once, Read Everywhere”. Really? Sure, it applies to accessing Kindle content on other devices. Amazon has done a commendable job of enabling books purchased for Kindle hardware to be used in other devices such as phones, tablets and personal computers via the kindle software for these non-kindle-e-reader devices. But it does not extend to physical book purchases.

A book purchased in a hard paper form remains an island. Although the paper version costs more, a user is left to pay again for a soft copy to use on electronic devices. Why should the consumer pay twice for the same content? Have we not learned any lessons from music piracy? Such double stance drives honest people to illegally obtain a e-book version of a paper copy they own.

The 500 year old invention called printed paper is not going away anytime soon. It is here to stay. An e-book provides the opportunity for enhanced content delivery. The economics of publishing adds fuel to e-books. We tend to cling on to old habits and the comfort, convenience of holding a physical paper in our hands. Clearly there is a place for e-books in the future.

It is a mind game. If e-books are to get the respect they deserve, publishers, content creators and device vendors should come together and make the transition easier and enriching.

Beetel, which is part of Bharti Enterprises, wants a piece of the fast growing Indian handset market. According to Gartner, 117 million handsets were sold in 2009. Bharti Airtel is the country’s largest mobile network operator (MNO) – It had 140 million customers as of July 2010. Courtesy of its parent company, Beetel will bring to table a deep understanding of the Indian consumer and a well entrenched distribution network.

Beetel has set itself a goal of entering the top 5 vendors in India within 3 years. It is not a lofty goal, even for a new entrant. Outside of the major vendors, handset market in India is highly fragmented. There are more than 50 local and Chinese vendors vying for the bottom 20% of the market.

Nokia, Samsung and LG lead in India just as they do world wide. In India however, Nokia dominates with a disproportionately large share. Major name-brands have reasonably loyal customers, and their market position does not come under any threat in the near future. The market share would definitely change.

Urban markets are considered saturated, growth has to come from rural markets. Unlike in other markets where a mobile phone vies for the spot of a third or fourth screen in a consumers’ communication/media-consumption devices, a mobile phone is THE ONLY screen for much of the rural population in low income countries like India. There is still a large untapped market outside the urban areas. While it is clear that growth will come from serving rural consumers, the fact that rural users would invoke services on a need basis necessitates businesses to innovate to create compelling services beyond voice. Voice has thus far provided the bulk of revenue.

Other MNOs have ventured into handset business in the past with mixed results. White label manufacturers provided a bulk of these phones. BeeTel is unlike other also-rans, it has a huge distribution channel, in Bharti Airtel, and has been in the phone manufacturing business for a long time. Admittedly a mobile phone is much more complex than a cordless/land-phone.

What merits attention to this move is the phenomenon of creating products that cater to developing economies which could then be marketed to developed economies – either disrupting the status-quo or creating a whole new market for devices that do to compete with features offered by the best in the class but are priced much less. Vijay Govindarajan and Chris Trimble of Tuck School of Business call this phenomenon Reverse Innovation. Revolutionary products such as the $2500 car (Nano) from Tata and $1,000 hand-held electrocardiogram from GE showcase India’s growing design and engineering prowess.

Bharti Airtel has a track record of such innovative thinking. Having no expertise in building telecom networks or running a large scale IT infrastructure, it made perfect sense for Bharti to outsource functions outside its core competency. It has since excelled by creating innovative services by keeping its ears to the ground. Judging from Bharti’s history, most of the the design and manufacturing of handsets will be outsourced – Bharti famously outsourced all network operations to Ericsson and Nokia-Siemens; and IT operations to IBM. Beetel, however, has been in the manufacturing business for a while and has been successful at it. It remains to be seen if most of the complex task of designing and manufacturing a handset would be outsourced.

Although manufacturing in China would seem like a good option, market forces and regulatory policies make the decision a tough call. Device vendors have been manufacturing within India to get around import duties. Chinese manufactured handsets – some of which lack IMEI numbers – have been facing increasing scrutiny from security agencies. Top vendors like Nokia already manufacture in India. Although Nokia’s share continues to decline, designing products catering to the unique needs of the Indian consumer has enabled it to dominate the market from early on.

Thus, Bharti’s advantage lies in its understanding of the Indian customer and the Indian market. Bharti would save itself a lot of time and trouble by not venturing into the innards of handset manufacturing. It should instead dole out most of the design and manufacturing to the best in class. As Bharti gains foothold in this market and expands to other low income markets, low cost handset platform vendors such as ST-Ericsson and MediaTek stand to gain.

As the sole reseller of Apple iPhone in India, Beetel has some sense of excellent profit margins possible with a successful samartphone platform. That is one temptation worth staying away from. Even the mighty Nokia is struggling with its smartphone strategy. It would be best to innovate at the low end and gradually add features to expand upstream.

Reserve Bank of India recently granted Bharti Airtel a license for mobile payments in the form of “semi-closed mobile wallet”. The set up is akin to a secure credit card. User loads up the payment instrument — a mobile phone — and uses it for paying at participating merchant locations, but cannot  draw cash. Bharti has not revealed implementation details; It is not clear if it will use NFC or simple SMS based transactions. MNOs acting as gatekeepers have so far resisted NFC in phones. If one subsidiary (Beetel) of the Bharti group makes mobile phones for use in another subsidiary’s network (Airtel), NFC could take off sooner in India than in other markets.

