While the telecom industry isn’t immune to the effects of the worldwide economic downturn, it will weather the storm better than other electronics sectors. In fact, iSuppli Corp. expects global unit growth for smart phones to reach 192.3 million units in 2009, up 11.1% over 2008’s 173.6 million total. The company also offers a more conservative estimate if consumer confidence continues to erode of 183.9 units for 2009, which is still a 6% improvement.

“For the optimistic scenario to come to fruition, wireless network operators must cut fees for data services and offer aggressive subsidies to reduce consumer smart-phone prices,” said Tina Teng, senior analyst for wireless communications for iSuppli. “Furthermore, wireless operators and handset brands have to sell consumers on the value of smart phones to encourage customers to upgrade.”

The research company defines smart phones as mobile handsets that use high-level operating systems (OSs), enabling them to expand their functionality via sophisticated add-on applications, such as personal information management programs. There presently is no industry definition for the smart phone. As the platform continues to evolve, iSuppli will refine its definition as well.

According to iSuppli’s more optimistic estimate, smart phones will represent 17.4% of total mobile handset unit shipments in 2009. If the conservative scenario emerges, they will account for 16.6% of total handset shipments. Additionally, the optimistic forecast expects a unit shipment compound annual growth rate (CAGR) of 21% from 2008 to 2013, while the conservative prediction targets an 18.3% CAGR.

“With 3G networks having become prevalent all over the world, smart phones are no longer just for corporate users. They are for consumers too,” Teng said. “Consumers increasingly are demanding data-intensive applications that require the kinds of high data speeds supported by 3G networks.”

OSs Emerge As Market Forces

These devices rely on their OSs for advanced functionality, and the competition is heating up. According to Teng, the endorsement of certain OSs by various operators and handset brands is giving open OSs a push. With the power and influence of the operators in the wireless supply chain, their support is putting high-level OSs under the spotlight.

These OSs include Microsoft’s Windows Mobile, Symbian Foundation’s OS, Research in Motion’s RIM OS, Apple’s Mac X OS, Android from Google and the Open Handset Alliance, Palm’s OS, and other Linux-based OSs. Enthusiasm in the industry is growing for smart-phone OS and software development as indicated by multiple industry announcements at February’s Mobile World Congress in Barcelona.

For example, Microsoft announced Windows Mobile 6.5 running on handsets from HTC, LG, and Orange. LG announced a plan to develop 50 Windows Mobile-based devices through 2012. Nokia announced its collaboration with Qualcomm on 3G smart-phone products based on the Symbian OS.

Huwaei, a Chinese mobile handset manufacturer, confirmed it will launch a smart phone in the third quarter based on the Google Android OS. Samsung confirmed its release of smart phones based on Android and LiMo, a Linux-based platform. And, PC maker Acer will develop a smart phone.

It’s All About The Applications

High-level mobile OSs have emerged as critical components of service providers’ handset strategies. The OS ecosystem and the direction of each application developer community determine the availability of applications for network providers and subscribers. Since the OS is transparent to the end user in most cases, such applications are essential to attracting consumer interest.

“Beyond the friendliness of user interfaces, the availability of a variety of applications is the key factor attracting consumer interest to smart-phone products,” Teng said. “Thus, different players at various segments of the supply-chain are starting to build mini-ecosystems—including applications—in order to attract consumers and gain their loyalty. Microsoft’s launch of MyPhone, Nokia’s Ovi, and the Android Marketplace all represent different approaches to building such an ecosystem.”

To retain subscribers and to reduce churn rates, network operators must differentiate themselves through device and service offerings, Teng added. As a result, additional proprietary customization on the user interface is required. With the arrival of open OSs, increasing vertical integration among device manufacturers and platform providers, the flourishing of widgets, and the growing phenomenon of social networking, network operators must either share the total available market for service revenue with the content providers and application developers or include them as partners in business development.

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