Smart Phones: Intelligence Spreads


By Steve Rosenbush

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Once in a while, during the family rush hour that begins shortly after dawn, I'll leave my cell phone on the kitchen counter as I head off to work. A few years ago, I wouldn't have considered doubling back more than a few steps to retrieve the device. But it's more important to me than ever, and I'm now willing to repeat the entire 10-minute walk from my front door to the subway to fetch the phone I left at home. It's worth the effort.

You might think that I'm a power user who talks endlessly on the cell phone, annoying people in restaurants, trains, and movie theaters. But that's hardly the case. My $40-a-month voice plan from wireless carrier T-Mobile includes 1,000 minutes of service, but I couldn't use all of that if I tried. I average only 150 minutes of calls a month, and that includes work calls.

HOT GROWTH. Like so many other smart-phone lovers, I find mine so valuable because of all the other things it does. The Nokia (NOK) 3650 is a smart phone, loaded with features that would have strained credibility just a few years ago. It's linked to my Microsoft Outlook software at work. I've transferred my calendar and the names, phone numbers, and addresses of more than 1,300 business contacts to my phone. I keep them up-to-date by wirelessly synchronizing the phone with the laptop as often as necessary.

And because I pay just a few dollars a month for unlimited wireless Internet access, I can check the news and send and receive e-mail with my phone. I also fork out $20 a year for a premium Yahoo! (YHOO) account that lets me forward corporate as well as personal e-mail to my phone.

The market for smart mobile devices such as the Nokia 3650 is in the very early stages of development, but it's growing rapidly. Only 23.5 million smart phones had been sold at the end of last year. That's a minute fraction of the overall cell-phone market, which included 1.56 billion devices, according to John Jackson, wireless analyst at consultant Yankee Group.

But that's about to change. Yankee estimates the global market, with 1.8 billion mobile devices, will have 49 million smart phones by yearend. Yankee expects the number of smart phones to double again, to 98 million, in 2006, while the number of cell phones worldwide creeps ahead to 1.85 billion.

HIGH-END OFFERINGS. As the price of smart-phone technology falls, the devices will push deeper into the mainstream -- though it will be some time before they're inexpensive enough for most folks, thanks to a list price of $300 to $1,000. "Price is the issue. The market just can't absorb very many $400 devices," Jackson says. He thinks prices need to fall to $150 or $200 before smart phones truly go mainstream.

That would still be a premium on the price of a basic phone, which is about $140 in the U.S. Wireless service providers typically subsidize retail handset sales so that consumers pay a lower price in exchange for signing a one- or two-year service contract. So nearly one-third of U.S. customers actually get their phones for free.

The first smart phones targeted high-end business users. Research in Motion (RIMM) took an early lead with its BlackBerry e-mail device, which has added a phone and other features. PalmOne's Treo 650 also is gaining traction in the upper end of the market, where devices look more like personal digital assistants than phones. Top-of-the-line offerings for business users typically run $450 or more after carrier subsidies, or $700 without subsidies.

Other high-end handsets use software from Microsoft and Symbian. The latter platform is utilized by European manufacturers such as Nokia.

SMART AND TUNEFUL. Smart phones for the mass market are available, but they've yet to take off. Symbian, RIM, and Microsoft make software for phone-like devices that retail for about $200. They have smaller screens and phone keypads instead of full keyboards -- but still pack an amazing number of features that true smart phones have into a tiny package. These full-featured cell phones have cameras, Web browsers, and other goodies. They might not be able to store hours of video or handle corporate e-mail, but they're just fine for most consumers and cost as little as $50.

But as the price of a high-end smart phone with a bigger screen and a real keyboard comes down, more consumers will be drawn in and will find a use for them. A Treo loaded with a 1- or 2-gigabyte memory card can store several feature films, making it a good diversion for people who find themselves with spare time during the day. As cell-phone networks boost their speed, these devices will increasingly lend themselves to audio and video broadcasts and interactive gaming.

Moreover, smart phones' attraction for mainstream consumers is bound to get a kick as the next generation of mobile music players arrive. Motorola (MOTO) and Apple (AAPL) have been developing a hybrid cell phone/iPod that could be a huge hit. However, wireless companies haven't agreed to carry the device because the carriers want customers to pay them for the ability to download music directly over the cellular network. The Motorola device would work like other iPods, which download music by syncing to a computer.

If the wireless service providers don't carry the hybrid iPod, they'll have to roll out their own devices -- with enough power and storage capability to manage a music library and photos.

RIGHT PRICE. I look forward to the arrival of all these new handsets. But I'm sticking with my Nokia 3650 for now. It isn't the most elegant piece of technology in the world. The screen is fuzzy, the camera is primitive, and it took me several months to figure out how to sync the phone with my computer.

But I'm used to it now, and it's as familiar as a ratty old shirt. Plus, it's durable. I often carelessly let it slip from my pocket onto the pavement, sending components scattering across the sidewalk and exposing the phone's electronic brain. But the keypad and face always pop back into place, and the phone still works fine.

If that isn't enough, the phone was free. It had a list price of $300 when Nokia introduced it about two years ago, but I obtained it for no cost during a T-Mobile promotion on Amazon (AMZN). Like most consumers, I find that "free" is my personal inflection point. After all, people can be smart, too. Rosenbush is a senior writer for BusinessWeek Online in New York


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