For a new technology to gain a foothold, it needs to be mature and enable scenarios that improve the user’s work flow, lifestyle, or both. Consistency, ease of use and reliability are essential for a new technology to take off. Winning trust is essential when money is involved. NFC, by its nature, is set to deliver on the ease-of-use aspect. Trust will be addressed by the security elements in hardware. Consistency and reliability are where there tend to be issues. NFC forum plans to address such issues by establishing core specifications that devices should adhere to. However, the compliance/certification program promised for Q3 2010 covers just the basics, and much is left to be done in 2011 – this could mean NFC could be waiting in the wings a little longer.

Unlike with cameras, Web on mobile, WLAN, and Bluetooth, it is not enough to start NFC deployment at the high end (think smartphones) and have it trickle down to the rest of the lineup. Smartphones comprise just 15% of all phones sold. The increased utility of a NFC-enabled phone is proportional to the diversity of the ecosystem. The ecosystem will evolve faster if more users can participate. For the NFC trend to have the maximum impact, deployment of NFC has to happen concurrently across the device lineup. It would be in the best interests of everyone to add NFC for mid-range and feature phones, if not for low-cost phones, immediately. The success of NFC hinges on a wider availability of such devices.

Most users carry multiple payment cards and prefer use different cards for different purposes and situations. A phone with NFC could replace multiple cards. For the first time, payment options from competing financial institutions would need to work out a way to coexist in a single device.

It is clear that for NFC in phones to succeed, it should enable use cases other than payment and ticketing. It is easiest for mobile phone vendors to justify adding NFC to phones as a small increase to production cost than it is for MNOs or financial institutions to invest in the infrastructure. Phone manufacturers can wait for a model year before they see the benefits of NFC; for MNOs and financial institutions, NFC investment is a discrete expense and needs to be accountable.

Just as MNOs are looking at NFC as a means to add value, vendors of standalone devices such as digital cameras should add NFC to keep their wares attractive and to stay competitive.

NFC will add to convenience in high-income countries. It will empower users in low-income countries without a formal credit system, especially the unbanked and under-banked population. Phone banking has been successful in such communities, and NFC will make transactions easier.

Mobile network operators (MNO) are still the gatekeepers of devices. Handset vendors’ attempts to reach consumers directly have met with little success. Case in point: Google sold Nexus One directly and withdrew completely within few months. Nokia has been trying to sell directly in the U.S. market and has very low penetration compared to its worldwide share. Prior to the current renewed interest, NFC phones received lukewarm reception at MNOs, partly because MNOs did not see a clear business case. MNOs now want a share of interchange revenue (payment processing fees) that Visa, MasterCard and their ilk have been making billions on. MNOs also see revenue potential in services like advertising, marketing, and coupon delivery. Such strong interest of MNOs is a considerable tailwind for NFC.

As contactless payment gathers steam, it has attracted increased scrutiny from regulators and consumer rights advocates, adding to troubles for NFC.

If and when it takes off, NFC would lead to people being even more engrossed with their phones – more staring at the phone for information about the next train or bus than asking a fellow passenger and starting a conversation. This is not necessarily a good thing.

Pilots programs underway to get consumers used to the idea of paying with a mobile phone use bridge technologies such as contactless stickers, add-on sleeves, and microSD cards. These could prevail longer than intended if use cases beyond payment are not realized. Such bridge technologies could become bridges to nowhere for NFC.

One of the barriers for successful adoption of NFC in phones has been the push and pull among ecosystem partners about the business models and direction. The vested interests of various players and their attempts to control where this plays out carry the risk of fragmentation of the ecosystem.

Costs

Although the cost of adding NFC to a phone has come down to about $5 from about $20–$25 in 2008. It is still not cheap. In contrast, to cite an example of the most popular smartphone around, according to iSuppli, the BT/WLAN combination chip (Broadcom’s BCM4329) in the iPhone 4 costs $7.80, and the GPS chip (Broadcom’s BCM4750) costs $1.75. So, the decision to add NFC will not be made lightly.

For the short term, payment and ticketing are the cash cows for businesses deploying NFC. According to ABI Research, retailers spent $14.8 billion on IT in 2009. Part of this went to point-of-sale (POS) terminals (hardware and software). The approximately 8-year life cycle of newly deployed terminals means adding NFC support during periodic upgrades is not an option. A bridge gap option is to have add-on units, and equipment vendors are hard at work on this. Still, merchants do not see a clear benefit to such investment, especially given the lukewarm reception to contactless payments.

Security Concerns

The very nature of NFC being contactless creates potential for abuse. NFC transactions create a radio frequency (RF) field over which power and data are transferred. This allows for eavesdropping.

Users need to be assured that a lost or stolen phone could be handled the same way a lost or stolen card would be, including liability and fraud protection similar to that for physical cards.

In addition, mobile phones these days – at least smartphones – come with a remote erase option. This service has so far been more prevalent among business users. If the phone carries payment and banking information, consumers are more likely to opt for such additional services.

Phones could provide an option for the user to configure NFC functionality to require a PIN or password to start a payment transaction and thus reduce misuse of lost or stolen phones. It could be argued that requiring such authentication beats the purpose of an elegant and seamless transaction.

Biometrics

To strengthen security and prevent a lost phone from being misused, fingerprinting technology could be used to authenticate the user. Using NFC features will involve bringing a certain side of the phone in proximity to the target – either a passive tag or an active reader –and the top rear side of a phone will be a good place to put the NFC antenna. It would not be asking much to require the user to hold the phone such that the thumb covers part of the screen (let us stick with touch screen devices for now) and other fingers mostly on the rear and sides. Who would not like the added security?

Apple, during the recent controversy over antenna placement that caused dropped calls, slipped a suggestion on how to hold the iPhone 4 to prevent such issues. Competitors had a field day pointing out that their phones did not have any such issues and that the users could hold their phones any way they preferred. If the above scenario were to be realized, phone manufacturers would be creating instructional material suggesting to users how to hold their phones!

The idea of using biometrics for authentication in mobile devices is not new. Companies such as Atmel, Authentec, and ST/Upek already promote the idea of authentication on devices using fingerprint detection. Fujitsu is the pioneer of adding fingerprint detection to a cellphone. The Fujitsu F505i cellphone, released in February 2003, uses an Authentec sensor.

Little Motivation

Thus far, payment and ticketing have been the major applications for contactless. These needs are well served with cards and NFC in phones will not make a big difference to these. Merchants are well served with current payment processing options.

But merchant unions are unhappy about interchange fees. They have a valid point that absence of real competition in this area has kept the cost high. However, as seen from their collaboration with major banks for NFC trials, interchange companies could join forces with banks and share their revenue with them and not pass on any savings to merchants.

Every major player in the ecosystem is in the process of fine-tuning its business case for NFC. Transit ticketing and point-of-sale (POS) payment transactions are seen as the primary avenues of generating revenue, at least in the short term. Other use cases such as peer-to-peer content sharing and smart posters can add to the value of a NFC-enabled phone, but the burden of generating revenue rests with transit ticketing and point-of-sale payments for now.

Contactless payments have been around for a while, but have failed to grow beyond a niche segment of early adopters. In fact, most people don’t even realize they carry cards capable of contactless payments. Ticketing is prominent only in big cities. Therefore, for NFC to be successful in the United States, its use has to extend well beyond these obvious use cases.

Allure of NFC in Phones

NFC in mobile phones can tap into several other technologies in the device to enable compelling and enriching use cases. Mobile marketing can be fine tuned and well targeted based on location. Coupons and advertisements can be served based on usage patterns.

A contactless card is limited to making payments. A NFC-enabled phone can combine the phone’s processing power to deliver more value to the user. For example, it could help the user stay organized, keep tabs on spending, and so forth. NFC phones can thus act as more than payment devices.

In reader mode, NFC can enrich the user experience. For example, a self-guided museum tour can be much more interactive with smart tags intelligently placed around exhibits. In addition to smart tags, NFC in phones can use GPS and other technologies readily available for applications to offer compelling location-based services (LBS).

In peer-to-peer mode, the ability to exchange information between devices can lead to a lot of applications yet undreamed of. Alternatives exist, but the process can be much faster and easier with NFC. For example, LinkedIn users can exchange business cards using their phones. The phones use Bluetooth/WLAN to accomplish this task. Since a business card is just a few bytes, setting up a BT/WLAN connection is more work than the actual information exchange! With NFC, this process would be a snap.

Such intelligent use of the capabilities of phones will determine the fate of NFC.

Beyond Phones

The more devices made NFC capable, the better the utility of NFC in these devices. For example, if a user’s computer, digital camera and printer have NFC, transferring content from camera to computer or printing pictures directly from the camera could be done in a more natural manner.

Another example is the RFID-enabled BRAVIA LCD TVs, unveiled by Sony in March 2009 in Japan. Users could pay, say, for a movie rental by bringing any contactless payment card or a NFC phone close to the TV remote. This eases impulsive purchases and allows the user to choose the mode of payment that fits the situation and need.

Online merchants like to store payment information and reuse it to expedite the payment process during subsequent visits. Security breaches at several retailers have led to exposing sensitive financial information to prying eyes. Many users would rather re-enter their payment information each time than leaving it on some corporation’s servers. NFC would make such transactions securely and instantly.

For NFC to see widespread adoption, it needs to be deployed in a variety of devices such as consumer electronics.

In spite of the recent turmoil in handset vendor market, Nokia is still the dominant player. After the company announced its intention to add NFC to all its smartphones in 2011, other players have had to ramp up their NFC plans even if they were reluctant earlier. Apple and Qualcomm are reported to have hired NFC experts.

Nokia, Samsung, and Sagem have made NFC-enabled phones in the past, but the NFC capability of a majority of these phones has been limited to field trials.

NFC Vendors

A variety of solutions are available from vendors like NXP, STMicroelectronics, the UK-based NFC leader, Innovision Research & Technology plc and Denmark-based Polaric. These firms have been providing technology for contactless cards and infrastructure and are thus well positioned to ride the NFC wave.

Innovision could have been to NFC what ARM is to application processors. Alas, Broadcom snapped it up for $33 million in August. Broadcom had been working with Innovision for some time, and the momentum behind NFC seems to have prompted this move.

Even before being acquired, Innovision expected to carry NFC slots in 15%–20% of phones shipped in 2012. With the added momentum of Broadcom as the market leader in connectivity solutions behind it, the target seems within reach. After all those broken promises, this one might be kept. More so, if NFC morphs into existing combo-connectivity solution chips.

While Qualcomm has been less successful than Broadcom in connectivity solutions, it has been selling baseband platforms such as mobile station modem (MSM)  and Qualcomm Single Chip (QSC) chipsets at a brisk pace. Qualcomm is an investor in Inside Contactless, a maker of contactless and NFC platforms based in France. This collaboration has enabled Qualcomm to offer NFC handset reference designs for MSM and QSC platforms. It is no coincidence that Inside Contactless claims or holds some essentials patents for NFC.

Texas Instruments, on the other hand, has been less than enthusiastic about NFC in phones. TI is the world’s largest integrated supplier of radio frequency identification (RFID) ICs – the bulk of the 500 million devices that TI has sold thus far were used in asset tracking and contactless payments. TI’s connectivity solutions have been well received. It would not want to miss on NFC. I expect TI to offer a combo-connectivity chip with NFC soon after Broadcom does.

Shanghai Fudan Microelectronics Co. is a big supplier for Chinese MNOs and manufacturers. It has little presence outside China and needs design wins from global Tier 1 handset vendors to expand.

Combo Chip

When a design incorporates multiple connectivity solutions, instead of adding a discrete chip for each of them, combo chips are used to save valuable space inside a phone. Various combinations of BT, WLAN, GPS, and FM are available from several vendors. NFC will surely follow suit.

By 2012, NFC in a combo chip is estimated to cost $1 down from the current level of $5 for a discrete part.

Ultra Low-Cost

The lack of interest in NFC from ultra low-cost (ULC) platform vendors like ST-Ericsson, MediaTek, and Infineon is troubling. Infineon has interests in NFC as part of its secure card business. ST-Ericsson offers NFC as part of its connectivity solutions. Ironically, it is this segment that could benefit the most from NFC. NFC could be the gateway to financial services for the unbanked and under-banked sections of low-income countries.

Low-end and ULC phones do not offer multiple connectivity options and thus do not use combo chips. NFC will need to be added to a baseband chip or may even exist as a separate chip.

Open API

NXP, Inside Contactless, and Stollmann opened up their NFC application programming interface (API). This will allow device makers and application developers to build and innovate faster without losing time to implementation and integration minutiae. The basic firmware is seen as a commodity. The real value is in creating innovative applications; what better way to do this than to tap into wisdom of the crowd?

Transition Time

In the short term, companies specializing in NFC will benefit until the big players and familiar names of mobile semiconductor vendors like Broadcom, Qualcomm, and TI start adding NFC to their platforms and/or integrate into their other chipsets.

Apple will likely use NXP for the first iteration and switch to Broadcom thereafter. BRCM already has the BT/WLAN combo connectivity slot in iPhone and iPod Touch, and the GPS slot in iPhone 4. The chances are better if Broadcom succeeds in integrating NFC into a combo-chip. For this reason, Broadcom’s acquisition of Innovision could have been cheered by Apple behind the scenes.

Smartcard IC vendors will see a mixed bag. If a mobile phone is to replace several payment and ticketing cards, fewer smart card ICs would be used. On the other hand, they could sell more value-added secure modules.

1. Mobile network operators (MNOs) and SIM vendors want NFC in the SIM. For GSM phones, especially for users not tied to a device, this approach has the advantage of portability. The communication between SIM and NFC chipset, is governed by the single wire protocol (SWP).

SIM vendors see this as an opportunity to reinvigorate a technology that started in 1988 as a means to provide a removable security module. It has remained just that – a way for the MNO to identify the user.

MNOs in South Korea and China, for example, are investing in banks and developing a platform for seamless payments. This approach bypasses traditional mediators such as Visa, MasterCard, American Express, and Discover. While it could lower the processing fees for merchants, it also means less choice for consumers by tying a phone to one MNO–bank alliance. Instead of restricting choice, MNOs should open their platform to application developers and let them innovate.

Money will be made in applications (more on this later). If MNOs plan to benefit from this trend and not be left behind as simply pipes providing network access to other applications, they will have to open their APIs. If the application resides outside of the SIM card – somewhere in the application processor – MNOs have no way to generate revenue from applications.

2. Handset vendors want to embed NFC into the phone. It is quick to implement, and one does not need to bother with SWP. Since the device works in a passive mode for payments, it could work even when a phone’s battery is exhausted. It will work even when a cellular signal is weak or absent.

This approach will enable design reuse for vendors making both GSM and CDMA phones. Application developers will simply see NFC as another hardware feature alongside, GPS, BT, and WLAN and can build on it. It’s simple, straightforward, and there is not a steep learning curve. It provides the best platform for innovative applications. Revenue models are not clear, though.

Traditionally, MNOs have controlled how phones were built. When Apple wretched the design decisions from AT&T, financial implications were not as clear as in NFC. It remains to be seen if device vendors can have it their way with NFC.

3. Financial institutions want NFC on the microSD card. The SE and NFC controller are outside of the phone. This approach enjoys the advantage of portability across devices, whether they be GSM or CDMA devices. Separate trials started by major U.S. banks (U.S. Bank, Bank of America, and Wells Fargo) in recent months have all been powered by microSD cards supplied by U.S.-based DeviceFidelity in an exclusive agreement with Visa.

But there are several disadvantages to this approach. A separate, smaller antenna means shorter operating distance and usability issues – both undesirable, especially when the trials are meant to convince consumers of the simplicity and elegance of NFC. This approach limits NFC phones to card emulation. Users in the U.S. are unlikely to get excited if all NFC enables are contactless payments.

Nokia, incidentally, took some wind out of the sails of this approach when it recently announced that it was removing microSD card slots from upcoming high-end smartphones.

As if this was not enough fragmentation, some players want to take a proprietary route. For example, China Mobile Ltd., China’s largest MNO, used a proprietary system based on a standalone 2.4GHz RF-SIM card. It has now withdrawn from this approach.

Let me illustrate the potential of NFC with a real problem and how the evolving landscape could use NFC to solve it.

By one estimate, 40% of India’s 1.2 billion people do not have access to formal banking. They are unable to put their savings in a safe place. (Yes, even the poor save in low-income countries; the difference is in the degree). The credit needs of this un-banked population are currently met by loan sharks, who charge exorbitant interest rates. Microfinance could be the solution, and it has been gathering momentum, but the reach is still small. Big banks need to step in to provide wide access to microfinance, but they are hesitant do so. The situation is such for two reasons:

1. There is no easy way to verify identity (existing forms of identification are far from unique). The Unique Identification (UID) project envisions providing an unique ID for every resident of India. This project, headed by Nandan Nikekani, cofounder of Infosys Technologies Ltd., is currently undergoing field trails, and there are plans to start issuing cards in February 2011. Among other uses, UID will provide a means for financial institutions to quickly and economically verify the identity of an applicant.

2. Physical banks in rural areas are few and far apart. Microfinance institutions send out agents known as business correspondents to tender and collect loans. This approach – one person wielding cash as the sole point of contact with a bank – is subject to abuse. This process could be simplified and scaled well if regular mom-and-pop stores are equipped with devices that allow users of NFC phones to carry out bank transactions. This approach would be much more efficient than carrying out individual transactions directly with the bank over the Internet. Transfers between people, of course, could be done without a visit to a local business correspondent. Just as sections of India’s population skipped landline telephones and leapfrogged to mobile phones, they can skip teller counters and start banking on electronic devices such as mobile phones.

NFC thus holds a lot of promise to solve real problems. I would be surprised if Nokia, which enjoys a dominant market share in low-income economies like India,  and Bharti Airtel, the biggest multinational organization (MNO) in the country,  are not already at work on NFC-enabled microfinancing and mobile banking solutions.

Over a series of posts, I will delve into the NFC ecosystem and present to you some background, hurdles faced by NFC in the past, reasons why NFC is poised to take off, hurdles to adoption now, strategy and product offering of major technology providers, and what needs to happen for successful adoption. First, let’s take a brief look at the history and basic technology.

Technology

NFC is a short-range wireless connectivity technology based on standards. NFC facilitates communication between electronic devices that are in proximity – typically less than 10 cm apart. It operates at 13.56MHz and transfers data at speeds up to 424Kbps. NFC data transfer rates are much slower than Bluetooth (BT) and wireless LAN (WLAN). NFC asks these technologies to take over when the situation demands faster data transfer rates than it can handle. In order to be compatible with existing contactless and RFID infrastructure, NFC incorporates several pre-existing standards. An NFC-enabled phone can thus act as a contactless payment card. Devices are governed by specifications agreed upon by NFC Forum members.

NFC’s benefits are all the more evident in its abilityto operate in multiple modes

• card emulation: NFC device mimics a contactless card.
• reader mode: NFC device is active and reads a passive RFID tag (e.g. on a smart poster.)
• peer-to-peer mode: two NFC devices communicate to exchange information.

Why bother with another wireless technology when we seem have enough in the form of BT and WLAN? The allure is in the ease of use and of setting up and tearing down connections seamlessly. The need for little configuration enables use cases not possible with existing connectivity solutions in phones. Finally, it fits well with the mobile phone requirement of using little power.

Broken Promises

The old joke, “Brazil is the country of the future – and always will be” comes to mind. NFC has been touted as a technology about to go mainstream since its inception in 2002.

In spite of several broken promises and failure to deliver in the past, industry watchers are still optimistic and convinced that the potential is great. ABI Research predicts that 300 million NFC chips will be shipped in 2015. IMS Research is even more optimistic and pegs its estimate at 785 million NFC chips for the same period. In addition to mobile phones, these chips could be targeting computers, consumer electronics, peripherals, and merchant terminals.

Caution is needed because NFC has been waiting in the wings for some time. However, after failing to deliver on its promises for several years, NFC seems poised for commercial success in 2012–2013. The groundwork for a successful ecosystem is being laid.

They will in the very near future revolutionise the market for system cameras.

Last year, I wrote that high end cameras might be safe. May be not.

Today, Nokia announced N8, its latest smartphone. Among other features, what stands out is that N8 is capable of recording HD video at 720p. This phone can drive a 40″ TV via HDMI interface. The battery is big enough to support 6 hours of video playback with HDMI.

Multiple vendors – Qualcomm, ST-Ericsson, Marvell  - have phone platforms that support recording 720p video or better. Expect more phones to follow in N8′s footsteps.

The use case of a phone being set aside to drive a TV for this long might not be convincing. But you see how the phone is encroaching on set top boxes and SLR cameras.

Not every player has had it easy competing in the smartphone market. For example, Palm and Garmin are struggling to find their foothold. 2010 will determine the fate of many wannabes.

Further, devices are a fraction of the total mobile ecosystem. As mentioned earlier, handset sales accounted for a mere $160 billion out of $1,070 billion in mobile industry revenues in 2009. Further, smartphones are just a fraction of the handsets sold. SMS and MMS revenue alone was $153 billion in 2009.

Smartphones let carriers sell lucrative data services to customers. Many feature phones can be used to serve TV, music, the Web, and so forth. In 2009, a mere 13% of the installed base was smartphones. In contrast, 80% of the entire installed base of phones is MMS capable, 53% of these phones are Java/BREW capable, and 91% are 2.5G data capable or better (source: Tomi Ahonen). This is a much bigger addressable market. Customers who do not own a smartphone would be willing to shell out some money to get useful data services, and the world is not going to be flooded with smartphones any time soon. There is money to be made by serving lesser devices, which are in abundance.

Qualcomm is pushing to expand support for its FLO TV on mobile phones. Those who have traveled to South Korea or Japan will have noticed the prevalence of mobile TV in those countries. Qualcomm said that it will bid in the upcoming wireless broadband spectrum auction in India. The stated reason is to expand its TD-LTE standard. I expect Qualcomm to push its FLO TV and similar services.

For much of the emerging world, a mobile phone is the only communication device that a person may have. It will be a long time before smartphones are affordable to this “base-of-pyramid” consumer. In the meantime, device and chip makers can help to improve the capability of the devices that this group can afford, and service providers can innovate and build on economies of scale.

This concludes this series. Thanks for reading.

Such a proposition immediately raises questions about security. Companies such as Infineon and ARM have solutions to make these transactions secure at the hardware level. Mobile banking is prevalent in poor countries that are not blanketed with banking institutions. Security can be further enhanced with fingerprint technology. Fingerprint-reading technology is mature enough that it can be added to a phone at a nominal cost.

Adding near field communication (NFC) capabilities to a phone would make it much more useful for making mobile payments. Device makers can add this at a minimal cost, but the infrastructure to accept and process mobile payments is not in place. Adding to the inertia is the vested interest of credit card companies that might then have to give a cut of their service charges to wireless carriers. But wouldn’t it be nice to have one bill for all the purchases that one makes?

Further, a phone with NFC capability could double as a key for cars or maybe even doors. Employees carrying access cards around their necks and on their belts would surely appreciate it.

NFC is just one example. As the convergence movement continues, the hope is that such features will find their way into our phones, making them ever more useful. But this comes at the risk of making us ever more dependent on this device.

There is a sizable section of the computer user base that uses the device purely as a means to consume media and communicate; they create very little on their phones. Even a reasonably configured desktop or a laptop computer has much more power than is necessary for such tasks. At the same time, a phone has evolved from being simply a voice communication device. Just to cite a few use cases, these days a phone as a converged device can double up as a camera (still picture and video), remote controller, media player, personal navigation device, and even e-book reader. However, the small form factor of a phone places restrictions on the user experience.

This gap between a laptop computer and a smartphone has been obvious for a while. Various players have introduced devices in various form factors to fill the gap. Netbooks, smartbooks, and mobile Internet devices (MIDs) all fit this bill. Apple of course wants to redefine this segment with the recently released iPad tablet. As it did while announcing the iPhone, Apple calls the release of iPad a revolutionary moment in computing history. It might well be. What the iPad does best is to serve consumers’ needs for consumption (media), communication (VoIP, social media), and entertainment (games, media).

Devices such as the iPad and the many clones that are sure to soon follow it use technologies similar to what is used in a smartphone – baseband, WLAN, GPS, Bluetooth, touch screen, application processor, and so forth. Since this is a newly invigorated category of devices and people will pay premium prices at least for a while, pricing pressure is not imminent. This class of devices can then bear the cost of innovation and advance the movement for cheaper smartphones.

In the next and final post, we will see why all this fervor around smartphones needs to be taken with a grain of salt.

Following in Apple’s footsteps, virtually every smartphone OS launched its own application storefront – Android Market, BlackBerry App World, Windows Mobile Marketplace, Palm App Catalog, and the Nokia Ovi store. Even carriers such as Verizon and China Mobile have set up their own app stores. Apple’s App store is the standard against which others are judged. Apple called its storefront the App store, the name stuck, and most others followed. Although app stands for application, every time I hear a competitor name its storefront some kind of app store or use the phrase to describe it, it makes me wonder if they realize how they are playing into the word apple.

Some of the top-selling and top-grossing apps are games. In fact, games have become so popular that Apple claims that the iPhone (or iPod Touch) provides the best portable gaming experience. Sony seems to agree and, seeing this as a threat, plans to release phones built around its PlayStation Portable (PSP) gaming platform.

Of the two leading personal navigation device (PND) makers, Garmin chose to build a handheld device that combined the functionality of a navigation device and a smartphone. By Garmin’s own account, its Nüvi phone has not seen much uptake. TomTom, on the other hand, chose to ride on the popularity of the iPhone and developed an application that turns the smartphone into a navigation device.

Applications such as these add momentum to the ongoing convergence movement. A navigation app on a phone can perform better than a traditional PND by taking advantage of the cellular signals (triangulation method) in addition to satellite signals to learn about its current location faster.

Variety can be a vice at times. Owing to the differences in hardware among phones from various vendors, TomTom’s Navigator software is compatible only with a few Windows Mobile smartphones. On the other hand, an application made for the App store is guaranteed to work seamlessly on all iPhones and iPod Touch models.

Apple’s low barriers to entry and the first-mover advantage have ensured that the number of applications available on its storefront far exceeds that on others. This advantage is akin to people flocking to Microsoft Windows because their favorite software tools were available on it. Although people do not choose one smartphone over another just because the app store has a bigger selection, a better app selection adds to the overall richness of the mobile experience.

According to Gartner, Apple took 99.4% of the $4.2 billion in mobile applications revenue in 2009. When one company has such complete dominance of a market that it invented, its market share is bound to go down as others play catch-up. In 2010, we should thus  see other app stores increase in stature and take a bigger piece of the app revenue pie.

Mobile Application Stores’ Number of Downloads and Revenue, Worldwide

Source: Gartner (December 2009). Numbers are for all apps (free and paid)

Gartner projects mobile app revenue to grow severalfold over the next few years. Any projection three years out in this tumultuous economy is to be taken with a grain of salt. The trend, however, is clear, and it points upwards.

Notice how the average selling price (ASP) of all applications is very small and is projected to fall. Much of this can be attributed to the freemium model. Nothing sells like free, and free stuff brings customers in the door. A majority of the apps sold are offered free in the hope that once users have had a taste of the apps, they can be persuaded to upgrade to feature-rich, paid versions. However, it could be that users are content with free versions and choose not to upgrade, and this, I think, is a major reason why industry observers expect ASP to decline.. This could render some of the app makers economically nonviable.

There is hope for app makers currently giving away their wares free to be economically viable. Although Google has figured out the formula for making billions from PC Web-based advertising, mobile advertising is still a nascent market. Mobile offers the opportunity for more targeted advertisements. Apple acquired Quattro earlier this year and less than three months later announced that advertisements will be offered within apps in the upcoming updated version of iPhone OS. Others will follow suit. Developers giving away their apps free might see some money after all and become economically viable.

Although the App store is at the forefront of Apple’s application marketing, Apple has also been promoting Web apps for iPhone and iPod Touch in a quiet corner of its website ever since Safari, its Web browser for Mac computers, was empowered to make Web clips to add to the “dashboard” as widgets.

Just as native PC software applications are facing a real threat from Web-based tools, the dominance of applications running native on mobile phones might not last forever. Mobile touch Web is an approach to make Web pages friendly to touch- and gesture-based interfaces found in many smartphones and feature phones sporting touch screens. This feature is built around the richness of HTML5, a Web standard that is still evolving. HTML5 is developed to enable an Internet experience that is more appropriate to the increasingly mobile user.

If Apple is able to dominate smartphones in spite of putting out just one model each year, much of the credit goes to the App store. Courtesy of the apps downloaded to them, an iPhone is as unique as its owner. The uniqueness argument also applies to Droids and BlackBerries.

In the next post, we will look at what is possible in a smartphone and a more powerful class of devices.

With Android on a roll (HTC, Motorola, Samsung, LG, Sony-Ericsson, Acer, Dell, and Garmin all have Andriod-powered phones coming in the next few months), the fortunes of other OSs depend on the performance of the handset vendors that make or control them. The fate of Microsoft’s embedded OS, on the other hand, does not solely rest with Microsoft – it rides on the success of several handset vendors putting out hit phone models.

HTC, Samsung and LG have made the bulk of Windows Mobile phones in recent years. HTC famously said that it had rolled out 80% of all Windows Mobile phones ever made. Windows Mobile faces an uphill task with HTC inclining towards Android and Samsung starting to move to homegrown Bada. LG phones used to be predominantly Windows Mobile with a sprinkling of Symbian here and there. Although the bulk of latest LG phones are still powered by Windows Mobile, a significant number of them are Android-based.

Garmin’s Nüvi series phones were predominantly Windows-based, some of the later models sport Android. Same story at Dell – Axim was all Windows, Dell’s latest smartphone offering, Mini – is based on Android.

Going forward, it would not be a big surprise if Samsung showed little interest in Windows Mobile. Many phone designs from Samsung that used homegrown processors were powered by Windows Mobile. With Samsung developing its own OS, it would not be a stretch to say that the designers would have made the Bada OS play nice with Samsung’s application processors.

Windows Mobile has made some inroads at Sony-Ericsson, where Symbian was the dominant OS for a long time. Windows Mobile is used in the Satio line of phones and in the Aspen. However, Windows Mobile has lost to Android in the Experia line. The Experia line started with X1 powered by Windows Mobile and Qualcomm MSM7200A, and while Qualcomm is still in the latest Experia X10 phone with its Snapdragon QSD8250, it runs Android OS.

It appears that Android beating Windows Mobile is a trend that should continue at least for this year. The trend might be irreversible unless Microsoft delivers on the impressive promises it has been making about Windows Phone 7. Windows Phone 7 could turn out to be as successful as Windows, if all goes well.

The picture is not all bad for Windows Mobile. It has seen some uptake from traditional PC makers (Acer, Toshiba) and  PND makers (Garmin) vying to become handset makers. However, these players have yet to make a significant impact on the handset market, and their success is not assured.

The combination of Qualcomm silicon and Windows Mobile OS is a recurring theme at many conventional PC vendors. Qualcomm hopes to build on this momentum when Windows Phone 7 starts shipping. Qualcomm hopes to make its platform more complete by offering a tighter integration with an embedded OS – and hence the continued collaboration with Microsoft on Windows Phone 7. The following quote from Steve Mollenkopf, executive vice president of Qualcomm and president of Qualcomm CDMA Technologies, says it best:

“Qualcomm has a long history of working closely with Microsoft on Windows Phone, and we are continuing this collaboration to support the launches this year of exciting new Windows Phone 7 Series devices based on our Snapdragon chipsets, We are very excited about the next generation of devices that will leverage the synergy of our highly integrated system on a chip solutions and Microsoft’s Windows Phone 7 Series software.” (February 2010)

Symbian used to be owned and used by many of the majors such as Nokia, Sony-Ericsson, Samsung, and Motorola. These days only Nokia is contributing to and using Symbian in a significant way. Although Nokia will be using Maemo in its high-end smartphones, it will continue to use Symbian for its other smartphones and its touchscreen phones. Feature phones from Nokia will also use Symbian to sport more capabilities. Symbian’s share, thus, is not about to evaporate just because some have left the camp.

Market share

The OS share closely reflects the smartphone device market share discussed in a previous post. Symbian, Windows Mobile, Android, and Linux/Maemo are used by more than one device maker. BlackBerry, the iPhone OS, and WebOS are proprietary and used by RIM, Apple, and Palm in their respective handsets.

Worldwide Smartphone Sales to End Users by Operating System in 2009 (Thousands of Units)

The iPhone OS, BlackBerry, and Android witnessed enviable growth at that expense of market share losses at Symbian, Windows Mobile, and Linux. Palm’s WebOS made its debut in 2009 and has yet to gain traction in terms of market share.

Apple has proved beyond doubt that a tight integration of hardware and OS is necessary for an elegant user experience. After Google decided to work closely with handset vendors (first with Motorola and then with HTC) on its Android platform, one could say that Windows Mobile is the only OS that does not have the indispensable feedback and the insider know-how from handset designers. Until recently, effectively, Microsoft was the only OS vendor without its own handset in the market. Sure, Microsoft has been the dominant OS vendor for PCs without making its own hardware. The smartphone ecosystem works in a different way, though – for starters, it is much easier to switch phones and thus the OS than to switch from Windows to say Mac OS or Linux. Microsoft is unique in another important way too – it is the only embedded OS vendor that licenses and gets paid for its OS; the rest are either free or are not licensed to others.

Smartphone operating systems

With Samsung’s Bada OS starting to show up in various Samsung smartphones and Samsung promising to take it to more touchscreen and feature phones in its portfolio, the distinction of a Smartphone OS is poised to blur this year. Bada will enter the above table when 2010 numbers are crunched.

Palm’s WebOS received rave reviews and attracted customers, resulting in some success for the company’s Pre and Pixi phones. The company hopes to reverse the slowing sales with Pre Plus and Pixi Plus. Although the upgraded models are a step in the right direction, unless it attains critical mass in the near future, Palm is likely to become an acquisition target for someone that wishes to ride on Palm’s brand name, the elegance of WebOS, and the strengths of its HTML foundation. I would not be surprised to see consolidation in this fragmented market.

BlackBerry used to be an email-centric OS, but it has been evolving to provide user experience comparable to trendsetters like the iPhone OS and Android. Both Nokia and RIM have recently purchased niche companies to spruce up their user experience for Web services

Thus in the above table, of the vertically integrated OSs, only WebOS seems to be facing imminent danger of becoming irrelevant. In the next post, we will look at the churn in non-integrated OSs.

Here is a rundown of what the chip makers have to say about their latest offering:

Broadcom unveiled the BCM21553 as a “3G HSPA chipset solution to enable high-speed, low-cost smartphone devices.”

Infineon XMM 6181 (X-GOLD 618 baseband, SMARTi UE RF transceiver) is a new “entry-level smartphone platform” based on Android and aimed at “addressing the high-volume consumer segment.”

Marvell qualifies its Pantheon 910 and 920 as “mass market smartphone communication platforms” to enable “$99 smartphones.” This platform is not to be mistaken as a wimpy alternative; it can drive 720p video and features, among others, an 800 MHz dedicated application processor.

MediaTek has released a hardware package that plays well with Windows Mobile. This enables low-cost manufacturers in China to put out cheaper smartphones to serve the mass market in emerging economies. This could ensure that Windows Mobile will have a long tail, in spite of the upcoming Phone 7. MediaTek is set to release a similar package that combines its smartphone platform and Android OS.

ST-Ericsson says its U6715 would bring down smartphones cost to the €100 ($135) level. It comes with a claim: “a cost-optimized chipset and software to enable smartphone features for all.”

The past few years have witnessed creation of platforms over which others can build and innovate. Cases in point: Facebook, Apple’s App store. After various companies have found tremendous success in building a platform and creating an ecosystem that builds on their platform, handset silicon vendors are following suit. The Infineon XMM6181, ST-Ericsson U8500 U6715, TI OMAP, Qualcomm Snapdragon and MSM, and Marvell Pantheon and ARMADA platforms should be looked at in a similar vein. The intent is to create an ecosystem in which several handset makers would innovate and build around these platforms. Such platforms still allow for several design choices and thus provide necessary differentiation.

As we await cheap smartphones, we should remember that cheap smartphones cannot mean cost recouped from data plans.

Design wins in some popular smartphones

For many of the devices considered for this analysis, display modules are provided by Sony, Samsung, Sharp, and Toshiba; touch screen controllers are predominantly from Synaptics and Toshiba.

Power

Power management IC slots are wide open with Qualcomm and TI each taking a few slots and still leaving room for Infineon, NXP, Dialog Semi, Maxim, Samsung, and Freescale. Several power amplifiers are seen in most designs. Most of the time, each cellular radio requires its own power amplifier. While Triquint and Avago have the bulk of these slots, it is not hard to spot STM, Skyworks, and TI.

Storage

Samsung and Toshiba dominate the storage slot.

Camera

Some phones boast 12 megapixel cameras. If a phone design has two cameras, the more powerful one is on the rear side and is provided by the likes of Sony and Toshiba; the less powerful camera is on the front of the phone allowing users to make video phone calls and indulge in self portraits – STM has seen some success in winning this slot.

Audio

Audio used to be done in software, but these days most of the time audio is handled by dedicated hardware to enhance noise reduction and cancel echo. If the audio processor is not integrated into the baseband chip, TI, Wolfson, or Audience have this slot.

The rest

Accelerometers are mostly from Kionix and STM; SMSC has been providing a bulk of USB mass storage PHY layer.

In sum, although TI lacks baseband and its application processor dominance is a thing of past, its connectivity solutions and power management expertise  – analog know-how in general – are serving it well. Qualcomm dominates baseband and combined processor platforms. Traditional PC makers are quite at home with Qualcomm parts. Broadcom is seeing good uptake of its connectivity chips; however, it has near zero presence in baseband and application processor. Marvell PXA has been loosing ground to Qualcomm’s MSM series, for example,, Garmin-branded Nuvi phones manufactured by Asus. Marvell hopes to win back some of these designs with its renewed and more powerful portfolio.

2010 might be the coming-out party for Nvidia Tegra in phones. Expect any functionality that is essential to a phone’s design,  such as audio, to morph into a combo chip.

In the next post, we will look at the promise of cheaper smartphones.